Cyclical situation, so temporary
Many are predicting alarming scenarios in the real estate market in recent days. The bad signs are justified by the war in Ukraine and its consequences for inflation, which may exceed 4% in 2022, as well as the strengthening of energy standards and rising prices per square meter, although the market is already tense due to insufficient supply. Adding these different factors scares away investors. Wrong, because the surrounding pessimism of real estate, of course, remains a safer investment if you plan for the medium and long term.
What are the current investment options for the saver? Money market products and bonds (at fixed rates) should be avoided, as yields are lower than inflation. Investments in the stock market are relevant, but their significant volatility corresponds only to certain profiles of the investor. Rental investments remain, which remain a reliable rate. However, in the short term the market may change, and it is possible that rental real estate is experiencing a decline in profitability, in particular due to rising construction costs. The fact remains that it remains indexed to inflation.
Historically, we have seen that the value of a property changes according to the cost of living, even if it is not automatic indexation and there may be time lags. At the same time, the need for housing will also increase, which will further unbalance the market. Thus, the main identified risk is short-term if the level of wages does not correspond to a sharp rise in consumer prices. And the longer the time lag, the greater the risk, somewhere with falling real estate prices, increased selling time and the possibility of default. However, these risks, if they existed, would be only temporary, until the natural adjustment of wages. This does not mean that long-term investments will not be profitable, on the contrary.
Bet on the long term to ensure profitability
The reality of the real estate market is that there is a significant need for housing in cities. However, demographic pressures are growing there, and housing production is and will remain insufficient in the coming decades. Therefore, supply will remain below demand. At the same time, the European Central Bank has announced that it will still have time before deciding to raise rates that remain historically low. In addition, given inflation, lending rates are even negative, which is a great window of opportunity to invest in real estate in search of profit. That is why it is better not to succumb to the policy of anticipation and continue to rely on rental investments, preferring tax exemption schemes that improve short-term profitability, and resorting to loans to take advantage of the surprise effect.
The High Council for Financial Stability, the credit regulator in France, now requires banks to adhere to a maximum debt ratio of 35% of the borrower’s income. However, they are given the freedom to act to allow them to exceed this limit, but only for 20% of their loans. As a logical consequence, to obtain the famous bank sesame now in almost all cases requires a personal contribution of at least 10%. In addition, with the entry into force of the law on climate and sustainability, banks are becoming more attentive to the energy performance of housing to take into account future costs of maintaining and heating real estate.