France’s housing market is gaining momentum, amidst improving economy

September 01, 2017

France house pricesIn Metropolitan France, house prices rose by 2.9% during the year to Q1 2017 (1.62% inflation-adjusted). This was the fifth consecutive quarter of year-on-year price hikes and the highest increase since Q4 2011, according to the National Institute for Statistical and Economic Studies (INSEE).

In Paris, the average price of existing apartments rose by about 5.5% (4.2% inflation-adjusted) to €8,450 (US$10,048) per square metre (sq. m.) during the year to Q1 2017, 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 4.6% y-o-y (2.9% inflation-adjusted) to €5,490 (US$ 6,528) per sq. m. to Q1 2017.
  • In the Petite Couronne (Small Crown), the average price of apartments rose by 4.3% y-o-y (2.6% inflation-adjusted) to €4,400 (US$ 5,232) per sq. m.
  • In the Grande Couronne (Great Crown), the average price of apartments increased 2.8% y-o-y (1.2% inflation-adjusted) to €2,950 (US$ 3,508) per sq. m.
  • In Hauts-de-Seine, one of the country's most populous department, apartment prices increased 4.1% y-o-y (2.4% inflation-adjusted) to €5,360 (US$ 6,374) per sq. m.

The price rises were backed by surging demand. In 2016, housing transactions in France reached a record 848,000 units, surpassing the previous 2005 peak of 829,000 units, according to the European Central Bank (ECB). In Paris, the number of existing apartments sold rose by 23% in Q1 2017 from a year earlier, according to the La Chambre des Notaires de Paris. In Île-de-France, the number of existing apartments sold increased by 32% y-o-y in Q1 2017, and in Petit Couronne and Grande Couronne by 32% and 36%, respectively.

Residential construction is also up. In July 2017, dwellings authorized increased 6.7% y-o-y while new housing starts rose slightly by 0.6%, according to the INSEE.

The French housing market is expected to strengthen further during the remainder of the year, with strong demand buoyed by low interest rates, coupled with improving economic conditions. Nationwide house prices are likely to rise by 3% to 5% in the next twelve months, according to Trevor Leggett, Chairman of Leggett Immobilier.

In Q2 2017, GDP rose by 1.8% from a year earlier, the country's strongest performance since late 2011, fuelled by rising exports and consumer spending. France's economy is expected to expand by 1.4% this year and by another 1.7% in 2018, after growth rates of 1.2% in 2016, 1.3% in 2015, 0.6% in both 2013 and 2014, and 0.2% in 2012, according to the European Commission.

There are no restrictions on foreign ownership in France. Most property is likely to be freehold. Apartments are likely to be 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.

Recent history of the French housing market

France average price existing apartments

During the boom 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:

  • In 2008, house prices in France fell by 3.82% (-5.48% inflation-adjusted)
  • In 2009, house prices fell by 4.07% (-4.41% inflation-adjusted)
  • In 2010, house prices rose by 7.57% (5.83% inflation-adjusted)
  • In 2011, house prices rose by 3.66% (1.19% inflation-adjusted)
  • In 2012, house prices fell by 2.08% (-3.56% inflation-adjusted)
  • In 2013, house prices fell by 1.85% (-2.48% inflation-adjusted)
  • In 2014, house prices fell by 2.54% (-2.81% inflation-adjusted)
  • In 2015, house prices fell by 0.48% (-0.58% inflation-adjusted)
  • In 2016, the housing market started to gain momentum, with house prices rising by 1.55% (1.02% inflation-adjusted) from a year earlier

French house-buyers can now track house price changes week-by-week, after the launch of the LPI (Les Prix de l'Immobilier) index in September 2014.

Demand is surging

France housing transactions

In 2016, the total number of housing transactions in France rose by 6.4% to 848,000 units from a year earlier, according to the European Central Bank (ECB).

In Q1 2017:

  • In Paris, the number of existing apartments sold rose by 23% from a year earlier, according to the La Chambre des Notaires de Paris.
  • In Petite Couronne,existing apartments sold rose by 32% y-o-y.
  • In Grande Couronne, existing apartments sold surged 36% y-o-y.
  • In Île-de-France, the sales of existing apartments rose by 32% over the same period.

Residential construction activity is rising

France residential building permits

The ECB's index of residential building permits for France increased 12.4% in May 2017 from a year earlier, following y-o-y rises of 15.6% in 2016, and 13.9% in 2015, and annual declines of 5.1% in 2014, 13.8% in 2013, and 15.4% in 2012.

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 2016, around 57.8% 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 21.8% are privately rented, while 17.3% 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.

In 2016, France's total housing stock increased about 1% to 35,425,000 units from a year earlier, according to the ECB.

Poor rental yields; high transaction costs

From 2000 to 2016, apartment prices in France rose by 102% (181% in Paris), i.e., way above rents, which only rose 37% 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 2017, France's rent index increased by a meagre 0.75% from the same period last year.

Currently, average apartment rents in Paris range from €32 (US$ 38) to €35 (US$ 42) 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.

Mortgage rates are at historic lows

France interest rates graph

In June 2017, the average interest rate on outstanding housing loans fell to 2.29% from 2.77% a year earlier, according to the ECB.

By original maturity:

  • Up to 1 year: 1.69% in June 2o17, down from 2.24% a year earlier
  • Over 1 and up to 5 years: 1.83% in June 2o17, down from 2.2% a year earlier
  • Over 5 years: 2.29% in June 2o17, down from 2.78% 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

Over the past 15 years, the French mortgage market has expanded tremendously - from 20.6% of GDP in 2000, to 44.8% of GDP in 2016. France's mortgage market grew by 3.8% in 2016, slightly down from an annual average growth rate of 4% from 2011 to 2015. Over 80% of all owner-occupied dwellings in France are bought with mortgages. In June 2017, total outstanding housing loans to households rose by 5.1% from the same period last year, according to the Banque de France.

France outstanding housing loans

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 improving

France GDP inflation

On an annual basis, GDP rose by 1.8% during Q2 2017, the country's strongest performance since late 2011. Growth is projected to continue to strengthen, fuelled by strong investment and consumption, according to the Organisation for Economic Co-operation and Development (OECD).

"Firming domestic demand will be supported by rising confidence, cuts in social contribution and business taxes and continued favourable financing conditions," said the OECD.

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 1.4% this year and by another 1.7% in 2018, according to the European Commission.

Inflation was 0.7% in July 2017, with core inflation 0.5%, unchanged from a year earlier.

France had a budget deficit of 3.4% of GDP in 2016, down from 3.6% in 2015 and 4% in 2014. The deficit is expected to fall further to 3% of GDP this year, according to the European Commission.

The European Commission expects France's public debt to rise to 96.4% of GDP this year and to 96.7% of GDP in 2018, up dramatically from 85.8% of GDP in 2011.

Unemployment falling; labour market reforms underway

France unemployment

France's unemployment rate is falling. In Q2 2017, the nationwide jobless rate stood at 9.5%, down from 9.6% in the previous quarter and 10% a year earlier, according to INSEE - the lowest level in five years.

Despite this, France's unemployment rate remains above the EU's average of 7.7% in June 2017 and the eurozone's average of 9.1%.

Newly-elected French president Emmanuel Macron 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 changes, if approved, are expected to make hiring and firing employees easier, in an effort to reduce the financial and legal risks of layoffs that discourage businesses from hiring more workforce.

Macron also plans to spend about €15 billion (US$18 billion) in training and to overhaul the tax system to encourage work and investment.

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