Real estate market : what impact will the rise in borrowing rates have?
The trend has been confirmed since the beginning of 2022: interest rates on loans are rising significantly. At the time of writing, a loan granted last year at a rate of 1% over 20 years would be more likely to be granted at a rate of 1.5% today. Nothing alarming, yet.
Although after several years of historically low rates, the duration of this increase and above all its extent remain uncertain in the long term, we can already analyse the consequences on the property market for the various players.
Acquisition budgets reduced
This is obviously the first consequence, somewhat modifying the supply and demand of real estate: buyers will have a smaller purchase budget for the same situation. For a loan of the same duration, the rise in interest rates leads to an increase in the monthly payment. In order to remain under the threshold of the desirable debt ratio, a household will therefore have to reduce its ambitions somewhat.
This point is all the more problematic in a context of high real estate inflation, which has been further verified after the health crisis: buyers will have to review their means upwards, or reduce their ambitions in terms of surface area or location.
Even if for the time being, prices seem to be stagnating or even falling in some places, this is probably just an adjustment after too strong an increase. It should be noted, however, that the price variable could suffer, over a period of a few months, from this rise in borrowing rates.
Sales prices that need to be adjusted
Since purchase budgets have to be reduced, a seller may find that the natural buyers of his property are silent and no longer have the necessary funds. On the other hand, buyers with the right budget may look for a larger surface area or better services. The market is therefore bound to adapt, just as buyers usually see property prices continue to rise when a project emerges.
However, the new situation changes the reflex: this time the sale prices must decrease, at the risk of the seller waiting longer to find the right buyer, or even not finding one after several months of promotion of his property. Faced with less wealthy buyers, he will have no choice but to adjust his selling price if he wishes to complete a transaction quickly.
Real estate professionals have an educational role to play here in guiding their clients towards a reduction in prices, in the face of entrenched beliefs of perpetual increase.
A less favourable banking environment
As for the possibility of actually carrying out the transactions, the usury rate must also be taken into account. This was previously set at 2.40% for a 20-year loan but, fortunately, was raised to 2.57% on 1er July. This is a good thing, because with interest rates on the rise, to which must be added the various costs attributable to property loans, the usury rate can be reached much more easily than before and constitute a definite brake on the granting of loans.
Even so, conditions are likely to become tougher and applications will have to remain irreproachable in both form and substance. As a result, buyers will once again have every interest in revising their budget downwards, in order to present a more than comfortable situation to their broker.
A market that is still dynamic, but which is less successful
If for the time being, the real estate actors underline a still sustained demand for real estate, even an increase in searches carried out on the sites, it is to be feared that the concretisation of real estate transactions will be negatively impacted, or at least that the projects will take longer to succeed: the rise in interest rates, the increase in prices or the maintenance of properties at a high price level, and the uncertain political and geopolitical context, have an influence that pushes one to wait and see.
The previous years have broken records: more than one million transactions in 2019, and more than 1.2 million in 2021. The year 2022 could then mark a regression, and the FNAIM is already forecasting a 15 to 20% drop in the volume of annual transactions.
The rise in interest rates is not good news for all buyers, especially those who are not in a position, by reaction, to extend the duration of their credit. Some projects will therefore be excluded by the 35% debt ratio barrier and will have to be adjusted. The same applies to sellers, some of whom may even have to sell at a loss if the acquisition is recent.
It should be noted, however, that for property investors, the context is also a great opportunity to increase their wealth. Indeed, rents indexed to the high inflation will allow a higher gain each month, after acquisition of a less expensive housing and at a rate remaining very reasonable: the profitability of a well done real estate investment should increase.