A recovery from the ill effects of the global financial crisis on the French residential housing market that began in 2010 appears to have come to an end. Prices are falling even in the wealthiest neighborhoods of the country and experts are blaming a struggling economy and lack of demand despite low interest rates. Even so, a restrictive mortgage market is making it difficult for many people to find financing. New construction is also down as the country’s GDP continues to falter and imminent reforms that will raise taxes and lower credits will not help matters. For more on this continue reading the following article from Global Property Guide.
The French housing market is in trouble again, as the country struggles to bring down its record high unemployment rate and budget deficit.
House prices in Metropolitan France fell by 1.63% in 2012 from a year earlier, the third consecutive quarter of year-on-year declines, according to the National Institute for Statistical and Economic Studies (INSEE). When adjusted for inflation, house prices actually dropped by 3.12% over the same period. House prices dropped by 1.27% (-1.51% inflation-adjusted) in Q4 2012 from the previous quarter.
In Ile-de-France, the wealthiest and the most populated region of France, the average apartment price dropped by 0.5% to €5,510 per square meter (sq. m.) in 2012 from a year earlier, based on figures released by La Chambre des Notaires de Paris.
- In Paris, apartment prices dropped by 0.96% (-2.46% inflation-adjusted) y-o-y to an average of €8,270 per sq. m. in 2012.
- In the Petite Couronne (Small Crown), the average price of apartments fell by 0.5% y-o-y to €4,420 per sq. m. in 2012.
- In the Grande Couronne (Great Crown), the average price of apartments was unchanged at €3,130 per sq. m. in 2012 from a year ago.
During the housing boom (1997-2007) French house prices surged by 150% (112.5% inflation-adjusted). However, the housing market started to weaken in 2008, mainly due to the global crisis. House prices fell by 3.82% (-5.48% inflation-adjusted) in 2008 and by another 4.07% (-4.41% inflation-adjusted) in 2009.
The housing market bounced back strongly in 2010, with house prices rising by 7.57% (5.82%). In 2011, the housing market started to slow, with house prices rising by just 3.66% (1.19% inflation-adjusted), mainly due to the adverse impact of the eurozone debt crisis.
Demand is also waning. In January 2013, the total number of existing homes sales in Paris plunged by 44% from the same period last year, according to La Chambre des Notaires de Paris. Likewise, sales of existing homes in Petite Couronne (-28%), Grande Couronne (-25%) and Ile-de-France (-31%) all fell over the same period.
In 2012, the total number of existing homes sold in France fell by 11.9% y-o-y to 709,000 units, according to the Conseil général de I´environnement et du développement durable (CGEDD).
Construction activity is also down. The total number of authorized houses in France fell by 7.3% to 495,496 units in 2012 from the previous year, according to the Ministère de l’Écologie, du Développement Durable et de l´Énergie. Likewise, the number of houses under construction also dropped 17.8%, to 346,463 units in 2012 from a year earlier.
France’s housing market is expected to remain depressed in 2013, as economic conditions worsen.
The French economy saw no growth in 2012, after an annual average real GDP growth rate of 1.7% in 2010 and 2011. In 2013, the economy is projected to grow by a meagre 0.1%.
Still relatively low interest rates
New lending activity fell 7.8% from the previous quarter, and by 17.2% during the year to Q3 2011, according to the European Mortgage Federation (EMF). After nearly three years of historically low key rates (at 1%), the ECB lifted its interest rate for the first time in April 2011 to 1.25%. The key rate was raised again in July to 1.50%, but lowered to 1% in December 2011 as the eurozone crisis worsened.
Actual mortgage rates are still trending up:
- The average rate on new housing loans with initial rate of fixation (IRF) of more than a year was 3.7% in January 2012, up from 3.07% a year earlier.
- Interest rates on loans with IRF of one year or less rose to 4.02%, from 3.5 %.
“Following last month´s rate reductions (February 2012), many French banks are now passing on the recent falls in the main rates,” said John Busby of Athena Mortgages in March 2012. “Those who began their applications recently… can now enjoy rates as much as 0.60% lower than in January. A 20 year fixed rate now goes for 4.25% at 80% LTV.”
Tighter mortgage market
France’s mortgage market is one of the EU’s largest. From 2004 to 2007, total outstanding housing loans rose by an average of 14% per annum. During the last decade the mortgage market grew enormously, from 22% of GDP in 2000, to 43.7% of GDP in 2011.
Over 80% of all owner-occupied dwellings in France are bought with mortgages, and more than 80% of housing loans are fixed rate. Due to the dominance of fixed rate mortgages, France’s housing market is arguably less prone to sharp upturns and downturns.
France’s mortgage market grew 5.86% in 2011, but in the second half, growth slowed. The banks were already becoming stricter in the first half of 2011 as they adopted Basle III criteria, which require that total outstanding loans should be no more than six times the borrower’s income. Moreover, there was also an increasing trend for banks, especially those holding large quantities of Greek debt, to be reluctant to lend to international investors, and to close their doors to non-residents.
France has low rental yields
The development of France’s rental market is constrained by rent controls. Initial rents are freely determined, but can be revised only once a year, and not by more than the (new) INSEE rental index. Around 93% of the landlords are private individuals rather than corporations, according to INSEE surveys.
Around 57% of France’s housing stock belongs to owner-occupiers, which means that almost half France’s population are renting. Of primary residences, around 24% are privately rented, while 18% are socially rented.
From 2000 to 2011, apartment prices in France rose by 144.44% (184% in Paris) - much more than the country’s rent index, which over that period rose only 32%, partly because in certain periods, the allowable rent increase has been below inflation.. This has resulted in unsatisfactory rental yields, especially in Paris, which now has yields ranging from 3.26% to 3.85%, according to Global Property Guide Research (July, 2011). The rent index increased by only 2.11% during 2011.
Rents in Paris were relatively stable at an average of €22.40 per square meter. Meanwhile, rents in the largest regional cities such as Bordeaux, Lille, Lyon, Marseille, Nantes, Rennes and Toulouse, were only almost half of Paris’ at an average rent of €22.40 per square meter, according to CBRE.
New tax reforms are likely to pressure France’s housing market in 2012:
- VAT hike from 5.5% to 7% for housing maintenance and renovation;
- Reduction of tax credits for equipment installation to improve housing energy performance, to 15%;
Higher tax on abusive rents for units smaller than 13 square meters.
- The Scellier scheme, allowing a 22% tax exemption from the property price, was cut to 13% in 2012, and will be axed by the end of December 2012.
Aside from the tax reforms, from 2012 the zero-interest loan scheme will be limited to first-time buyers of new homes, and social housing tenants who want to purchase their home. Other modifications are: 1) the share of the loan in the total financing plan of the house purchase should be equal or lower than 10% in 2012; and 2) the energy performance of the house will directly determine eligibility in 2013.
French economy struggling
From 2004 to 2007, the French economy expanded by an average of 2.3% per year.
However, the economy contracted by 0.08% in 2008, due to the global crisis. Real GDP declined again by another 3.1% in 2009, France’s sharpest recession since World War II. Despite the worsening eurozone debt crisis, the French economy managed to expand by 1.7% both in 2010 and 2011.
Overall, the French economy recorded no growth in 2012, as firms slashed thousands of jobs and President Francois Hollande squeezed the budget deficit, according to National Institute for Statistical and Economic Studies (INSEE).
Real GDP declined by 0.3% q-o-q in Q4 2012, after rising by 0.2% in Q3, and declining by 0.1% both in Q2 and Q1 2012. In the first quarter of 2013, the economy is expected to barely dodge recession with a 0.1% real GDP growth forecast, according to the Bank of France.
The French economy is projected to grow by a meagre 0.1% in 2013, according to the Organisation for Economic Cooperation and Development (OECD).
The government is now struggling to bring the country’s budget deficit down within the 3% threshold. In 2012, France’s budget deficit stood at 4.8% of GDP, overshooting the government target of 4.5%, according to figures released by INSEE.
France is expected to miss again its budget deficit target in 2013. The deficit is expected at about 3.7% of GDP this year, higher than the 3% target.
Public debt rose to about 90.2% of GDP in 2012 (€1.8 trillion), up from 85.8% of GDP in 2011.
The country’s public spending, currently at 56% of GDP, is the second highest in the EU.
France’s high unemployment is another problem. The jobless rate had reached 10.6% in Q4 2012, the highest level since Q2 1999. In February 2013, the number of unemployed persons in France rose by 10.8% y-o-y to reach 3.187 million, the highest since January 1997.
The overall unemployment rate is expected to rise to 11% by end-2013, according to the OECD.
The country’s inflation rate decelerated to its lowest level in three years to 1.2% in February 2013, from 1.4% in the previous month, according to INSEE.
This article was republished with permission from Global Property Guide.