France’s housing market remains resilient
Lalaine C. Delmendo | June 27, 2020
Although due to Covid-19 the economy is now in recession, France’s housing market continues resilient. In Metropolitan France, house prices rose by a robust 5% during the year to Q1 2020 (3.75% inflation-adjusted), an improvement from the previous year’s growth of 2.95% and the market’s strongest performance since Q3 2011, according to the National Institute for Statistical and Economic Studies (INSEE). Quarter-on-quarter, house prices increased 1.16% in Q1 2020 (1.25% inflation-adjusted).
Meanwhile the French economy, the eurozone’s second largest, has fallen into recession after contracting by a revised 5.3% in the first quarter of 2020, following a 0.1% decline in Q4 2019, reflecting the heavy economic fallout of the strict anti-coronavirus lockdown which lasted for nearly two months. It was the biggest contraction since Q2 1968 when the country was dealing with civil unrest.
Paris saw significantly stronger house price rises than the wider nation. The average price of existing apartments in the capital city rose by 7.95% (6.67% inflation-adjusted) to €10,460 (US$11,741) per square metre (sq. m.) during the year to Q1 2020, according to the La Chambre des Notaires de Paris.
- In Île-de-France, the country’s wealthiest and most populated region, the average apartment price rose by 6.81% y-o-y (5.55% inflation-adjusted) to €6,430 (US$ 7,217) per sq. m. to Q1 2020.
- In the Petite Couronne the average price of apartments rose by 6.55% y-o-y (5.3% inflation-adjusted) to €5,040 (US$ 5,657) per sq. m.
- In the Grande Couronne the average price of apartments increased 4.03% y-o-y (2.8% inflation-adjusted) to €3,100 (US$ 3,480) per sq. m.
- In Hauts-de-Seine, one of the country’s most populous departments, apartment prices increased 6.54% y-o-y (5.28% inflation-adjusted) to €6,190 (US$ 6,948) per sq. m.
Existing home sales rose strongly in 2019 by 10.2% to a record 1,065,000 units, while new home sales increased slightly by 0.3% to 130,103 units, according to the General Council for the Environment and Sustainable Development (CGEDD).
However buyers are now temporarily moving to the sidelines due to the coronavirus pandemic. Existing home sales fell slightly by 1.2% y-o-y in April 2020 while new home sales dropped sharply by 32% during the year to Q1 2020.
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 housing market has not moved much. It started to weaken in 2008. While price falls were moderate, so too 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|
While the short-term outlook is negative due to the pandemic, the housing market seems poised for a strong comeback later this year, due to strong underlying demand coupled with weak construction activity.
The central bank estimated that the economy willcontract further by 15% in Q2 2020 from the previous quarter. For the full year of 2020, it expects the economy to shrink by as much as 10.3%, after expanding by 1.3% in 2019 and 1.7% in 2018, according to Banque de France.
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 continues to fall
In 2019, new dwellings authorized fell by 3% y-o-y to 446,500 units while dwelling starts dropped slightly by 0.6% y-o-y to 411,200 units, according to the Ministry of Ecological and Solidarity Transition. And due to Covid-19, the construction industry is projected to contract by 9.4% this year.
“Despite the easing of the lockdown and the earlier step of exempting construction from these measures, construction activities have been disrupted due to the stringent measures taken by the government to contain the spread of the virus,” said Danny Richards of GlobalData.
“Demand for housing is expected to slow significantly this year as unemployment increases and incomes are constrained,” added Richards.
Existing home sales rose strongly by 10.2% to a record-high of 1,065,000 units in 2019 from a year earlier, following y-o-y increases of 0.2% in 2018, 14.1% in 2017, 5.9% in 2016 and 15% in 2015, according to the General Council for the Environment and Sustainable Development (CGEDD). Likewise, new home sales increased slightly by 0.3% y-o-y to 130,103 units in 2019.
However, demand has declined recently as potential buyers adopt a wait-and-see approach due to the coronavirus pandemic. Existing home sales fell slightly by 1.2% y-o-y in April 2020 to an annualized 973,000 units.
Similarly, new home sales fell sharply by 32% to 24,022 units in Q1 2020 from a year earlier. Over the same period:
- New apartment sales dropped 23.9% to 22,481 units
- Newly-built single-family homes sales fell by 29.3% to 1,541 units.
Mortgage rates continue to fall
In April 2020, the average interest rate on outstanding housing loans fell to 1.73% from 1.92% a year earlier and 2.07% two years ago, according to the European Central Bank (ECB).
By original maturity:
- Up to 1 year: 1.35% in April 2020, down from 1.45% a year earlier
- Over 1 and up to 5 years: 1.32% in April 2020, down from 1.45% a year earlier
- Over 5 years: 1.73% in April 2020, down from 1.92% a year ago
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 44.8% of GDP in 2019. Over 80% of all owner-occupied dwellings in France are bought with mortgages.
In April 2020, the amount of new housing loans was up 3.8% y-o-y to €19.2 billion (US$ 21.5 billion), based on figures from Banque de France. Likewise, the total outstanding housing loans to households rose by 6% to €1.09 trillion (US$ 1.22 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 as of April 2020, while loans with initial rate fixation (IRF) of over 10 years account for more than 87% of new housing loans, based on the central bank’s latest figures.
Poor rental yields; high transaction costs
From 2000 to 2019, apartment prices rose by 124% in France and by 245% in Paris, i.e., way above rents, which increased by only about 41% 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.
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.
During the first quarter of 2020, France’s rent index increased by a minuscule 0.92% from the same period last year – a slowdown from a 1.7% rise in Q1 2019, according to INSEE. Rents grew by an annual average of just 1.15% from 2006 to 2019.
In Metropolitan France, rents in the private sector increased 0.8% in Q1 2020 from a year earlier while they declined by 0.6% in the social sector.
Currently, average apartment rents in Paris range from €21 (US$ 24) to €31 (US$ 35) 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 by which rents were freely determined, but revisable only once a year, and not by more than the (new) INSEE housing rent reference index.
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.
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. Of primary residences, around 22.9% are privately rented, while 19.4% are socially rented.
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).
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 housing stock in France, excluding Mayotte, increased 0.8% y-o-y to reached 36.6 million units in 2019, a slowdown from a 1.7% growth in the previous year, 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, is in recession. It contracted by 5.3% in the first quarter of 2020, following a 0.1% decline in Q4 2019, reflecting the strict anti-coronavirus lockdown which lasted for nearly two months.“A gradual upturn is anticipated over the coming quarters, as economic activity adapts to the new environment. However, in annual average terms, GDP for 2020 should still be extremely badly affected, dropping by more than 10%,” said the central bank in its June 2020 report .
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.
As such, the country’s budget deficit is expected to rise sharply to 9.9% of GDP this year, from a shortfall of 3.3% of GDP in 2019, according to the European Commission . Public debt is also projected to increase to 116.5% of GDP this year, from 98.1% of GDP last year.
In May 2020, inflation stood at 0.4%, slightly up from 0.3% in the previous month but up from 0.9% a year earlier, based on figures fromINSEE . Inflation is expected to slow to 0.4% this year, from 1.3% in 2019, 2.1% in 2018, and 1.2% in 2017.
Unemployment falling, but expected to rise sharply this year
In Q1 2020, the nationwide jobless rate in France dropped to 7.8%, down from 8.1% in the previous quarter and 8.7% a year earlier, according to INSEE . In fact, it was the lowest level since Q4 2008.
In metropolitan France, the unemployment rate stood at 7.6% in Q1 2020.
However, the nationwide jobless rate is projected to rise again to 10.1% this year, according to the European Commission , mainly due to layoffs and business closures caused by coronavirus-related lockdowns.
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 Q1 2020, the rise of prices of second-hand dwellings accelerated (INSEE):https://www.insee.fr/en/statistiques/4497413#tableau-ipla-g2-en
- 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
- Housing construction - Results at the end of February 2020 (whole France) (Ministry of Ecological and Solidarity Transition): https://www.statistiques.developpement-durable.gouv.fr/construction-de-logements-resultats-fin-fevrier-2020-france-entiere?rubrique=&dossier=1047
- Construction in France to contract 9.4% in 2020 (KHL Magazine International Construction): https://www.khl.com/international-construction/construction-in-france-to-contract-94-in-2020/144609.article
- 36.6 million dwellings in France, excluding Mayotte, on 1st January 2019 (INSEE): https://www.insee.fr/en/statistiques/4293464
- World Economic Outlook Databases (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx
- Financial markets and interest rates (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691099
- Credits to individuals Apr 2020 (Banque de France): https://www.banque-france.fr/statistiques/credit/credit/credits-aux-particuliers
- Temporarily reduced activity of loans to individuals during the full lockdown period (Banque de France): https://www.banque-france.fr/en/statistics/loans/loans/loans-households
- In Q1 2020, household gross disposable income held steady and their savings jumped despite the 5.3% drop in GDP (INSEE): https://www.insee.fr/en/statistiques/4501850
- In May 2020, consumer prices rose by 0.1% over one month and by 0.4% year on year (INSEE): https://www.insee.fr/en/statistiques/4507212
- In Q1 2020, the labour market to the test of the health crisis (INSEE): https://www.insee.fr/en/statistiques/4493299
- 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 June 2020 (Banque de France): https://www.banque-france.fr/sites/default/files/medias/documents/proj-june_v6_sel_1906_0.pdf
- France’s housing market is gaining momentum, amidst improving economy - September 01, 2017
- House prices are rising again in France - October 07, 2016