France's housing market still buoyant despite pandemic
Lalaine C. Delmendo | November 10, 2021
Quarter-on-quarter, house prices rose 1.57% in Q2 2021 (0.8% inflation-adjusted).
However the house price rises are lowest in the centre. During the year to Q2 2021:
- In Île-de-France, the country's wealthiest and most populated region, the average apartment price rose by 2.1% y-o-y (0.7% inflation-adjusted) to €6,710 (US$ 7,665) per sq. m., according to the La Chambre des Notaires de Paris.
- In the Petite Couronne the average price of apartments rose by 4.5% y-o-y (3% inflation-adjusted) to €5,390 (US$ 6,157) per sq. m.
- In the Grande Couronne the average price of apartments increased 4.1% y-o-y (2.7% inflation-adjusted) to €3,290 (US$ 3,758) per sq. m.
- In Hauts-de-Seine, one of the country's most populous departments, apartment prices increased 4.3% y-o-y (2.9% inflation-adjusted) to €6,590 (US$ 7,528) per sq. m.
In Paris, house prices even declined slightly – it seems the capital's high cost of living is prompting some rural relocations. The average price of existing apartments in the capital city fell by 0.2% (-1.5% inflation-adjusted) to €10,650 (US$ 12,166) per square metre (sq. m.) during the year to Q2 2021, according to 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. The pandemic has clearly been pushing people away from cities towards greener areas.
Both demand and supply are now recovering. New dwellings authorized in France were up 25% y-o-y to 351,066 units in the first three quarters of 2021, and new dwelling starts increased 13.7% to 296,906 units. Existing home sales rose by 22.6% y-o-y in August 2021 to an annualized 1,208,000 units, after falling by 4% during 2020, according to the General Council for the Environment and Sustainable Development (CGEDD). Likewise, new home sales rose by 29% y-o-y to 61,718 units in the first half of 2021, following a decline of 22.8% last year, according to Ministère de la Transition Écologie.
The French economy, eurozone's second largest, contracted by a huge 7.9% during 2020, its worst performance in recent history. The economy is expected to rebound with GDP growth of 6.5% this year, according to the European Commission.
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.
Economy recoveringThe French economy, eurozone’s second largest, contracted by a huge 7.9% during 2020, in contrast to an annual average growth of 1% in 2009-19 and its worst performance in recent history.
Fortunately, economic conditions are now improving, buoyed by a rebound in consumer spending and exports, as households and businesses adapt to the new environment. The French economy grew by an annualized 1.5% in Q1, 18.8% in Q2 and 3.3% in Q3. In fact, the European Commission expects the France’s economy to grow by 6.5% this year.
“The French economy is thus emerging from the Covid crisis and will enter a new phase,” said Banque de France. “After the strong rebound in 2021 resulting from the reopening of the economy and the support measures, GDP will gradually return to its potential level.
“Conditions should still be favourable at the horizon of this projection (excess household disposable savings, generally preserved financial situation of companies, recovery plan) but will therefore steadily become more dependent on the more structural drivers of growth.”
The government has launched a stimulus package worth €110 billion (US$123.5 billion), equivalent to 4% of the country’s GDP, to help struggling firms and employees.
The country’s budget deficit is expected to have been 9.1% of GDP in 2020, from a shortfall of 3.1% of GDP in 2019, according to the European Commission. The deficit is projected to be 8.1% of GDP in 2021, and to fall to 5.3% in 2022 and finally to 3.5% in 2023.
Public debt reached about 115.7% of GDP in 2020, sharply up from 97.6% in 2019, according to INSEE. It is expected to remain high at 114.6% of GDP in 2021, based on figures from the European Commission.
Nationwide inflation surged to 2.6% in October 2021 – the highest level in about twelve years, according to figures from INSEE. Inflation is expected to accelerate to 2% this year, from just 0.5% in 2020.
In Q2 2021, the nationwide jobless rate in France was 8%, slightly down from 8.1% in the previous quarter but still up from 7.2% a year earlier, according to INSEE.
In metropolitan France, the unemployment rate was 7.8% in Q2 2021, unchanged from the previous quarter but up from 7.1% in Q2 2020.
The nationwide jobless rate is projected to remain steady at 8% this year, at par with the previous year, according to the European Commission.
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.