Property market: what impact does the rise in borrowing rates have?

The trend has been confirmed since the start of 2022: the interest rates applicable to borrowings have seen a significant rise. As we write, a loan granted last year at a rate of 1% over 20 years would now more likely be granted at a rate of 1.5% currently. Nothing alarming as yet.

If after several years of historically low rates, the duration of this rise and above all its scale remain uncertain over the long term, we can already analyse the consequences on the property market for the various players.

Acquisition budgets revised downwards

This is obviously the first consequence, somewhat altering the balance between supply and demand in the property market: buyers will, all things being equal, have a reduced purchasing budget. For a loan of the same duration, the rise in interest rates indeed leads to an increase in the monthly payment taken each month. To remain below the desirable debt-to-income ratio threshold, a household will therefore have to scale back its ambitions somewhat.

This point is all the more problematic in a context of high property price inflation which was again evident after the health crisis: buyers will have to increase their means, or reduce their ambitions in terms of surface area or location.

Even if for now prices appear to be stagnating or even falling in some places, this is most likely a simple adjustment after too strong a rise. However, let us note that the price variable could suffer, on the scale of a few months, from this rise in borrowing rates.

Sale prices that must adjust

Since purchase budgets must be revised downwards, a seller may find themselves facing silence from the natural buyers of their property, who will no longer have the necessary funds. Buyers with the adequate budget, however, may look for greater surface area or higher-quality features. The market is therefore having to adapt, like buyers who normally note the continuous rise in property prices when a project emerges.

The new situation changes the reflex though: asking prices must this time fall, at the risk of the seller waiting longer to find the right buyer, or not finding one after several months of marketing their property. Faced with less wealthy buyers, they will have no choice but to adjust their sale price if they wish to quickly complete a transaction.

Property professionals have a pedagogical role to play here in guiding their clients towards a price reduction, in the face of entrenched beliefs of perpetual increase.

A less favourable banking context

As for the possibility of actually completing transactions, the usury rate must also be taken into account. It was set at 2.40% for a credit over 20 years but, fortuitously, was raised on 1st July to 2.57%. A good thing because faced with rising interest rates and the various fees attached to property loans, the usury rate can be reached much more easily than before and constitute a certain obstacle to the granting of loans.

Even so, conditions are set to become stricter and files will need to be irreproachable in substance and form. As a consequence, buyers will once again have every interest in revising their budget downwards, to present a more than comfortable situation to their broker.

A market still dynamic, but completing fewer transactions

If for now property professionals note that demand remains strong, or even an increase in searches on websites, it is to be feared that the completion of property transactions will be negatively impacted, or at least that projects will take longer to come to fruition: the rise in rates, the rise in prices or the maintenance of properties at a high price level, and the uncertain political and geopolitical context, have an influence that encourages a wait-and-see approach.

Previous years broke records: over one million transactions completed in 2019, and over 1.2 million in 2021. The year 2022 could therefore mark a regression, and FNAIM is already forecasting a 15 to 20% drop in annual transaction volumes.

The rise in interest rates is not good news for all buyers, in particular those who are not able, in response, to extend the duration of their loan. Some projects will therefore be excluded by the 35% debt-to-income ratio barrier, and will have to be adjusted. Similarly for sellers, some of whom may even have to sell at a loss if the acquisition is recent.

Let us note however that for property investors, the context is also a tremendous opportunity to increase their wealth. Indeed, rents indexed to high inflation will allow a greater gain each month, after acquiring a less expensive property and at a rate that remains very reasonable: the profitability of a well-executed property investment should increase.