The well-known adage is that in real estate, what matters most is
1- Location 2- Location 3- Location
The value of certain locations is certain and undeniable. For example, in Paris, the Place des Vosges, the central districts, the heart of the 16th arrondissement, or a location offering an breathtaking view of the Eiffel Tower…
The exclusivity of these locations, intrinsically linked to the rarity of the properties found there, sustains a demand for these properties that is significantly higher than the supply. As a result, prices are very high.
This is why a “prestige” or “luxury” property doesn’t really have a fixed market price, because by nature, it is incomparable. Its sale price is what the buyer is willing to pay to acquire it. Therefore, in the realm of luxury real estate, the price is primarily the value attributed to the rarity of a property relative to its attractiveness. A property can be rare; if it doesn’t attract anyone, its price will be low.
The golden rule of location is actually just a consequence of market law. Real estate prices belong to a market—the real estate market—which, like any market, fluctuates based on supply and demand.
As long as demand in certain neighborhoods remains strong, prices stay high; as long as properties meet buyers’ criteria, prices are maintained. If buyers’ criteria change—due to shifts in lifestyles—demand will evolve, and so will prices.
The example of having an outdoor space, even a small one, is quite telling. Before COVID-related lockdowns, having a balcony had little or no impact on Parisian prices. Since then, having a balcony significantly increases the price, even if the balconies are generally small, narrow, and their surface area doesn’t even count in the Carrez measurement. Buyers are eager for this feature, which is also rare in Paris.
Thus, since the lockdowns, a balcony or outdoor space influences prices. Today, we see that accessibility to public transportation has become a very important criterion. In urban areas with more than 100,000 inhabitants, this criterion is a priority for 7% of respondents and is among the top three most important pieces of information for 24% of them.
Could this be a consequence of city policies against cars or of the French people’s growing awareness of the importance of reducing their carbon footprint?
Beyond the specific criteria of buyers, there are exogenous factors that influence real estate prices. The main exogenous factor is well known: interest rates.
The lower the rates, the cheaper the loan, and thus the greater the borrowing capacity of the buyer. Demand will increase for attractive properties, which will mechanically impact prices—it’s the law of supply and demand at play again: if demand becomes stronger than supply, prices rise.
Conversely, if interest rates increase, the cost of borrowing rises, which will weigh on demand, causing prices to fall.
Interest rates do not directly affect real estate prices; they influence supply. So once again, real estate prices are the meeting point of supply and demand.
So, real estate prices: rarity or level of interest rates?
Neither one nor the other, or perhaps both: it’s the market law—the law of supply and demand.