Rental restrictions may crimp the boom in France
October 10, 2018
House prices rose by 3.12% during the year to Q1 2018 in France (1.73% inflation-adjusted), the ninth consecutive quarter of year-on-year price hikes, according to the National Institute for Statistical and Economic Studies (INSEE).
However in Paris the average price of existing apartments rose by 7.2% (5.8% inflation-adjusted) to €9,070 (US$10,574) per square metre (sq. m.) during the year to Q1 2018, according to the La Chambre des Notaires de Paris.
- In Île-de-France, the country's wealthiest and most populated region, the average apartment price rose by 5.1% y-o-y (3.7% inflation-adjusted) to €5,750 (US$ 6,703) per sq. m. to Q1 2018.
- In the Petite Couronne (Small Crown), the average price of apartments rose by 4.1% y-o-y (2.7% inflation-adjusted) to €4,540 (US$ 5,293) per sq. m.
- In the Grande Couronne (Great Crown), the average price of apartments increased slightly by 1.4% y-o-y (unchanged when adjusted for inflation) to €2,970 (US$ 3,462) per sq. m.
- In Hauts-de-Seine, one of the country's most populous department, apartment prices increased 4.7% y-o-y (3.3% inflation-adjusted) to €5,570 (US$ 6,493) 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.
However sales volumes are now slowing. During the year to Q1 2018, the total number of existing homes sold in France dropped slightly by 0.4% - after reaching a record high of 960,000 units in 2017, according to the General Council for the Environment and Sustainable Development (CGEDD). During the first five months of 2018, dwellings authorized fell by 1.9% y-o-y while new housing starts dropped 4.3%, according to the Ministry of Ecological and Solidarity Transition. Housing starts are also down.
The market seems poised for a pause. Perhaps house prices have been pushed too high by low interest rates relative to rents?
On the other hand, the economic outlook is good. The French economy hit a decade-high growth of 2.3% in 2017, according to INSEE. However in line with a broader euro zone slowdown, economic growth in France is projected to slow to 1.7% this year, as the appreciation of the euro and oil price increases are making the bloc's exports more expensive.
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.
French economy to slow; unemployment fallingThe French economy hit a decade-high growth of 2.3% in 2017, mainly driven by strong investments and exports, according to INSEE. However in line with a broader euro zone slowdown, economic growth in France is projected to slow to 1.7% this year, as the euro appreciation and oil price increases make the bloc’s exports more expensive.
“We expect French growth to still have momentum even though less than in 2017,” according to Julien Pouget of INSEE.
On an annual basis, GDP rose by 1.8% during Q2 2018, up from the previous quarter’s 1.1% expansion.
From 2004 to 2007, the French economy expanded by an average of 2.3% per year. In 2009, real GDP fell almost 3%, the country’s sharpest recession since World War II. The French economy expanded by almost 2% in 2010 and by another 2.1% in 2011.
In 2012, the economy stagnated, with growth of 0.2% 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 0.58% and 0.64%, respectively. The economy has bounced back somewhat in the past two years, with real GDP growth rate of 1.3% in 2015 and 1.2% in 2016.
France’s economy is expected to expand by 1.7% in both 2018 and 2019, according to the European Commission.
Inflation was 2.3% in June 2018, unchanged from the previous month but sharply up from just 0.7% a year earlier, according to INSEE. Buoyed by higher energy prices, inflation is expected to reach 2.3% this year – a 7 year high.
France brought its budget deficit below the EU’s 3% limit for the first time in a decade last year. The country’s deficit stood at 2.6% of GDP in 2017, down from 3.4% in 2016, 3.6% in 2015, 3.9% in 2014 and 4.1% in 2013.
Despite this, France’s government debt remains one of the highest in the eurozone. In 2017, government debt was 97% of GDP, up from 96.6% of GDP in 2016 and 85.8% of GDP in 2011, according to INSEE.
France’s unemployment rate is falling. In Q1 2018, the nationwide jobless rate stood at 9.2%, down from 9.6% a year earlier, according to INSEE.
Despite this, France’s unemployment rate remains above the EU’s average of 7.1% in March 2018 and the eurozone’s average of 8.5%.
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.
“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 spend about €15 billion (US$17.5 billion) in training and to overhaul the tax system to encourage work and investment.