French house prices continue to rise modestly
Lalaine C. Delmendo | July 15, 2019
Paris saw a significantly stronger house price increase than the wider nation. The average price of existing apartments in the capital city rose by 6.5% (5.2% inflation-adjusted) to €9,680 (US$11,000) per square metre (sq. m.) during the year to Q1 2019, according to the La Chambre des Notaires de Paris.
- In Île-de-France, the country's wealthiest and most populated region, the average apartment price rose by 4.5% y-o-y (3.3% inflation-adjusted) to €6,010 (US$ 6,830) per sq. m. to Q1 2019.
- In the Petite Couronne (Small Crown), the average price of apartments rose by 4.4% y-o-y (3.2% inflation-adjusted) to €4,730 (US$ 5,375) per sq. m.
- In the Grande Couronne (Great Crown), the average price of apartments increased by a meager 0.3% y-o-y (fell by 0.9 when adjusted for inflation) to €2,970 (US$ 3,375) per sq. m.
- In Hauts-de-Seine, one of the country's most populous department, apartment prices increased 4.3% y-o-y (3.1% inflation-adjusted) to €5,800 (US$ 6,591) per sq. m.
During the long housing boom which lasted 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. After falling by an annual average of 1.7% in 2012-2015, house prices started to rise again in 2016.
While the short-term outlook remains positive, the market seems poised for a pause. Perhaps house prices have been pushed too high by low interest rates relative to rents?
Existing home sales rose by 2.6% to an annualized 985,000 units in Q1 2019, according to the General Council for the Environment and Sustainable Development (CGEDD). In contrast, new home sales fell slightly by 0.4% to 30,863 units in Q1 2019 from a year earlier.
Residential construction is now falling. During the first four months of 2019, dwellings authorized fell by 7.3% y-o-y to 134,400 units while dwelling starts dropped 5% y-o-y to 124,400 units, according to the Ministry of Ecological and Solidarity Transition.
France's economic growth is slowing. The economy grew by 1.6% in 2018, a slowdown from the prior year's 2.2% growth. The growth was primarily driven by exports, which helped offset a slowdown in consumer spending after violent “yellow vest” protests forced many stores in Paris to close on key year-end shopping days. On an annual basis, GDP rose by 1.2% during Q1 2019, at the same pace as the previous quarter.
Economic growth is expected to slow further to 1.3% this year, according to the European Commission.
There are no restrictions on foreign ownership in France. Most property is freehold. Apartments are mostly held in two forms of freehold: co-ownership (which has meetings of co-owners, with votes taken and accounts kept), and volumes, adapted mostly for mixed-use developments. There are also leaseholds, for up to 99 years.
Rental returns in Paris are disappointing
The good news is that if you have an apartment in Paris you will have no trouble letting it. Demand outstrips supply, the main reason that rents are not higher being that French rental contracts are often long-term and there are legal restrictions on raising rents during the contract.
However gross rental yields from apartments in Paris are poor, at around 4.2% for small apartments and 3.9% for big apartments (however it is fair to say that our Paris yields results arguably may not reflect yields in less desirable locations, which are likely to be higher, because our sample focuses on Paris' high-end city centre).
The price of a 120 sq. m. apartment in these locations is around EUR 970 per sq. m., or EUR 90.1 per sq. ft. This year, we did not find a big price-difference between smaller and larger apartments.
The average monthly rent ranges from EUR 32 to EUR 35 per sq. m., or EUR 3.8 to EUR 3.25 per sq. ft. Smaller apartments tend to rent for proportionately more.
Round trip transaction costs are high on residential property in France. See our French residential property transaction costs analysis and our Transaction costs in France compared to other countries.
Rental income tax is surprisingly low in France
Rental Income: The effective rate of tax on gross rental income accruing to nonresident foreigners is likely to be around 10.00% on an income of €1,500/month, according to calculations provided by Anthony & Cie.
Capital Gains: Capital gains are generally taxed at 19%. Capital gains tax is levied at 33.33% for non-EU citizens.
Inheritance: French private international law uses the standard double rule on inheritance: the law of the deceased’s domicile applies to moveable assets, and the law of the location of the property applies to immoveable assets.
Residents: French residents are taxed on their global income at progressive rates, from 5.5% to 45%.
Transaction costs are moderate to high in France
Round-trip transaction costs in France can range from 7.90% to 28.99%%. New properties have the highest costs because of the 20% VAT but this is slightly offset by a lower registration fee. Real estate agent fees range from 3% to 10% typically split between buyer and seller.
Tenant protection laws are onerous in France
French tenancy law is very pro-tenant.
Rent: Though the initial rent can be freely agreed, the rent can only be revised once a year, and not more than the increase in the (new) INSEE rental index. In combination with a highly restrictive contract structure, this means that rentals of old apartments have tended to drag well behind new rentals and prices.
Tenant Security: An unfurnished property contract has, as a minimum, a three-year term, though furnished property contracts may be for one year. In both cases, even when the contract ends, the owner can only recover the property if he or a family member intends to live there, or he intends to sell. In addition, eviction through the legal system takes a long time.
Economic growth to slow further; budget deficit to rise againThe French economy grew by 1.6% in 2018, a slowdown from the prior year’s 2.2% growth, amidst social unrest and a broader eurozone slowdown. The growth was primarily driven by exports, which helped offset a slowdown in consumer spending after violent “yellow vest” protests forced many stores in Paris to close on key year-end shopping days.
On an annual basis, GDP rose by 1.2% during Q1 2019, at the same pace as the previous quarter.
Macron’s tough economic agenda was strongly rejected by the working class, resulting in more than six months of social unrest. The “yellow vest” protest movement, which began in November 2018 as a peaceful backlash against rising fuel and living costs, quickly morphed into a wider rebellion against Macron’s pro-business economic policies. A total of 11 deaths have been linked to these protests, with 76 others seriously injured.
Desperate to contain the uprising testing Macron’s authority, the government unveiled a €10 billion package in December 2018, aimed at increasing wages for the poorest workers and providing tax cuts for most pensioners.
From 2004 to 2007, the French economy expanded by an average of 2.3% per year. In 2009, real GDP fell by almost 3%, the country’s sharpest recession since World War II. The French economy expanded by 1.9% in 2010 and by another 2.2% in 2011.
In 2012, the economy stagnated, with growth of 0.3% as President Francois Hollande squeezed the budget deficit and firms slashed thousands of jobs. France’s weak economic expansion continued in 2013 and in 2014, with growth rates of around 0.6% and 0.9%, respectively. The economy has bounced back somewhat in the following years, with real GDP growth rate of 1.1% in 2015, 1.2% in 2016 and 2.2% in 2017.
France’s economy is expected to expand by 1.3% this year and 1.5% in 2020, according to the European Commission.
In May 2019, inflation stood at 0.9%, down from 1.3% the previous month and the lowest level in two years, based on figures from INSEE. Inflation is expected at 1.3% this year, from 2.1% in 2018, 1.2% in 2017, 0.3% in 2016, 0.1% in 2015 and 0.6% in 2014.
France’s budget deficit was about 2.5% of GDP in 2018, down from 2.8% of GDP in 2017 and the lowest level since 2006, according to INSEE. It was the second straight year that the deficit was below the EU’s 3% limit. However, the shortfall is expected to rise again to 3.2% of GDP this year, as payroll tax credit scheme becomes a permanent tax cut.
Despite this, France’s government debt remains one of the highest in the eurozone. In 2018, government debt was 98.4% of GDP, unchanged from the previous year but up from 95.6% in 2015, 93.4% in 2013 and 87.8% in 2011, according to INSEE.
Unemployment falling, amidst labour market reforms
France’s unemployment rate continues to fall. In Q1 2019, the nationwide jobless rate stood at 8.7%, down from 9.2% in Q1 2018 and 9.6% two years ago, according to INSEE. Despite this, France’s unemployment rate remains above the EU’s average of 7.7% in March 2019 and the eurozone’s average of 6.4%.
Over the same period, jobless rate was just 3.2% in Germany and 3.8% in the UK.
French president Emmanuel Macron, who was elected last May 2017, has begun taking steps to ease the burden of the country’s onerous labour code, and reduce the distance between the (highly protected) long-term employed, and those who are on short-term contracts or unemployed. In September 2017, Macron signed a wide-ranging series of decrees to reform the country’s labour laws, despite opposition from labour unions.
“France’s problem is that it has had mass unemployment for 30 years,” Macron said. “The reality is that we are the only big European country that hasn’t won the battle against unemployment.”
The new labour laws make it easier to hire and fire employees, in an effort to reduce the financial and legal risks of layoffs that discourage businesses from hiring more workforce. In addition, the new rules also increase sanctions against those who failed to look properly for work.
Macron also plans to cut the country’s unemployment benefits and extend the period that people must work to qualify for the aid, in an effort to encourage work and investment. The government is also expected to increase payroll taxes on companies that use to many short-term contracts.