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Feb 25, 2014

French housing market weak, economy stagnant


 

France house pricesFrance's housing market remains weak, with the economy hardly moving and unemployment at a record high.  But in Paris transaction volumes are rising.

In Metropolitan France, house prices fell by 1.64% during the year to end-Q3 2013, its sixth consecutive quarter of year-on-year declines, according to the National Institute for Statistical and Economic Studies (INSEE). When adjusted for inflation, house prices actually dropped by 2.57% over the same period.  On a quarterly basis, house prices in Metropolitan France increased 1.12% (1.03% inflation-adjusted) in Q3 2013.

In Ile-de-France, the wealthiest and the most populated region of France, the average apartment price dropped by 1.6% (-2.5% inflation-adjusted) y-o-y to €5,510 per square meter (sq. m.) in Q3 2013 from a year earlier, based on figures released by La Chambre des Notaires de Paris.

  • In Paris, apartment prices dropped by 2.1% (-3.1% inflation-adjusted) y-o-y to an average of €8,260 per sq. m. in Q3 2013.
  • In the Petite Couronne (Small Crown), the average price of apartments fell by 1.3% y-o-y (-2.3% inflation-adjusted) to €4,420 per sq. m. in Q3 2013.
  • In the Grande Couronne (Great Crown), the average price of apartments dropped by 0.6% (-1.6% inflation-adjusted) to €3,110 per sq. m. in Q3 2013 from a year ago.

During the housing boom (1997-2007) French house prices surged by 150% (112.5% inflation-adjusted). However, the housing market started to weaken in 2008, mainly due to the global crisis. House prices fell by 3.82% (-5.58% inflation-adjusted) in 2008 and by another 4.07% (-4.36% inflation-adjusted) in 2009.

The housing market bounced back strongly in 2010, with house prices rising by 7.57% (5.85%). In 2011, the housing market started to slow, with house prices rising by just 3.66% (1.14% inflation-adjusted), mainly due to the adverse impact of the eurozone debt crisis. In 2012, house prices dropped again by 2.08% (-3.58% inflation-adjusted) from a year earlier.

From January to November 2013, the total number of existing homes sold in France fell slightly by 1.7% to 701,000 units from the same period last year, according to the Conseil général de I'environnement et du développement durable (CGEDD).

However, demand is already rising in some prominent areas. In Q3 2013, the total number of existing home sales in Paris rose by 13% from the same period last year, according to La Chambre des Notaires de Paris. Likewise, sales of existing homes also increased in Petite Couronne (15%), Grande Couronne (14%) and Ile-de-France (14%) over the same period.

Residential construction activity remains down. The total number of house permits issued in France fell by 12.6% to 432,885 units in 2013 from the previous year, according to the Ministère de l’Écologie, du Développement Durable et de l'Énergie. Likewise, the total number of houses started also dropped 4.2%, to 331,867 units in 2013 from a year earlier.

As in the past two years, France’s housing market is expected to experience modest house price falls in 2014, according to local real estate agents. "If interest rate [for] mortgages remain stable, there will be less than 2% decline [in 2014],” says Laurent Vimont , CEO of Century 21.

In the fourth quarter of 2013, the French economy, the eurozone’s second largest economy, expanded by 0.3% from the previous quarter, an improvement from the 0.1% contraction recorded in the previous quarter, according to INSEE. In 2013, real GDP growth was estimated at 0.1%, after almost no growth in 2012. In 2014, the economy was expected to expand by 0.9%.

Still relatively low interest rates

France interest rates graph

New lending activity fell 7.8% from the previous quarter, and by 17.2% during the year to Q3 2011, according to the European Mortgage Federation (EMF). After nearly three years of historically low key rates (at 1%), the ECB lifted its interest rate for the first time in April 2011 to 1.25%. The key rate was raised again in July to 1.50%, but lowered to 1% in December 2011 as the eurozone crisis worsened.

Actual mortgage rates are still trending up:

  • The average rate on new housing loans with initial rate of fixation (IRF) of more than a year was 3.7% in January 2012, up from 3.07% a year earlier.
  • Interest rates on loans with IRF of one year or less rose to 4.02%, from 3.5 %.

“Following last month´s rate reductions (February 2012), many French banks are now passing on the recent falls in the main rates,” said John Busby of Athena Mortgages in March 2012. “Those who began their applications recently… can now enjoy rates as much as 0.60% lower than in January. A 20 year fixed rate now goes for 4.25% at 80% LTV.”

Tighter mortgage market

France outstanding house loans graph

France’s mortgage market is one of the EU’s largest. From 2004 to 2007, total outstanding housing loans rose by an average of 14% per annum. During the last decade the mortgage market grew enormously, from 22% of GDP in 2000, to 43.7% of GDP in 2011.

Over 80% of all owner-occupied dwellings in France are bought with mortgages, and more than 80% of housing loans are fixed rate. Due to the dominance of fixed rate mortgages, France’s housing market is arguably less prone to sharp upturns and downturns.

France’s mortgage market grew 5.86% in 2011, but in the second half, growth slowed. The banks were already becoming stricter in the first half of 2011 as they adopted Basle III criteria, which require that total outstanding loans should be no more than six times the borrower’s income. Moreover, there was also an increasing trend for banks, especially those holding large quantities of Greek debt, to be reluctant to lend to international investors, and to close their doors to non-residents.

France has low rental yields

The development of France’s rental market is constrained by rent controls. Initial rents are freely determined, but can be revised only once a year, and not by more than the (new) INSEE rental index. Around 93% of the landlords are private individuals rather than corporations, according to INSEE surveys.

Around 57% of France’s housing stock belongs to owner-occupiers, which means that almost half France’s population are renting. Of primary residences, around 24% are privately rented, while 18% are socially rented.

From 2000 to 2011, apartment prices in France rose by 144.44% (184% in Paris) - much more than the country’s rent index, which over that period rose only 32%, partly because in certain periods, the allowable rent increase has been below inflation.. This has resulted in unsatisfactory rental yields, especially in Paris, which now has yields ranging from 3.26% to 3.85%, according to Global Property Guide Research (July, 2011). The rent index increased by only 2.11% during 2011.

Rents in Paris were relatively stable at an average of €22.40 per square meter. Meanwhile, rents in the largest regional cities such as Bordeaux, Lille, Lyon, Marseille, Nantes, Rennes and Toulouse, were only almost half of Paris’ at an average rent of €22.40 per square meter, according to CBRE.

Tax reforms

New tax reforms are likely to pressure France’s housing market in 2012:

  • VAT hike from 5.5% to 7% for housing maintenance and renovation;
  • Reduction of tax credits for equipment installation to improve housing energy performance, to 15%;

Higher tax on abusive rents for units smaller than 13 square meters.

  • The Scellier scheme, allowing a 22% tax exemption from the property price, was cut to 13% in 2012, and will be axed by the end of December 2012.

Aside from the tax reforms, from 2012 the zero-interest loan scheme will be limited to first-time buyers of new homes, and social housing tenants who want to purchase their home. Other modifications are: 1) the share of the loan in the total financing plan of the house purchase should be equal or lower than 10% in 2012; and 2) the energy performance of the house will directly determine eligibility in 2013.

French economy struggling

France GDP inflation

From 2004 to 2007, the French economy expanded by an average of 2.3% per year. However, the economy contracted by 0.08% in 2008, due to the global crisis. Real GDP declined again by another 3.1% in 2009, France’s sharpest recession since World War II. Despite the worsening eurozone debt crisis, the French economy managed to expand by 1.7% in 2010 and by another 2% in 2011.

Yet the French economy recorded no growth in 2012, as firms slashed thousands of jobs and President Francois Hollande squeezed the budget deficit, according to National Institute for Statistical and Economic Studies (INSEE).

In 2013, real GDP growth was estimated at a meagre 0.1%. “This is obviously not enough,” said French Finance Minister Pierre Moscovici.

The government revised its economic growth forecast for 2014 down to 0.9% from the initial forecast of 1.2%. The French economy is projected to grow by 0.1% in Q1 2014 and 0.7% in Q2 2014, according to INSEE.

Public debt is expected to hit a record 95.1% of GDP this year, up dramatically from 85.8% of GDP in 2011, and far higher than previous estimates.  France’s public deficit reached 4.1% of GDP in 2013, down from 4.8% of GDP in 2012 but higher than its EU-agreed target for 2013. The government aims for a 3.6% of GDP deficit this year, by tightening spending of local authorities and ministries. About €15 billion is expected to be saved this year through austerity measures.

France’s high unemployment is another problem. The jobless rate reached 11.1% in December 2013, up from 10.6% in a year earlier and the highest level since Q2 1999. In November 2013, the total number of unemployed persons in France rose to about 3,293,000. French unemployment is expected to stabilize at about 11% in the second quarter of 2014, based on estimates released by INSEE.

Inflation stood at 0.7% in January 2014, according to INSEE.

In May 2012 Francois Hollande became the country’s first Socialist president since Francois Mitterand (1981-1995), beating incumbent Nicolas Sarkozy. His government is now struggling with weak economic growth, poor competitiveness, a record high jobless rate and overall economic uncertainty.

In November 2014, international ratings agency Standard and Poor’s lowered its ratings for French sovereign debt, as doubts increased over the effectiveness of Hollande’s policies.






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