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Oct 17, 2015

House price declines continue in France

France house pricesHouse prices in Metropolitan France fell by 2.75% during the year to Q2 2015, the thirteenth consecutive quarter of year-on-year price declines, according to the National Institute for Statistical and Economic Studies (INSEE).  When adjusted for inflation, house prices fell by 2.96%. During the latest quarter, house prices in Metropolitan France fell by 0.58% (-1.47% inflation-adjusted).

In Ile-de-France, France’s wealthiest and most populated region, the average apartment price fell by 2.97% (-3.18% inflation-adjusted) to €5,220 (US$ 5,875) per square metre (sq. m.) during the year to Q2 2015, according to the La Chambre des Notaires de Paris.

  • In Paris, apartment prices declined by 3.08% (-3.28% inflation-adjusted) to €7,880 (US$ 8,868) per sq. m. y-o-y to Q2 2015.
  • In the Petite Couronne (Small Crown), the average price of apartments dropped by 2.54% y-o-y (-2.75% inflation-adjusted) to €4,220 (US$ 4,749) per sq. m.
  • In the Grande Couronne (Great Crown), the average price of apartments also fell by 3.68% (-3.89% inflation-adjusted) to €2,880 (US$ 3,241) per sq. m.

Despite these price declines, sales of existing apartments in Paris rose by 15% y-o-y to around 8,070 transactions in Q2 2015, according to La Chambre des Notaires de Paris. In Ile-de-France, existing apartment sales were up by 21% to 25,560 transactions. Petit Couronne registered a 26% y-o-y increase in apartment sales over the same period, while in Grande Couronne sales were up by 19% y-o-y.  House sales volumes also rose in Ile-de-France (18%), in Petit Couronne (22%) and Grande Couronne (17%).

This is a Paris phenomenon.  The number of existing homes sold in France as a whole only rose by 1.4% to 740,000 units during the year to August 2015, according to the Conseil général de I´environnement et du développement durable (CGEDD).

French construction has fallen to its lowest for more than 15 years, worsened by a new rental law capping rents in expensive areas (such as Paris).

History of recent prices

During the boom from 1997 to 2007, French house prices surged by 150% (112.5% inflation-adjusted).

The housing market started to weaken in 2008, but price-falls have been moderate:

  • In 2008, house prices in France fell by 3.82% (-5.48% inflation-adjusted)
  • In 2009, house prices fell by 4.07% (-4.41% inflation-adjusted)
  • In 2010, house prices rose by 7.57% (5.82% inflation-adjusted)
  • In 2011, house prices rose by 3.66% (1.19% inflation-adjusted)
  • In 2012, house prices fell by 2.08% (-3.56% inflation-adjusted)
  • In 2013, house prices fell by 1.85% (-2.48% inflation-adjusted)
  • In 2014, house prices fell by 2.54% (-2.82% inflation-adjusted)

French house-buyers can now track house price changes week-by-week, after the launch of the LPI (Les Prix de l’Immobilier) index in September 2014. The LPI shows weekly house price changes, using data from banks and financial institutions including Sogeprom, Gecina, Crédit Foncier, as well as from the Syndicat National des Professionnels Immobiliers (SNPI).

The impact of the rent control law

In France, initial rents have till recently been freely determined, but revisable only once a year, and not by more than the (new) INSEE rental index.   However on 19 February 2014 the French Parliament passed a new law, the Loi pour l´accès au logement et un urbanisme rénové (ALUR: improving access to housing and updating town planning), also known as the ‘Loi Duflot’, after housing minister Cécile Duflot. The bill, which came into effect on March 27, 2014, set new rules regarding housing and property rentals:

  • One of the most relevant parts of the law was the rent cap on long-term rentals. Rents should not be higher than 20% above the median rent set by the Prefect in the urban areas.  This new rent control, which will be imposed on 28 cities with more than 500,000 inhabitants, will affect areas with high demand on rental properties such as Paris, which is expected to see monthly rents decline by from 20% to 25%.
  • Short-term rentals still need to seek authorization from the City of Paris, or the local town hall in areas with housing shortages.
  • Property owners are required to grant exclusivity to one letting or property agent.
  • A new mechanism for the Universal Guarantee of Rents (GUL) was introduced; tenants will no longer provide guarantors or pay a deposit, since the government will underwrite any non-payment of rent.

The Global Property Guide has long been firmly against rent controls, which harm tenants and landlords alike.  "It is the surest way to destroy a city without bombing it" noted our former chief economist Prince Cruz in The pros and cons of rent control.

These rent control laws are likely to have a highly unfortunate impact. As of 2013, around 57.8% of France’s housing stock belongs to owner-occupiers, which means that almost half France’s population are renting. Of primary residences, around 21.8% are privately rented, while 17.3% are socially rented.

Around 97% of French private rented dwellings have private individual landlords, while only 3% are owned by companies or institutions, according to Dr. Joris Hoekstra, researcher at OTB (TU Delft).

When combined with the significant protection given to tenants, who can stay in their properties long-term, these laws are persuading landlords to sell their buy-to-let properties, thus putting downward pressure on prices and increasing transaction volumes.

Rental yields were already low, even before the new legislation

Apartment prices in France increased by 137.11% (182% in Paris) from 2000 to 2014. The increase was higher than the rise of the country’s rent index during the same period by around 37%, partly because the allowable rent increase has been lower than inflation in certain periods.

This has led to disappointing rental yields, especially in Paris. Gross rental yields in Paris range from 3.07% to 3.64%, with smaller apartments having higher yields than bigger ones, based on the figures from the Global Property Guide research in July 2015. Also, during the second quarter of 2015, France’s rent index barely rose, increasing by only 0.08% from the same period last year.

In a study conducted by real estate agent Century 21, it was also observed that rental prices in France fell during the first half of 2015, registering an average drop of 1.7%. Century 21 observed that average rents of 2-bed and 3-bed apartments in Paris saw a 2% and 6% rent increases, respectively during the first half of 2015.

Rents in Ile-de-France have stagnated. Rents in Bordeaux and Lyon plunged, with rents in Lyon declining by 4.1% and 7% for two-bed and four-bed apartments. Other major cities in the country, except for Strasbourg and Montpellier, also experienced rent declines during the first half of 2015, according to Century 21. 

Low interest rates will encourage buyers

Mortgage interest rates remain low:

  • The average rate on new housing loans with initial rate of fixation (IRF) of more than one year was around 2.16% in July 2015, below the 2.96% rate a year earlier.
  • Interest rates on loans with IRF of one year or less also declined to 2.05%, down from 2.65% in July 2014.
  • 20-year fixed rate mortgage rates hit an all-time low rate of 2.55% in May 2015, but were raised to 2.70% in July 2015, according to the French Private Finance.

France interest rates graph

The ECB announced another interest rate cut In September 2014, reaching a new low of 0.05%, due to expectactions that the eurozone would continue to have weak economic growth (0.9% in 2014) and low inflation (0.6% in 2014). Aside from the rate cut, the ECB also announced an asset purchase programme, to buy debt from banks.

This was the second ECB rate cut in 2014, and its 7th since end-2011.

According to the latest European Central Bank’s (ECB) bank lending survey, credit standards for housing loans to households in France eased in Q2 2015 after a tightening in the first quarter.

Mortgage market growth

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. The mortgage market has doubled from around 22% of GDP in 2000 to 44% of GDP in 2014. France’s mortgage market grew by 2.25% in 2014, lower than the 3.76% growth recorded in 2013.

France outstanding housing loans

Over 80% of all owner-occupied dwellings in France are bought with mortgages. Floating-rate loans only make up 6% of new loans, and around 15.6% of outstanding housing loans, according to the Autorité de contrôle prudentiel et de résolution (ACPR). Due to the dominance of fixed rate mortgages, France’s housing market is arguably less prone to sharp upturns and downturns than many others.

Stronger growth, lower deficit expected in 2015

France’s economy had zero growth flat during the second quarter of 2015, according to the National Institute for Statistical and Economic Studies (INSEE). As compared to the previous year, however, GDP growth was 1.1% y-o-y to Q2 2015.

France GDP inflation

The recent stagnation is due to weak demand. Private consumption was up by only 0.1% in Q2 2015, down from 0.9% growth in the previous quarter. Public spending also registered a 0.4% growth, slightly lower than the 0.5% expansion in the first quarter.

From 2004 to 2007, the French economy expanded by an average of 2.3% per year. There was a slowdown in 2008, when the economy expanded by only 0.2%. In 2009, real GDP fell almost 3%, the country’s sharpest recession since World War II. Despite the worsening eurozone debt crisis, the French economy managed to expand by almost 2% in 2010 and by another 2.1% in 2011.

In 2012, the economy stagnated, recording growth of 0.2%. Firms slashed thousands of jobs and President Francois Hollande squeezed the budget deficit. France’s weak economic expansion continued in 2013 and in 2014, with growth rates of around 0.7% and 0.2%, respectively.

France’s economy is expected to grow 1.1% to 1.2% in 2015, based on the published forecasts from the IMF, the European Commission, and the Bank of France. Moody’s has downgraded France’s credit rating from Aa1 to Aa2 with a stable outlook, pointed to the EU’s “institutional and political constraints”, as well as France’s “continuing weakness in the medium-term growth outlook."

High unemployment is one of France’s major problems. In Q2 2015, unemployment was around 10.3% in France and 10% in Metropolitan France, slightly higher than the previous year´s 10.2% (France) and 9.7% (Metropolitan France).

Inflation was 0% in September 2015, below the 0.3% inflation recorded the same month last year.

The European Commission expects France’s public debt to rise to 96.4% of GDP in 2015, up dramatically from 85.8% of GDP in 2011, and far higher than previous estimates. The government was able to cut the country’s public deficit to 4% of GDP in 2014, down from 4.1% in 2013 but still lower than the EU cap of 3%. The government aims to bring down its deficit to 3.8% of GDP this year and by 3.3% of GDP in 2016. "The government is fully confident that it can bring its public deficit below 3% in 2017, while helping the economic recovery," according to Finance Minister Sapin.

In May 2012 Francois Hollande became the country’s first Socialist president since Francois Mitterand (1981-1995), In August 2014, France entered political turmoil triggered by Economy Minister Arnaud Montebourg´s demand for an end austerity policies. Montebourg demanded a fiscal stimulus to boost growth, arguing that France shouldn’t be “slavish” and “dogmatic” in pursuing deficit cuts.

In response President Hollande asked Manuel Valls, Prime Minister since March 2014, to form a new government “consistent with the direction set for the country”.  Montebourg was replaced as Economy Minister by Emmanuel Macron, a former investment banker at Rothschild. Michel Sapin, a career politician, was appointed Finance Minister, all of which signals a determination to continue France´s present austerity policies.


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