France’s housing market momentum stalls

France’s housing market is noticeably cooling – with house prices falling, amidst declining demand and slowing residential construction activity.

In Metropolitan France, the price index of second-hand dwellings fell by 1.94% (-6.33% inflation-adjusted) during the year to Q3 2023, in stark contrast to the y-o-y growth of 6.36% in Q3 2022 and 7.43% in Q3 2021, according to figures released by the National Institute for Statistical and Economic Studies (INSEE). It was the first y-o-y decline recorded since Q4 2015.

Quarter-on-quarter, house prices dropped by 1.13% (-1.76% inflation-adjusted) in Q3 2023.

House prices have been falling in the centre. During the year to Q3 2023:

  • In Île-de-France, the country’s wealthiest and most populated region, the average apartment price fell by 5.26% (-9.49% inflation-adjusted) y-o-y to €6,490 (US$ 7,175) per sq. m., according to the La Chambre des Notaires de Paris.
  • In the Petite Couronne, the average price of apartments was down by 6.1% (-10.3% inflation-adjusted) y-o-y to €5,230 (US$ 5,782) per sq. m.
  • In the Grande Couronne, the average price of apartments fell by 4.01% (-8.3% inflation-adjusted) y-o-y to €3,350 (US$ 3,704) per sq. m.
  • In Hauts-de-Seine, one of the country’s most populous departments, apartment prices fell by 6.5% (-10.68% inflation-adjusted) y-o-y to €6,330 (US$ 6,998) per sq. m.

France’s house price annual change

In Paris, house prices have been declining in the past two years – it seems the capital’s high cost of living is prompting some rural relocations. In Q3 2023, the average price of existing apartments in the capital city fell by 5.26% (-9.50% inflation-adjusted) to €10,090 (US$11,155) per sq. m, based on figures from the La Chambre des Notaires de Paris.

In a recent study conducted by the University of Paris and King’s College London, almost half of Parisians think that the city is too expensive and 43% believe that they could find a better quality of life elsewhere. Since the Covid-19 pandemic, people have been moving away from cities towards greener areas.

France Average Price of Existing Apartments in Paris graph

Demand is falling sharply. Existing home sales in France were down by a huge 20% in the twelve months to October 2023 as compared to the same period last year, at 908,000 units, following a y-o-y decline of 5.2% in 2022 and an annual increase of 14.7% in 2021, according to the General Council for the Environment and Sustainable Development (CGEDD). Likewise, new home sales plummeted by 38.7% y-o-y to 54,835 units in the first three quarters of 2023, based on figures from the Ministère de la Transition Écologie.

Residential construction activity is also down. In the first eleven months of 2023, new dwellings authorized in France, excluding Mayotte, plunged by 27.3% y-o-y to 297,609 units, according to the INSEE. Over the same period, new dwelling starts fell sharply by 23.8% y-o-y to 223,048 units in Jan-Nov 2023.

The French economy, the euro zone’s second-largest, expanded by a modest 2.5% during 2022, following a 6.4% expansion in 2021 and a huge 7.7% contraction in 2020. However, the economy is projected to slow further, with the European Commission projecting a real GDP growth rate for France of just 1% in 2023 – at par with the forecast released by the International Monetary Fund (IMF).

France’s housing cycle

During the long housing boom which lasted from 1997 to 2007, French house prices surged by 150% (112.5% inflation-adjusted). Since then the French housing market has not moved much.

The market started to weaken in 2008, amidst the global financial crisis. Price falls were moderate, as have been price rises since then. After falling by an annual average of 1.7% in 2012-2015, house prices started to rise again in 2016.

Despite the pandemic, house price growth strengthened to 6.4% (6.32% inflation-adjusted) in 2020 and to 6.93% (4.1% inflation-adjusted) in 2021. These two years had been the highest growth since 2010.

During 2022, house prices increased by 4.69% from a year earlier but dropped 1.3% in real terms, amidst heightened inflationary pressures.

HOUSE PRICES IN FRANCE, ANNUAL CHANGE (%)
Year Nominal Inflation-adjusted
2008 -3.75 -5.41
2009 -4.09 -4.44
2010 7.60 5.86
2011 3.68 1.20
2012 -1.96 -3.44
2013 -1.81 -2.44
2014 -2.52 -2.79
2015 -0.50 -0.59
2016 1.50 0.99
2017 3.25 2.08
2018 3.34 1.41
2019 3.78 2.67
2020 6.40 6.32
2021 6.93 4.10
2022 4.69 -1.30
Sources: National Institute for Statistical and Economic Studies (INSEE), Global Property Guide

Property demand is plummeting

Existing home sales in France were down by a huge 20% in the twelve months to October 2023 as compared to the same period last year, at 908,000 units, following a y-o-y decline of 5.2% in 2022 and an annual increase of 14.7% in 2021, according to the General Council for the Environment and Sustainable Development (CGEDD).

From 2015 to 2019, existing home sales have been growing by 9.1% annually. Sales dropped 4.8% in 2020 during the onset of the Covid-19 pandemic.

France Number of Existing Home Sales graph

Likewise, new home sales fell by 12.1% q-o-q and by 39.7% y-o-y to a seasonally adjusted 16,201 units in Q3 2023, according to the Ministère de la Transition Écologie. The number of new homes sold has been declining q-o-q in the past six consecutive quarters. 

In the first three quarters of 2023, new home sales plummeted by 38.7% to 54,835 units as compared to the same period last year.

“Three months ago properly priced properties were selling in a fortnight, but now there are not enough buyers,” said Helena Hermanns of Leggett Immobilier. “It’s the quietest we have been for five years.”

While there has been an observed increase in interest from international buyers, this is not enough to fill the gap created by space-seeking Parisians leaving the city centre for the suburbs or other cities outside France.

“Strongest interest is from U.S. buyers, but we also have some from Asia Pacific and the U.K. looking to buy second homes in Paris,” said Yves Romestan, chief executive of YRSA Résidences par Progedim, an estate agency.

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.

Residential construction activity falling

Recently, residential construction activity is showing signs of a slowdown. In the first eleven months of 2023, new dwellings authorized in France, excluding Mayotte, plunged by 27.3% to 297,609 units as compared to the same period last year, following y-o-y increases of 2.3% in 2022 and 20.4% in 2021, according to the INSEE.

Likewise, the number of new dwellings started in France, excluding Mayotte, fell sharply by 23.8% y-o-y to 223,048 units in Jan-Nov 2023, after a decline of 6.7% in 2022 and a growth of 10.5% in 2021.

France Residential Construction graph

During the peak of the housing market (2005-07), new dwellings authorized and dwellings started averaged 575,000 units and 483,000 units, respectively, every year.

Construction activity started to slow in 2008 due to the global financial crisis. In 2009, permits fell sharply to just 380,200 units and starts to only 345,500 units.

The sector gradually recovered since. From 2010 to 2022, new dwellings authorized averaged 455,150 units while dwellings started averaged 382,300 units over the same period.

France Number of Authorized Dwellings graph

Mortgage interest rates are rising, amidst successive ECB rate hikes

In December 2023, the European Central Bank (ECB) kept its repo rate unchanged at 4.50%, after ten consecutive rate hikes since June 2022 when the repo rate was at a record low of 0%, to curb the high inflation in the region.

As a result, mortgage interest rates are now rising. In October 2023, the average interest rates on new housing loans rose sharply to 3.42%, from 1.77% in the previous year and 1.13% two years ago.

By initial rate fixation (IRF):

  • Floating rate and IRF of up to 1 year: 3.64% in October 2023, up from 1.67% in October 2022 and 1.19% in October 2021
  • IRF of over 1 and up to 5 years: 3.64%, up from 1.77% in the previous year and 1.19% two years ago
  • IRF of over 5 and up to 10 years: 2.77%, up from 1.47% in the previous year and 0.85% two years earlier
  • IRF of over 10 years: 3.44%, up from 1.79% in the prior year and 1.14% two years ago

France ECB Repo Rate and Interest Rates of New Housing Loans graph

Likewise, the average interest rate on outstanding housing loans in France rose to 1.64% in October 2023, up from 1.46% in October 2022 and 1.51% in October 2021.

By original maturity:

  • Up to 1 year: 2.48% in October 2023, up from 1.39% a year earlier and 1.28% two years ago
  • Over 1 and up to 5 years: 2.11% in October 2023, up from 1.31% in the previous year and 1.18% two years earlier
  • Over 5 years: 1.63%, up from 1.46% in October 2022 and 1.51% in October 2021

France Interest Rates on Outstanding Housing Loans graph

The French mortgage market is slowing

Over the past two decades, the French mortgage market has expanded tremendously - from 18.5% of GDP in 2000, to about 51% of GDP in 2022.

However, the market is noticeably slowing this year, with the total value of outstanding housing loans falling slightly by 0.1% y-o-y in October 2023 to €1.32 trillion (US$1.46 trillion). This is in sharp contrast to the annual average growth of 6% from 2015 to 2022.

As a result, the size of the mortgage market as a percentage of GDP is expected to fall to around 47.3% in 2023.

Over 80% of all owner-occupied dwellings in France are bought with mortgages.

Due to the dominance of fixed-rate mortgages, France’s housing market is likely to be much less prone to sharp upturns and downturns than housing markets in other countries, where floating-rate housing loans are a major source of instability.

Floating-rate loans only make up less than 10% of new loans in France, while loans with initial rate fixation (IRF) of over 10 years account for about 80% to 90% of new housing loans.

France Housing Loans Outstanding graph

Moderate rental yields; high transaction costs

Gross rental yields from apartments in Paris are moderate, at around 4.72% in Q4 2023, based on research conducted by the Global Property Guide in December 2023. However, it is fair to say that the Paris yield results arguably may not reflect yields in less desirable locations, which are likely to be higher because the research sample focuses on Paris’ high-end city centre.

The yields are not much better in other cities as well. Marseille has an average rental yield of 4.67% in Q4 2023; Nice has an average of 4.43%; Lyon’s average yield is 4.48%; Toulouse has an average yield of 4.11%; Bordeaux has an average of 4.59%; Montpellier’s average yield is 4.8%; and Nantes’ average is 4.65%.

From 2000 to 2022, apartment prices rose by 166% in France and by 254% in Paris, i.e., way above rents, which increased by only about 50% during the same period. The slower rise of the rent index was partly attributed to the lower allowable rent increase relative to inflation in certain periods. Rents grew by an annual average of just 1.2% from 2006 to 2022.

During the third quarter of 2023, France’s Housing Rent Reference Index increased by 3.5% from the same period last year, according to INSEE. The annual change in the rent index is capped. Article 12 of the 2022-1158 Act on Emergency Measures for the Protection of Purchasing Power provides that the annual change of the housing rent reference index may not exceed 3.5% between the third quarter of 2022 and the second quarter of 2023.

Currently, the average rent for two-bedroom apartments in Paris ranges from €1,900 (US$ 2,100) to €3,225 (US$ 3,565) per month.

Round-trip transaction costs are moderate to high on residential properties in France.

France Housing Rent Reference Index graph

The impact of the LoiDuflot rent control law

On 19 February 2014, the French Parliament established controls on rentals, replacing the previous system.

The Loi pour l’accès au logement et un urbanismerénové (ALUR: improving access to housing and updating town planning), also known as the ‘LoiDuflot’:

  • Capped 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, imposed on 28 cities with more than 500,000 inhabitants, affects areas with high demand for rental properties, such as Paris.
  • Aside from rent control, Paris and Lille are also subject to rent ceilings – the maximum amount a landlord can charge a tenant.
  • 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 Rent (GUL) was introduced; tenants will no longer provide guarantors or pay a deposit since the government will underwrite any non-payment of rent.

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

The Global Property Guide has long been firmly against rent controls, which harm tenants and landlords alike. We, however, approve of rules tending to increase security of tenure, without seeking to control rents, so long as the security is only medium-term.

Around 57.7% of France’s housing stock belongs to owner-occupiers, which means that almost half of France’s population is renting, according to the ECB. 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, a researcher at OTB (TU Delft). Of the primary residences, around 22.9% are privately rented, while 19.4% are socially rented.

The housing stock in France excluding Mayotte stood at 37.6 million units in 2022, according to INSEE figures. In Metropolitan France, 82% of dwellings were main residences and 55% were one-family dwellings. In the past four decades, the housing stock increased by an average of 1.1% annually in Mainland France while it grew by an annual average of 2.4% in the overseas departments.

Housing Stock in Metropolitan France graph

Economic growth slowing, inflation easing

The French economy, the euro zone’s second-largest, expanded by a modest 2.5% during 2022, following a 6.4% expansion in 2021 and a huge 7.7% contraction in 2020. 

However, the economy is projected to slow further, with the European Commission projecting a real GDP growth rate for France of just 1% in 2023 – at par with the forecast released by the International Monetary Fund (IMF).

France GDP Growth and Inflation graph

“Real GDP is expected to grow moderately in 2023, by 1.0% in annual terms with acquired growth standing at 0.9% at the end of the third quarter. In 2022-Q4 and 2023-Q1, net exports drove GDP growth as the manufacturing of transport equipment caught up,” said the European Commission. “Domestic demand remained subdued over this period as high inflation and tighter financial conditions outweighed government support measures and dynamic wages that preserved households’ purchasing power. In 2023-Q2 however, domestic demand rebounded and is now the main driver of growth.”

Before the Covid-19 pandemic, France had been registering an annual average growth of a minuscule 1% in 2009-19.

During the onset of the outbreak, the government launched a stimulus package worth €110 billion (US$121.7 billion), equivalent to 4% of the country’s GDP, to help struggling firms and employees.

As a result, the country’s budget deficit surged to 9% of GDP in 2020, sharply up from a shortfall of just 3.1% of GDP in 2019 and 2.3% of GDP in 2018. With improved economic conditions, the deficit eased to 6.5% of GDP in 2021 and further to 4.8% last year. The shortfall is expected to remain unchanged at about 4.8% of GDP this year before falling to 4.4% in 2024, according to the European Commission.

Public debt is expected to fall gradually to about 109.6% of GDP this year, from 111.8% in 2022, 112.9% in 2021 and 114.6% in 2020. Yet it remains far above the pre-pandemic public debt of around 97.4% of GDP in 2019.

The European Union’s target debt level for any member state is set at just 60% of GDP.

Nationwide inflation slowed to 3.5% in November 2023, down from 4% in the previous month and 6.2% in the same period last year, based on figures from INSEE. In fact, it was the lowest reading since January 2022.

Inflation averaged just 1.2% from 2011 to 2021 before accelerating to 5.9% in 2022.

The labour market remains strong

France’s labour force remained fairly dynamic. In Q3 2023, the nationwide jobless rate in France stood at 7.4%, slightly up from 7.2% in the previous quarter and 7.3% from a year earlier, according to INSEE. Yet it remains far below the average unemployment rate of about 9.2% annually from 2012 to 2022.

In Q3 2023, the number of unemployed people as defined by ILO reached 2.3 million, up by 64,000 from the previous quarter but unchanged from a year ago.

The nationwide jobless rate is estimated at 7.2% this year before increasing slightly to 7.4% in 2024, based on a forecast released by the European Commission.

France Unemployment Percentage graph

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, to make it easier to hire and fire employees. In addition, the new rules increase sanctions on those who fail to look for work.

Then in November 2019, Macron’s government introduced another reform increasing the time people need to work to be entitled to unemployment benefits. Also, the benefit that wealthier workers receive after six months of unemployment was reduced by 30%.

Macron’s tough economic agenda was strongly rejected by the working class, resulting in several 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.

In a major concession to the protesters, Macron increased the monthly minimum wage by €100 in 2019.

The resilience of France’s labour market during the onset of the Covid-19 pandemic is largely credited to Macron’s market reforms. The unemployment rate has been generally falling and the pervasive use of temporary contracts has been declining since early 2018.

In the April 2022 presidential election, Macron defeated again his far-right challenger Marine Le Pen in the second round of voting.

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