France’s housing market still buoyant despite pandemic
Lalaine C. Delmendo | November 18, 2021
France’s housing market remains strong, with the highest price rises in a decade. In Metropolitan France, house prices rose by a robust 5.85% during the year to Q2 2021 (4.41% inflation-adjusted), following y-o-y growth of 5.86% in Q1, 6.4% in Q4 2020, 5.21% in Q3 and 5.64% in Q2, according to the National Institute for Statistical and Economic Studies (INSEE).
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.
France’s house price boom and after
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. 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.
HOUSE PRICES IN FRANCE, ANNUAL CHANGE (%)
|Sources: National Institute for Statistical and Economic Studies (INSEE), Global Property Guide|
Despite the pandemic, house prices increased 6.4% during 2020 – the highest growth since 2010.
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 recovering
Residential construction activity fell sharply last year. New dwellings authorized fell by 12.6% y-o-y to 393,106 units while dwelling starts fell 7.9% to 354,682 units, according to the Ministry of Ecological and Solidarity Transition.
“In 2020, production in housebuilding declined by 22.3%, mainly due to the first lockdown in spring,” said FIEC European Construction Industry Association.
Fortunately, the construction sector is now recovering fast. In the first three quarters of 2021:
- New dwellings authorized: 351,066 units, up 25% from a year ago
- New dwellings started: 296,906 units, up 13.7% from a year earlier
Sales rising again
Existing home sales in France were down just 4% in 2020 on the previous year, at 1,024,000 units - the second highest level ever recorded, according to the General Council for the Environment and Sustainable Development (CGEDD) (existing home sales rose by 9.1% annually from 2015 to 2019). But new home sales fell by 22.8% y-o-y to 101,259 units in 2020, according to the Ministère de la Transition Écologie.
Demand is now rising strongly, with existing home sales rising by 22.6% y-o-y in August 2021 to an annualized 1,208,000 units. And new home sales were up sharply by 29% to 61,718 units in the first half of 2021 from the same period last year. Over the same period:
- New apartment sales increased 29.7% to 57,682 units
- Newly-built single-family homes sales rose by 19.5% to 4,036 units
Mortgage interest rates now amazingly low!
The average interest rate on outstanding housing loans fell to 1.53% in September 2021, from 1.67% a year earlier and 1.85% two years ago, according to the European Central Bank (ECB).
By original maturity:
- Up to 1 year: 1.32% in September 2021, up from 1.28% a year earlier but down from 1.36% two years ago
- Over 1 and up to 5 years: 1.21% in September 2021, down from 1.27% in the previous year and 1.38% two years earlier
- Over 5 years: 1.54%, down from 1.67% in September 2020 and 1.85% in September 2019
The decline of mortgage rates is partly attributable to the ECB’s reduction of its key rate to 0.00% in March 2016, where it has remained since.
The French mortgage market is mostly fixed rate, helping housing market stability.
Over the past 15 years, the French mortgage market has expanded tremendously - from 18.5% of GDP in 2000, to 51.7% of GDP in 2020. Over 80% of all owner-occupied dwellings in France are bought with mortgages.
In September 2021, total outstanding housing loans to households were up 7.1% to €1.25 trillion (US$ 1.43 trillion) from the same period last year.
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 6% of new loans in France, while loans with initial rate fixation (IRF) of over 10 years account for more than 87% of new housing loans.
Poor rental yields; high transaction costs
Gross rental yields in Paris range from 3.9% to 4.2%, with smaller apartments having relatively higher yields, based on research conducted by the Global Property Guide.
From 2000 to 2020, apartment prices rose by 138% in France and by 264% in Paris, i.e., way above rents, which increased by only about 42% during the same period. The slower rise of 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 1.13% from 2006 to 2020.
During the third quarter of 2021, France’s rent index increased by a minuscule 0.83% from the same period last year, according to INSEE.
Currently, average apartment rents in Paris range from €21 (US$ 24) to €31 (US$ 36) per square metre (sq. m.) per month. Smaller apartments tend to rent for proportionately more.
Round trip transaction costs are high on residential property in France.
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.
- 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.
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. “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. 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 are 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, researcher at OTB (TU Delft). Of primary residences, around 22.9% are privately rented, while 19.4% are socially rented.
The housing stock in France, excluding Mayotte, increased 0.7% y-o-y to reach 36.24 million units in 2021, according to INSEE. In the past 30 years, the housing stock increased by an average of 1.1% annually in Mainland France while it grew by an annual average of 2.5% in the overseas departments.
The 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.
- Rental returns in Paris are disappointing (Global Property Guide): https://www.globalpropertyguide.com/Europe/France/Rental-Yields
- In Q3 2021, the Housing Rent Reference Index increased by 0.83% over a year (INSEE): https://www.insee.fr/en/statistiques/5542336
- In October 2021, real estate developers’ opinion on demand for new housing is unchanged (INSEE): https://www.insee.fr/en/statistiques/5759706
- Number of authorized dwellings - Total - France excluding Mayotte - Estimates calculated at the time of event - Calendar and seasonally adjusted (INSEE): https://www.insee.fr/en/statistiques/serie/010752271
- Number of started dwellings - Total - France excluding Mayotte - Estimates calculated at the time of event - Calendar and seasonally adjusted (INSEE): https://www.insee.fr/en/statistiques/serie/010752277
- France - Building Permits/dwellings, All Residential Buildings excluding residences for communities (European Central Bank): https://sdw.ecb.europa.eu/quickview.do;jsessionid=D9595123530029F94347A9293FBD7620?SERIES_KEY=132.STS.M.FR.S.BPER.CC1109.4.000&periodSortOrder=ASC
- Annual estimate of housing stock - Total number of dwellings - Metropolitan France (INSEE): https://www.insee.fr/en/statistiques/serie/001687211
- Marketing of new homes - Results for the second quarter of 2021 (Ministère de la Transition Écologie): https://www.statistiques.developpement-durable.gouv.fr/commercialisation-des-logements-neufs-resultats-au-deuxieme-trimestre-2021?rubrique=53&dossier=1047
- France: Overall construction activity (FIEC: European Construction Industry Federation): https://fiec-statistical-report.eu/2021/france
- House Prices in France : Property Price Index, French Real Estate Market Trends in the Long Run (CGEDD): http://www.cgedd.developpement-durable.gouv.fr/house-prices-in-france-property-price-index-french-a1117.html
- Transaction costs are moderate to high in France (Global Property Guide): https://www.globalpropertyguide.com/Europe/France/Buying-Guide
- Rental returns in Paris are disappointing (Global Property Guide): https://www.globalpropertyguide.com/Europe/France/Rental-Yields
- Loans to individuals (Banque De France): https://www.banque-france.fr/statistiques/credit/credit/credits-aux-particuliers
- France´s economy roars in Q3, inflation jumps (Reuters): https://www.reuters.com/article/france-economy-gdp-idUSKBN2HJ0NH
- GDP accelerated in Q3 2021 (+3.0%), and returns to its pre-crisis level (–0.1% from Q4 2019) (INSEE): https://www.insee.fr/en/statistiques/5761180
- Economic forecast for France (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/france/economic-forecast-france_en
- Macroeconomic Projections September 2021 (Banque De France): https://www.banque-france.fr/sites/default/files/medias/documents/proj-sept_v01_sel_1309_eng.pdf
- In October 2021, consumer prices increased by 2.6% year on year (INSEE): https://www.insee.fr/en/statistiques/5760463
- France’s housing market is gaining momentum, amidst improving economy - September 01, 2017
- House prices are rising again in France - October 07, 2016