France's housing market remains resilient
Lalaine C. Delmendo | June 27, 2020
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.
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.
Economic recessionThe 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 from INSEE. 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.