The economic and financial situation is dominated by uncertainty, what are the scenarios that are emerging in terms of interest rates, inflation and real estate activity. Decryption by Michel Mouillart
Before the outbreak of the war in Ukraine, the great economic imbalances inherited or not from the health crisis had begun to affect the activity of the old market: strengthening of inflation and deterioration of purchasing power, in the context of Malthusian wage policies; tightening of access to real estate loans imposed by the Banque de France; deterioration of the morale of families with less and less support for the uncertainties deriving from the Covid-19 crisis and its multiple health and social consequences.
Three months after the outbreak of the war in Ukraine, the observation is that of growing uncertainties and the strengthening of economic and financial imbalances, with in particular further pressure on prices and a significant rise in interest rates. And what could have been just a bad parenthesis for the old housing market is turning into a shock for activity, the intensity and duration of which are still uncertain.
The rise in interest rates
The economic and financial situation is dominated by uncertainty, as the duration of the war in Ukraine is so uncertain, as is its end.
All the scenarios proposed so far testify to this, whether they are presented in the second half of March (Banque de France, ECB or Société Générale) to promptly inform the main decision-makers in the best possible way, or shortly afterwards, towards the end of April, to take into account the multifaceted and complex interactions taking place in Western economies (BNP-Paribas, Crédit Agricole or FMI) and to refine forecasts.
But there is no longer any doubt that the shock of activity on economic growth should remain contained in 2022: with GDP slowing but still growing from 3.2% to 3.4% (against + 3.6% expected before the outbreak of the war) for the Banque de Francia, BNP-Paribas or Crédit Agricole; even if some scenarios (ECB, IMF or Société Générale) are a little less “optimistic” and show a growth of 2.7% to 2.9%, which is increasingly probable.
On the other hand, the inflationary shock is very clear in 2022: after + 2.1% in 2021, between 3.7% (Banque de France and Société Générale) and around 5% (BNP-Paribas and Crédit Agricole), against 2.5% generally expected before the outbreak of the war.
It is through this inflationary shock that the impact of the war on the French economy is expected to be the most significant. Because its consequences will be numerous, both on the purchasing power of families and on their morale and therefore on their intentions to engage in major purchases, as well as on the evolution of mortgage rates and therefore on the ability to access credit (longer rates , with probably shorter durations, and ultimately a bite of the tightening of access to credit decided by the Banque de France which is more painful for borrowers).
Furthermore, apart from the Banque de France scenario which, as usual, shows the lowest 10-year OAT rate on the market (0.70% on average in 2022, compared to 0.01% in 2021), banks present quite “pessimistic” rates scenarios: with an average rate between 1.10% (Société Générale) and 1.25% (BNP-Paribas and Crédit Agricole), for a rate of 1.50% at the end of the year. As of December 2021, the 10-year OAT rate stood at 0.05%, on a monthly average. The shock will therefore be serious: knowing that in April 2022 the average rate was already 1.27%.
According to these banking scenarios, mortgage rates to individuals will obviously increase in 2022: for an average April rate of 1.27% according to the Observatoire Crédit Logement / CSA (1.07% in 2021, of which 1.06 % in December 2021), and under the shared hypothesis (but increasingly less likely) of a maintenance of the ECB intervention rates, the average rate expected in 2022 should be between 1.40% and 1.50%. In comparable situations, the loan rate “transfers” less than a third of the changes in the 10-year OAT rate: especially given the current levels of usury rates that will only be changed on July 1st! If that were the case, the mortgage rate would close 2022 at around 1.75%: it would return to the level of spring 2016, but the inflation rate at the time was only 0.12%.
And a half-auction credit production
In consideration of the trend in mortgage interest rates which is foreseeable in the coming months, the production of mortgages should not show dynamism.
But by itself, the level of interest rates is not the determining variable in the decision to borrow. Furthermore, between December 2021 and March 2022 the rate hike was only very modest, while for several months the press releases of most financial intermediaries announced an increase (often rapid, between 10 and 30 basis points) for the month just started: but in fact, an increase of only 5 basis points according to the Banque de France (1.15% in March) and 12 points for the Crédit Logement / CSA Observatory (1.18% in March). However, during the first two months of the year, the number of loans to individuals to finance the purchase of an old home had already decreased by 8% year over year (YY); it fell by 27.8% in March alone (year on year), demand was greatly destabilized by the outbreak of the war in Ukraine; all this means that overall the number of loans decreased by 16% (on an annual basis) in the 1st quarter of the year.
And the decline in demand continued in April, in an electoral context not favorable to the expansion of real estate markets. Thus, in the first quarter of 2022, the number of loans granted decreased by 19.4% year-over-year. The shock is severe, commensurate with the current situation.
However, banking institutions have tried to limit the increase in loan rates and the consequences it should have had: keeping the duration of the loans granted high and transferring the increase only slightly to young people in the first home. . . It is probably to avoid a further increase in the duration of the loans (particularly to young people with low personal contributions) that the Banque de France has, against all expectations, (slightly) reduced the usury rate for the 2nd quarter on loans beyond 20. years (which represents over 65% of loans granted): while at the same time it has significantly increased the usury rate on loans under 10 years (less than 4% of production) largely consumed by the over 55 (for whom it is easier to mobilize a significant personal contribution)!
Furthermore, the main changes already underway in the first quarter of the year should be strengthened, at least until the summer. Even before the outbreak of the war in Ukraine, the reduction in the production of loans to individuals was to be 8.5% in 2022 according to the OPCI (for 182.5 billion euros, against 199.5 billion euros). € in 2021): the implementation of HCSF recommendations for a full year, accelerating inflation, tensions on credit rates, worries about purchasing power, all would have contributed to this decline. With the outbreak of war in Ukraine, all imbalances deepen. Production should therefore drop much more, reaching 170 billion euros: a drop of 14.8% in total. Such a development is not fundamentally catastrophic: on the one hand, such a level of production would in fact be comparable to that observed in 2017 or 2018, therefore satisfactory for years for real estate markets; and on the other, from 2023 the production of loans should recover and allow the recovery of demand, without however returning to the particularly high levels of 2019 and 2021.
An old market in trouble
In a context of growing uncertainty and tighter access to credit, after several months of market expansion, purchases of existing homes by individuals have weakened since the beginning of the year. As early as January 2022, the number of compromises signed in the past 3 months was down by 4.7% year-over-year, according to the LPI-SeLoger barometer. And the downward movement intensified in February, dropping 8.5%.
Since March, the additional shock caused by the war in Ukraine has reinforced the market weaknesses observed thus far: sales fell by 23.6% in Q1, year-over-year, with no hope of a rapid turnaround or even a recovery.
However, since the outbreak of the war in Ukraine, prices have not fallen more than before in cities with more than 50,000 inhabitants. Thus, in March 2022, the price increase continues in 93% of large cities. At the most, it can be noted that in the context of a significant deterioration in demand, the increase in prices of more than 10% is observed in only 27% of the big cities, compared to 30% until last February. But of course, after several years of sometimes rapid growth, the rate of increase may slow down in some cities: in Bordeaux, Lyon, Mulhouse or Strasbourg for example, but that doesn’t mean that prices are falling rapidly and generally.
Because in fact the market is changing profoundly. The difficulties in accessing credit which, until summer 2021, had mainly affected candidates for purchases with low personal contributions (young people and low-income families), have also begun to penalize middle-income families who can no longer borrow enough and they have to give up or shift their demand, given the price levels. Furthermore, as for more than half of them, these families who cannot make the purchase were retailers, they also cancel their resale plans and the market is no longer sufficiently supplied (in houses and apartments), reinforcing price pressures. of goods even rarer than before.
So the market collapses and prices hold on. The number of old homes purchased by private individuals should therefore decrease in 2022, but it is not possible to hope for public support to cushion the decline. Before the outbreak of the war in Ukraine, in response to the deterioration of the market environment (including the tightening of the lending conditions decided by the Banque de France), purchases of existing homes would have had to decrease by about 6%, to start increasing. slowly from 2023.
With the outbreak of the war the activity of the old market will decrease even more, at least by 10% in 2022 and if nothing will degrade even more (public decisions, for example) an already degraded environment! Although there are few sources of recovery for this market, particularly due to the rationing of access to credit, purchases made by individuals are likely to stagnate between 2022 and 2024.
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