Homebuyers in Paris enjoyed the lowest mortgage rates since World War II last year, leading to double digit year-over-year increases in Q3. Meanwhile, housing prices throughout the rest of France remained stable. Uncertainty about the French economy and cutbacks in government spending have some speculating that housing growth may stall in the new year. See the following article from Global Property Guide for more on this.
Apartment prices in Paris and vicinity surged during the year to Q3 2010, while prices for the rest of France were generally stable. The average price of Paris apartments was €6,381 per sq. m, up 9.7% y-o-y, according to the National Association of Real Estate Agents (FNAIM), or 13.8% y-o-y to Q3 according to Notaires - INSEE (National Institute for Statistic and Economic Studies).
Moving out from Paris:
- For the wider Paris region (formally, Ile-de-France), composed mainly of Paris metropolitan area, the average price rose 12.07% y-o-y to Q3, to €4,920 per sq. m..
- The average price in the Petite Couronne (Little Ring) was up by 11.6% on the year to Q3 at €4,030 per sq. m..
- In the Grande Couronne (Large Ring), the average price was up 9.12% to €2,990 per sq. m..
Why Paris’ sharp price increases? Two possible reasons: first, Paris tends to lead France. Second, the economic crisis may possibly be shifting housing demand from the countryside to the capital, because of uncertainty about France’s economy.
In France as a whole, the average price of residential real estate was up by a mere 0.6% y-o-y to €2,426 per sq. m. in Q3 2010, according to FNAIM. Apartment prices rose by a mere 0.2% y-o-y to reach €2,956 per sq. m., and detached houses rose 1.1% over the same period.
Low yields, rent constraints
France’s house price boom lasted from 1997 to 2007, with double-digit apartment price rises almost continuously during the years 1998-2007. Low interest rates had boosted house prices up from 2001 to 2006, with annual house price increases peaking in 2004. But price rises ground to a halt from late 2007, with the inflation-adjusted price of existing dwellings falling 11.52% during 2008, under the impact of the global financial meltdown. France’s economy grew by a mere 0.3% during 2008, and contracted by 2.19% during 2009.
From 2000 to 2009, apartment prices in France rose by 110.03% (115% in Paris) - much more than the country’s rent index, which over that period rose only 29%. This brought poor rental yields, especially in Paris, which now has yields ranging from 3.17% to 4.10%, according to Global Property Guide Research (August 20, 2010). The rent index increased by 1.10% over the year to Q3 2010.
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 more than the (new) INSEE rental index. In certain periods, the allowable rent increase has been below inflation. According to INSEE surveys, 93% of France’s landlords are private individuals. and not corporations.
The social housing sector has a serious impact on private rental market, especially as social sector rents declined from 1999 to 2001. The private rental market comprises about 21% of the housing stock while 17% belongs to the social rental market. There is also a relatively large “other” category at 6% including work-related residences.
Paris’ strong price increases, however, are not expected to continue. France is implementing cost-cutting measures, and economic activity ground to a halt in October, due to rolling strikes and nationwide demonstrations, as workers and students protested against plans to increase the retirement age from 60 to 62, and the age for full pension from 65 to 67.
Stable mortgage market
In France, over 80% of all owner-occupied dwellings are mortgaged, and more than 80% of housing loans are fixed rate. Due to the dominance of fixed rate mortgages, France’s housing market is therefore arguably less prone to sharp upturns and downturns. Despite the economic slowdown from 2008 to 2009, France’s mortgage market grew 3.89% to €738 billion. During the decade it has grown enormously, from 21% of GDP in 2000, to 37.9% of GDP in 2009. France’s mortgage market is the third largest in the EU, after UK and Germany.
Historically low rates
New lending activity surged by 38.5% during the year to Q2 2010, according to the European Mortgage Federation (EMF). Lending by banks to households increased by 6.8% during the month of September 2010, in impressive contrast to last October’s growth of 2.39%.
Mortgage rates in France are at their lowest levels since World War II, with an average rate of 3.30%. This is due in part to low rates on long term government debt, now at their lowest level for 200 years.
In September 2008, the European Central Bank (ECB) started to reduce key rates, and rates for new housing loans also began to move down.
- The average rate on new housing loans with initial rate of fixation (IRF) of more than a year moved down to 3.52% in September 2010, from 5.19% in December 2008.
- Interest rate for loans with IRF of one year or less fell to 3.05%, from 5.38%, over the same period.
The TEC 10, an index used to set fixed interest rates, fell to 2.66% in September 2010, because of low inflation and investors flocking to safer investments such as government bonds.
‘With fixed rates falling, we have seen a noticeable shift in the types of mortgages people are ringing to discuss. Fixed rates are now the overwhelming choice amongst buyers,’ says John Busby of Athena Mortgages.
Restructured PTZ housing loan
Despite the financial crisis, The French government has actually expanded subsidized zero-interest loans (the prêt à taux zero - PTZ loan scheme), redefining it to cover an even wider range of beneficiaries, and extending the programme, which was intended to end in 2009, until 2012. PTZ+, which will take effect in January 2011, will replace three existing schemes, namely: PASS FONCIER loan, the current PTZ loan, and the tax relief on home loan interest.
The amount of credit available under the PTZ is based upon the house location, number of family members and the length of loan maturity.
- To qualify for a loan in zone A areas, which include major urban areas like Paris, individuals should have an income of less than €31,250. Households with 5 family members or more should not have a combined income of more than €64,875.
- Higher loans are now made available under the new PTZ (called PTZ+) to house purchases meeting the BBC (Low-Energy Building) standard, thus encouraging energy efficiency.
- Under specific conditions, the period of loan repayment has been extended to 30 years.
- The loan amount to first-time buyers of new homes in areas under pressure (zones A and B1) was increased. For example, families with 5 and above members may loan €359,000 under the PTZ+, in contrast to €285,000 in the old PTZ scheme.
PTZ loans can be combined with a special housing loan that enables modest-income households to buy their own home (prêt à l’ accession sociale – PAS loans). Households entitled to these loans should have an income below a certain limit. and the building cost must not exceed a certain threshold. Recipients of PAS loans benefit from lower interest rates and a housing grant to cover part of the monthly payment.
Debt reduction plan
The French economy’s period of slow growth is ending, and the International Monetary Fund (IMF) expects France’s GDP will expand by 1.52% in 2010, and by 1.75% in 2011.
Nevertheless, France’s situation is worrying. Its national debt increased to 78% of GDP in 2009, up from 68% of GDP in 2008. France’s deficit was 7.5% in 2009, up from 3.2% in 2008. The European Commission plans to sanction countries that fail to control their debt. New rules proposed include the reduction of member countries’ total debt to 60% of GDP, In addition to the current deficit limit of 3% of GDP.
Although France’s condition is not as worrying as that of the PIIGS, it requires action. In the proposed 2011 budget, the government is planning to lower the fiscal deficit to 6% of GDP or €92 billion ($125 billion), down from 7.7% or €152 billion in 2010. The target is a deficit of only 3% of GDP in 2013.
To attain this goal, more than 30,000 civil service staff will be retired without replacing them. Likewise, the government also plans to withdraw €10bn worth of tax breaks. French Finance Minister Christine Lagarde has recently explained how extra cuts can save €40 billion:
- Abolition of various economic stimulus measures will bring up to €16 billion
- A 5% cut on state spending will generate €7 billion
- Tax shelters will be curved, saving €10 billion
- The resumption of economic growth will bring the government €7 billion in extra tax revenues
This is a relatively un-aggressive debt reduction plan, in contrast to the UK and Ireland. Time will tell who has got it right – the French moderates or the British extremists.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.