House prices in France rose by 4.3% (1.8% when adjusted for inflation) during 2011, according to the National Institute for Statistical and Economic Studies (INSEE).

However rougher weather lies ahead: nationally French property prices could drop by 5% to 6% in 2012, forecasts Credit Agricole, which also predicts an 8% decline in sales. The pace of house price rises softened in the latest quarter.

Paris continues strong, with apartment prices up 14.8% y-o-y (12% in real terms) to €8,390 per square meter at end 2011, according to Notaires - INSEE.

Around Paris:

  • In the Ile-de-France, where Paris is located, house prices rose 10.6% in 2011, to €5,550 per sq. m.
  • In the Petite Couronne (Little Ring), house prices rose 8.8%%, to €4,440 per sq. m..
  • In the Grande Couronne (Large Ring) average prices were up 5%, to €3,140 per sq. m.

In France as a whole, house prices rose strongly from Q1 to Q3 2011, according to the National Association of Real Estate Agents in France (FNAIM), but again, the latest quarter was weak.

Compared to a year earlier, the average price of all dwellings was up 7.1% in Q3 2011 (4.8% in real terms), at €2,626 per square metre. However, prices rose only 1.04% in the last quarter.

Detached house (maisons) average prices fell 0.96% in Q3 2011 (0.91% in real terms), after 4.2% and 2.4% price rises the previous two quarters.

Some French regions are weak, exemplified by the 4.6% average price fall in Brittany during 2011.

The softening is partly due to the withdrawal of the previous economic stimulus, as part of France's fiscal response to the eurozone crisis. Focusing minds, France was recently downgraded by Standard & Poor's (S&P) to AA+, losing the its coveted AAA status.

The risk of recession in the eurozone is increasing. The upcoming presidential elections in April and May have also made home buyers more cautious.

France's economy grew 1.7% in 2011, with an increase in production of 2.2%. However consumer confidence is weak, and household consumption rose only 0.6% in 2011. With purchasing power stagnating, France is expected to grow only 0.7% in 2012.

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.

Tax reforms

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 slowing

The second-biggest economy in Europe, France enjoyed the coveted triple-A credit rating status from 1975 until January 13, 2012, when Standard & Poor's (S&P) downgraded it to AA+ status, alongside 8 other eurozone countries.

According to S&P, the downgrade was due to the insufficient policy measures made by the bloc's leaders in containing the sovereign debt crisis. Moreover, S&P also changed France's rating outlook to negative, indicating that a further downgrade may occur in 2012.

The rating cut is a major setback for President Nicolas Sarkozy's chances of being re-elected in the incoming May elections.

Though 2011 was tough due to the worsening euro zone crisis, the economy grew by 1.7%, better than the 1.5% growth in 2010. This followed a 2.5% decline in 2009, France's sharpest recession since World War II. However France's recent GDP quarterly growth of only 0.2% in Q4 2011 suggests the economy is slowing.

The strength of French unions and lack of labour market flexibility have both affected France's competitiveness. France's generous unemployment benefits have led to a structurally high unemployment rate, which stood at 9.4% at the end of 2011.

Amid flagging consumer confidence, France's CPI increased 2.3% y-o-y in Q4 2011, higher than ECB's 2% limit. The increase was caused by the seasonal increase of prices of services and high energy prices.

Global Property Guide