French property market fights back

What does 2011 hold for the property market in France? Alice Cannet asks the people who know 'immobilier' inside out

31 January 2011

PROPERTY prices stabilised in the second half of 2010 after being hit in the aftermath of the credit crisis by falling prices and a slow-moving market, although some differences remain across the country.

The market is moving at different speeds, with prices in Paris soaring – and being compared to those of New York – while other regions are seeing prices falling as they are hit by reduced demand.

But after a difficult two years, 2010 looks like the year of recovery for the housing market, which has managed to resist the downturn and keep a healthy level of activity thanks to attractive rates of borrowing and incentives to first-time buyers through eco-loans and zero-rate interest on loans.

René Pallincourt, president of the FNAIM, Europe's biggest business federation with 12,000 estate agents in France, explained the intricacies of today's property market in France and how it is likely to move this year.

“The paradox is that, in France, despite having experienced the credit crisis – which we date from a little before the fall of Lehman Brothers and its consequences until March/April 2009 – and a business environment with many outside influences, which was not favourable to the market generally, we have seen a surprising rebound in the housing market.

“We have recovered a level of activity that is the same as at the end of 2007 and beginning of 2008.

“We also have prices that, after having fallen quite significantly – by approximately 10 per cent if we look at the end of 2009 – have regained a certain strength. Today, we feel the slump in prices is behind us and we are recording a rise. It is a rise after a fall, so we can speak of a stabilising of prices," Mr Pallincourt said.

Indeed, for the first time in two years, prices across the country were on the rise over the 12-month period compared to the previous 12 months. Even more remarkably, between the third quarter of 2009 and the third quarter of 2010, prices rose by six to seven per cent.

This national trend was also boosted by the strong increase in prices that was observed in Paris, despite the fall recorded between the end of 2008 and mid 2009.

Back then, the notaires' price index showed that prices per square metre had fallen by several hundred euros. But today, prices have resumed their climb, and are exceeding expectations.

Notaires noted a price increase of close to 14 per cent in the capital between September 2009 and the same month in 2010.

Mr Pallincourt said: “The numbers from notaires say that the square metre now costs €7,000 – an average price that obviously hides two extremes, the lowest being around €5,000 and the highest between €9-10,000 per square metre.

“Paris today sees prices comparable to those of New York, but still a little behind those of London. However, Paris is not France."

Some parts of France are still seeing falling prices but only up to a modest two per cent, Mr Pallincourt said, but he added that in certain areas prices had risen, but to a relatively small extent.

“The areas where prices are falling are, as always, the Atlantic coast: Normandy, Brittany for instance which are quite heavily hit by the absence of British buyers who are not there any more. We still have rises on the eastern side of the country of a similar importance, in Savoie, Rhône-Alpes and PACA," Mr Pallincourt said.

In France last year, the second clearest sign of recovery was the large increase in transactions. In 2009, the number of transactions fell to its lowest level since 1997, with a total number of about 580,000.

Mr Pallincourt said: “Activity has restarted. We saw a fall of some 30 per cent in activity after the crisis; we are now reaching pre-crisis levels, and this year, we should reach the 700,000 threshold."

“With the current global environment being not very favourable, the housing market has been exceptional compared to other markets and has shown a quite reassuring state of health," he said.

So why is the French housing market so robust? The consensus among property experts seems to point at the low interest rates of borrowing, which had come down to about 3.3 per cent last September.

“We have not seen such low interest rates since 1945 and this is what allowed the market to resist the crisis," Mr Pallincourt said.

“That being said, we are now reaching the limits of this device and cannot hope to see rates go down.

“The rate of repayment that was asked of people taking out loans stayed the same because interest rates went down and the mortgage terms were extended. However, I think we are reaching the limit of this measure."

He was supported in this by Jacques Friggit, a member of the ecology and housing ministry's CGEDD think-tank, who publishes long-view housing price analyses and is particularly interested in the evolution of the relationship between prices and household income.

Mr Friggit found that housing prices in France from 1965 to 2000 rose in parallel with income per household, plus or minus 10 per cent, forming what he called a “tunnel" in what looked like a logical progression.

However, from 2000 to 2010, housing prices outgrew income, as well as rents, by 70 per cent.

This, he says, could not be explained by changes in supply and demand, but rather by changes in mortgage conditions. He backed this up with evidence showing that interest rates since 2000 had fallen by two per cent and mortgage terms had increased by seven years.

Mr Pallincourt said that, even if the market was looking steadier, it was still biased towards people looking for their first property or those who had not owned their home in the previous two years, the “primo accédants".

In fact, he said, family homes were the most in-demand type. They are often three-bedroom accommodation and typically of an average area of 100m for houses and 70m for flats.

“What we have the most difficulty selling is what is outside this market, such as very big flats, because prices per square metre are very high," Mr Pallincourt said.

This is a big limiting factor and Mr Friggit said he did not think housing prices would outgrow households' incomes, as housing expenses would become unbearable.

A “level change", where both household incomes and housing prices settled at a new, higher, level was also unlikely, as the impact of longer mortgages would be dampened by the additional monthly payments.

He sees interest rates and rent-to-priceratio eventually returning to their long-run level; and, since a sharp rise in rents seems unlikely, housing prices will revert towards their initial level.

Mr Friggit said there were two plausible scenarios: one would see housing prices and household income return to a parallel evolution by 2015, the other by 2025.

He said housing prices in France had also been boosted by households becoming involved in the buy-to-let market because of the historic low interest rates. While this had not happened in the UK, because household involvement in buy-to-let was less widespread, adjustable mortgage rates based on the historically low Bank of England rate had helped stop the fall in home prices.

As for foreign buyers in France, Mr Pallincourt said they were not back in numbers and the British slowdown had had a noticeable impact on the demand in certain areas.

“We see a comeback from some Americans. The British buyers are still much withdrawn. The Italians are present, the Belgians, too, and the Russians are starting to enter the market. British buyers are still on the Atlantic coast but there are fewer and fewer of them. Nevertheless, today it is Paris and Paca that attract most of the foreign clientele.

“In Paris, 30 per cent of the transactions above €2million are by foreign buyers; when we go above €5m, 80 per cent are foreign."

Mr Pallincourt said the high-rollers knew what they wanted from their properties: “At this level of price, the areas most sought after are the 6ème, 5ème and 16ème arrondissements, and Antibes and St Raphaël."

For those with not quite enough cash for the Riviera, he suggested looking towards the Haut-Var and Savoie, which were displaying attractive prices at the moment.

“In Haut-Var, there still are acceptable prices and areas where you can still find good deals.

“This is less and less true of Aquitaine, because prices have been going up very noticeably. Then there is the area around Savoie, sectors in the northern Alps where there still are interesting deals to be done."

Mr Pallincourt's predictions for 2011 look towards more stable prices and a revival in sales. Prices would remain within the same category, but any falls or increases would be contained within three per cent.

“I would also say that we are reaching the limit of the fall in interest rates, but I do not think they will go up in any significant way.

“We can be worried about the announcements on taxation, and especially fiscal changes on capital revenues. These are perhaps of a nature to moderate the ardour of the market but otherwise I think 2011 will continue like 2010."

Mr Friggit, on the other hand, was more interested in what happens when mortgage rates eventually rise, and what impact the government's economic measures will have on households' desire and capacity for buying housing.

Availability is the key word

THERE ARE too few of the “right" properties for the buyers in the market today, said Eric Massat, secretary of the FFCI (Fédération Française des Chasseurs Immobilier)

Noting the price rises in cities like Paris, Toulouse and Montpellier, he said it was because of a systematic lack of availability in Paris, while Toulouse and Montpellier benefited from great professional mobility which meant the lack of availability was felt even more there.

Mr Massat feels that price rises are here to stay this year: “There is very little availability and this is not likely to change in the coming quarters, so the trend of rising prices and the price bubble that we thought had exploded will, instead, be consolidated.

“One measure that will impact the market is the change in government incentives for first-time buyers. In theory, this is a very good thing, but, in fact, there will be even more buyers, while the properties available are mismatched.
More buyers and less availability will push prices up.

“After the price bubble popped, people who were renting thought it was time to buy, and insufficient availability meant the trend towards growing demand was reinforced.

“There are too few properties because construction is not important enough in France and because the economic crisis has meant prospective sellers have decided to hold on to their bricks and mortar.

“Besides, interest rates cannot go down any more and are tending to rise. We are still on attractive rates, which explains the surplus demand, but, if they stay attractive, the current picture can continue for a few months."

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