Rental restrictions may crimp the boom in France

Lalaine C. Delmendo | October 10, 2018

France house pricesParis is leading the way. Historically, just as London tends to lead UK house price booms, Paris prices are the first to rise in France. 

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.

Some history

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.


Year Nominal Inflation-adjusted
2008 -3.82 -5.48
2009 -4.07 -4.41
2010 7.57 5.83
2011 3.66 1.19
2012 -2.08 -3.56
2013 -1.85 -2.48
2014 -2.54 -2.81
2015 -0.48 -0.58
2016 1.55 1.02
2017 3.25 2.09
Source: National Institute for Statistical and Economic Studies (INSEE)

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. 

France average price existing apartments

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.

Poor rental yields; high transaction costs

From 2000 to 2017, apartment prices in France rose by 108% (202% in Paris), i.e., way above rents, which only rose about 38% 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 the figures from the Global Property Guide research in August 2017.

During the second quarter of 2018, France´s rent index increased by 1.25% from the same period last year – an improvement from an average growth of 0.5% from 2013 to 2017, according to INSEE.

Currently, average apartment rents in Paris range from €32 (US$ 38) to €35 (US$ 41) 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

In France, initial rents have till recently been freely determined, but revisable only once a year, and not by more than the (new) INSEE housing rent reference index

However on 19 February 2014 the French Parliament passed a new bill, the Loi pour l´accès au logement et un urbanismerénové (ALUR: improving access to housing and updating town planning), also known as the ‘LoiDuflot’, after housing minister Cécile Duflot. The bill, which was passed into law on March 24, 2014, set new rules regarding housing and property rentals:

  • The law put a rent cap on 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, will affect areas with high demand on 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.

France housing rent index

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.

In 2017, around 57.7% of France’s housing stock belonged to owner-occupiers, which means that almost half 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 35.7 million units in 2017, 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.

Construction is slowing

France residential building permits

As if the market is unconsciously anticipating harsher times ahead, the number of new dwellings authorized fell by 1.9% during the first 5 months of 2018, compared to the same period last year, in sharp contrast to growth of 11.4% in 2017, and 12.6% in 2016, according to the Ministry of Ecological and Solidarity Transition. Likewise, dwelling starts also declined 4.3% to 162,200 units over the same period – after annual rises of 10.4% in 2017, and 14.6% in 2016.

Sales volumes are slowing

France housing transactions

Existing home sales dropped slightly by 0.4% during the year to Q1 2018, apparently due to supply shortages in some locations. In contrast in 2017, existing home sales soared to a record 960,000 units – up 13.6% from a year earlier, according to the General Council for the Environment and Sustainable Development (CGEDD).

During the three months ending April 2018:

  • In Paris, the number of existing dwellings sold fell by 9.5% from a year earlier, according to the La Chambre des Notaires de Paris.
  • In Petite Couronne, existing dwellings sold dropped 1.1% y-o-y.
  • In Grande Couronne, existing dwellings sold dropped 1.4% y-o-y.
  • In Île-de-France, the sales of existing dwellings fell by 3.1% over the same period.

“Despite the decline, the number of old homes sales during this period is almost one-third higher than the average of the past 10 years and 14% over the 1999-2007 high activity period,” said La Chambre des Notaires de Paris.

Mortgage rates are at historic lows

France interest rates graph

In May 2018, the average interest rate on outstanding housing loans fell to a record 2.03% from 2.3% a year earlier, according to the ECB.

By original maturity:

  • Up to 1 year: 1.53% in May 2018, down from 1.67% a year earlier
  • Over 1 and up to 5 years: 1.55% in May 2018, down from 1.82% a year earlier
  • Over 5 years: 2.03% in May 2018, down from 2.3% a year ago

The decline of mortgage rates is partly attributable to the European Central Bank´s (ECB) 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

France outstanding housing loans

Over the past 15 years, the French mortgage market has expanded tremendously - from 18.4% of GDP in 2000, to 41.7% of GDP in 2017. Over 80% of all owner-occupied dwellings in France are bought with mortgages. In May 2018, total outstanding housing loans to households rose by 5.5% to  €971.03 billion (US$1.14 trillion) from the same period last year, according to the Banque de France.

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 6% of new loans in France, and around 15.6% of outstanding housing loans, according to the Autorité de contrôleprudentielet de résolution (ACPR).

French economy to slow

France GDP inflation

The 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.

Unemployment falling; labour market reforms underway

France unemployment

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.


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