Property: new-build in crisis, but prices continue to rise

The new-build property market raises as many questions as the older properties market, in the unprecedented situation we have been experiencing for approximately 18 months. The rise in interest rates deprives buyers of a budget often essential to completing a purchase in new-build, except that prices for this type of property continue to rise, whereas the older properties market is stabilising or even reducing its price level slightly for now.

What is the situation in the new-build market and what evolution can be expected? Why are prices in new-build continuing to rise? Here are our answers, partly based on a study by the Laboratoire de l’Immobilier published last May and on figures supplied by the Fédération des promoteurs immobiliers.

A finding: new-build construction is weakening

If older properties are showing signs of exhaustion, with a projected 15% reduction in the number of transactions in 2023 (from 1.13 million in 2022 to 950,000 in 2023 if projections materialise), the impact of market developments on new-build is even more detrimental.

In fact, if 2022 was already not a flourishing period, 2023 reveals even more encouraging figures: if the overall decline in new-build housing starts was 8.3% between April 2022 and March 2023, the first quarter of 2023 alone saw a 31% decrease in permits granted.

This acceleration in production reduction is accompanied by a decline in demand, or rather, in acquisitions actually completed: 21,000 for the first quarter of 2023, which is 34% less than in the same period in 2022.
Recall that 2022 in its entirety was already the worst year since 2016 for new-build property sales, with only 121,875 effective transactions, which is approximately 15,000 fewer than during the year 2020 which was nonetheless hampered by Covid. There was thus a 26% decline in sales to investors, and 13.4% for those to owner-occupiers.

The rest of 2023 should not see any improvement in this trend, which partly explains the price increases observed.

Why are new-build sales in sharp decline?

To explain this phenomenon, we must look at the evolution of financing conditions for a property purchase, which have continued to deteriorate until now. Admittedly, the adjustments to the usury rate, which have been monthly since February 2023, reduce the blocking effect that this limit represented for assembling bank applications.

However, the soaring mortgage rates - approaching 4% this summer for a classic 20-year loan - deprive households of part of their purchasing power and require a revision of their expectations in terms of location or floor area. For investors among them, an acquisition in the previous situation was a very interesting strategy, insofar as the money was practically “free”, with interest rates sometimes below 1%. The viability of projects must also be revised with the new data.

These developments result in a drastic reduction in new-build purchases, for several reasons:

• Some households prefer to adopt a wait-and-see approach for better days - a risky strategy because in a context that is deteriorating, the best time to invest is always now;
• Part of the purchases that would normally have taken place in new-build end up as acquisitions in older properties due to a smaller budget to allocate;
• For households determined to acquire new-build, the difficulty in accessing credit explains the failure of a significant number of sales: some developers would face withdrawal rates of 40 to 50% for this reason;
• Investors who have the opportunity to acquire new-build housing develop concerns about tenant solvency, in the context of high inflation. As a result, a less expensive acquisition in older properties allows for renting at a lower rent.

Supply that influences price levels

One might think that to revive the new-build market, developers would opt for price reductions and maintain the development of new programmes. Yet the opposite is happening: they prefer to wait for better days rather than sell off their units at a loss, similar to older property sellers who are slow to adapt their selling prices to the new situation.

The scarcity of supply has an impact on prices and despite the mentioned decline in housing starts, new-build prices have risen significantly. The trend even appears to be accelerating, with the average price of a new-build flat in municipalities of over 45,000 inhabitants standing at €5,592 per square metre in May 2023, up 6.6% over twelve rolling months. For comparison, in November 2022, a 5.7% increase over one year was recorded.

However, supply scarcity is not the only factor at play: the inflation of construction costs (and particularly that of material prices) and new standards (RE2020) do not allow for building more cheaply, quite the opposite. It is logical that these additional costs are passed on to selling prices, although this comes at a bad time.

The good news is that the property market is not really in crisis: demand remains strong and households only want to become owners for themselves or to rent because property remains the safe haven par excellence in an uncertain economy.
The real question that arises is rather how to invest in property while respecting one’s budget and objectives? Adjustments are underway, which should lead to an evolution in the variables over the long term: price per square metre, rent levels, interest rates of course, and volume of transactions completed. New-build, due to its higher selling price than older properties, risks remaining struggling in the near future, especially if developers do not make a significant effort. Watch this space!