In the first quarter of 2025, real estate purchasing capacity of households in France continued its recovery, enabling the first rise in property prices in two years. However, this upward trend could be hampered by the slowdown in the rebound in households’ real estate purchasing capacity.
The real estate purchasing capacity index measures the amount of space that can be bought on credit by a representative household in each period. It depends on gross disposable income per household, the average interest rate on new loans, the average initial loan term, and real estate prices.
In the first quarter of 2025, two-thirds of the increase in real estate purchasing capacity was due to lower borrowing rates. After peaking at an average of 3.5% in the first quarter of 2024, they fell to 3.1% in the first quarter of 2025. A further decline in borrowing rates seems unlikely. Indeed, it is not the ECB’s rates, from which we expect one more cut of 25 basis points by the fall, but long-term rates that determine rates for house purchase in France. With the 10-year OAT rate currently around 3.20%, house purchase rates are likely to stabilize in the near future and could even rise slightly.
The improvement in households’ real estate purchasing capacity could also be hampered by a sharper rebound in property prices. According to the Notaires-INSEE index, in the first quarter of 2025, prices of existing dwellings rose by 0.5% year-on-year. This trend is expected to continue in the second quarter, as notarial projections indicate a year-on-year price increase of around 0.4% in May 2025. However, the rebound in real estate prices should quickly reach its limits as borrowing rates stop falling.
Other components of real estate purchasing capacity do not appear to be able to offset a rise in rates or prices. Household incomes are expected to continue to rise, but at a slower pace. The potential for extending loan terms is also limited. The maximum maturity set by the HCSF is 25 years, while the average is already over 22 years and almost 24 years for first-time buyers. The debt-service-to-income ratio is also unlikely to rise significantly. It stands at around 31%, while the HCSF has set a ceiling of 35%.
Finally, the improvement in households' real estate purchasing capacity could run out of steam in the coming weeks. Intense competition between credit institutions is resulting in very low interest margins, making it inevitable that market rate rises will be passed on. Home purchase intentions, which historically lag behind changes in real estate purchasing capacity by a few months, already fell in May 2025 to their lowest level since June 2016. Against this backdrop, the continued rebound in real estate prices appears uncertain.
