Towards a collapse of the real estate market in 2024?

From the pandemic to the war in Ukraine and the return of inflation, the real estate economy is irremediably subject to monetary policies and global flows. Thus, prices and sales increased disproportionately in developed countries post-COVID with historically low interest rates; then prices decelerate and sales fall in 2022 with interest rates at a record level for 10 years.

The Minister in charge of housing, Patrice Vergriete, during a conference within the framework of the Cercle des Managers Immobiliers, issued an alert: “In France there is a massive gap between the evolution of real estate and the purchasing power of households. We have been worried about this state for a long time as a kind of bubble. This speculative bubble, the day it bursts, the crisis is serious and that is what we are experiencing today.” The minister highlights the possibility of a crash resulting from a collapse of real estate priceswhat Americans call “the black swan”.

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But what is a speculative bubble?

The bubble is fueled by speculation, that is, when the buyer invests in the hope of making a large profit. It can also occur in the case of an influx of offers, for example, an overproduction of housing, or an employment crisis with households no longer meeting their loan repayments. The bubble bursts when values ​​are so disproportionate that everyone wants to sell. This is not the situation we find ourselves in: there is certainly a gap between prices and the purchasing power of buyers, but the market is not speculative.

READ: Do our politicians realize how bad the housing crisis is getting?

Are Rising Rates Making Prices Affordable?

According to the European Central Bank (ECB), the solution to making housing affordable is to increase mortgage rates, and to reduce demand by reducing the purchasing power of buyers. This is not working: despite the increase in rates for over a year, it is clear that prices around the world are not falling in proportion.

The ECB raised its reference interest rate to 4.75% on September 14, its highest level since the creation of the euro. Christine Lagarde sticks to her credo, to fight inflation, at the risk of an economic recession. In the eurozone, inflation is certainly falling, to 5.5% over one year in June, but this figure remains well above the 2% target set.

READ: Real estate: the French market in free fall

The real estate situation in the world

Worldwide, inventory levels remain low due to the deficit in new construction and the wait-and-see attitude of the existing home buying and selling market. The overall market is not a speculative market, as it was in France in the 1990s, and prices are resilient. A significant portion of owners do not negotiate the asking price; listings are slowed down by owners who do not commit to a more expensive loan. At the same time, the share of financing without a loan is increasing. Average-income tenants or first-time buyers are being denied access to property. Rather than a “black swan” effect, the ideal conditions are being created for a new social divide.

Regional variations are more or less marked, but the trends at the end of 2023 are very similar. In the United States, over the first five months of 2023, average prices have recovered by 10%, albeit with a drop of 6% at the same time in 2022. The number of sales there is down 2%, which still represents 8 million homes. In France, according to official figures from notaries in the second quarter of 2023, prices have increased by 0.5% over one year, with -15% in sales volume for existing properties, -34% for new properties. In Germany, prices will fall by 3.5% in 2023. In the UK, values ​​are expected to fall by around 3%, with the number of completed home sales in 2023 down 21% from 2022, the lowest level since 2012. In Canada, prices fell by an average of 4%, with the number of sales falling by 13%.

What scenario for 2024?

The current housing problem – and it’s global – is the shortage of supply. There has been a shortage of about 4 million to 5 million homes in America since 2019. France and Germany are estimated to need 400,000 new homes per year. That target is far from being met. “That’s because population and employment growth outpaced new home construction,” said Lawrence Yun, an economist with the National Association of Realtors. “Then the shortage worsened in the first year of the COVID-19 housing boom, as many wanted to take advantage of record-low interest rates. The shortage intensified when mortgage rates skyrocketed as homeowners refused to sell and lose the benefit of their locked-in low rates.”

Lawrence Yun sees two future scenarios playing out depending on various factors.

The first is “some easing” in the economy and inflation, which could lead to a slight decline in mortgage rates and more buyers entering the market. It would also depend on developers stepping up construction and renovating existing homes.

“House prices will not collapse in this scenario,” Yun said. “House price growth will depend on the ability of homebuilders to bring sufficient supply to the market.”

The other scenario is where an economic recession leads to job losses and, as a result, forced home sales and a loss of consumer confidence. This would also lead to much lower interest rates, and about 70 to 80 percent of households with stable employment could benefit from these rates.

“We are not going to see a repeat of the housing market crash of 2008 to 2012. There are no subprime mortgages that could implode, nor the combination of massive oversupply and overproduction of housing,” he said.

The current real estate market is not speculative, prices are justified by high demand with the shortage of goods on the market. The monetary policy of central banks has only a marginal effect on housing prices. The adjustment is made on the volume of sales. This results in an exclusion effect from real estate ownership of a part of the population with average incomes. By being mistaken about the causes, we are mistaken about the remedies. Public authorities must be extremely attentive to supporting housing dynamics and private investment.

André Perrissel
World Property Business Club