French house prices continue to rise modestly, despite continued social unrest and broader eurozone slowdown. In Metropolitan France, house prices rose by a modest 3% during the year to Q1 2019 (1.8% inflation-adjusted), at par with the previous year’s growth, according to the National Institute for Statistical and Economic Studies (INSEE). It was the thirteenth consecutive quarter of year-on-year price hikes. Quarter-on-quarter, house prices increased 0.7% in Q1 2019 (0.9% inflation-adjusted).
Paris saw a significantly stronger house price increase than the wider nation. The average price of existing apartments in the capital city rose by 6.5% (5.2% inflation-adjusted) to €9,680 (US$11,000) per square metre (sq. m.) during the year to Q1 2019, according to the La Chambre des Notaires de Paris.
- In Île-de-France, the country’s wealthiest and most populated region, the average apartment price rose by 4.5% y-o-y (3.3% inflation-adjusted) to €6,010 (US$ 6,830) per sq. m. to Q1 2019.
- In the Petite Couronne (Small Crown), the average price of apartments rose by 4.4% y-o-y (3.2% inflation-adjusted) to €4,730 (US$ 5,375) per sq. m.
- In the Grande Couronne (Great Crown), the average price of apartments increased by a meager 0.3% y-o-y (fell by 0.9 when adjusted for inflation) to €2,970 (US$ 3,375) per sq. m.
- In Hauts-de-Seine, one of the country’s most populous department, apartment prices increased 4.3% y-o-y (3.1% inflation-adjusted) to €5,800 (US$ 6,591) per sq. m.
During the long housing boom which lasted from 1997 to 2007, French house prices surged by 150% (112.5% inflation-adjusted).
The housing market started to weaken in 2008, but price falls have been moderate. After falling by an annual average of 1.7% in 2012-2015, house prices started to rise again in 2016.
HOUSE PRICES IN FRANCE, ANNUAL CHANGE (%)
|Source: National Institute for Statistical and Economic Studies (INSEE)|
While the short-term outlook remains positive, the market seems poised for a pause. Perhaps house prices have been pushed too high by low interest rates relative to rents?
Existing home sales rose by 2.6% to an annualized 985,000 units in Q1 2019, according to the General Council for the Environment and Sustainable Development (CGEDD). In contrast, new home sales fell slightly by 0.4% to 30,863 units in Q1 2019 from a year earlier.
Residential construction is now falling. During the first four months of 2019, dwellings authorized fell by 7.3% y-o-y to 134,400 units while dwelling starts dropped 5% y-o-y to 124,400 units, according to the Ministry of Ecological and Solidarity Transition.
France’s economic growth is slowing. The economy grew by 1.6% in 2018, a slowdown from the prior year’s 2.2% growth. The growth was primarily driven by exports, which helped offset a slowdown in consumer spending after violent “yellow vest” protests forced many stores in Paris to close on key year-end shopping days. On an annual basis, GDP rose by 1.2% during Q1 2019, at the same pace as the previous quarter.
Economic growth is expected to slow further to 1.3% this year, according to the European Commission.
There are no restrictions on foreign ownership in France. Most property is freehold. Apartments are mostly held in two forms of freehold: co-ownership (which has meetings of co-owners, with votes taken and accounts kept), and volumes, adapted mostly for mixed-use developments. There are also leaseholds, for up to 99 years.
Poor rental yields; high transaction costs
From 2000 to 2018, apartment prices rose by 115% in France and by 223% in Paris, i.e., way above rents, which increased by only about 40% during the same period. The slower rise of rent index was partly attributed to the lower allowable rent increase relative to inflation in certain periods.
Gross rental yields in Paris range from 3.9% to 4.2%, with smaller apartments having relatively higher yields, based on research conducted by the Global Property Guide.
During the first quarter of 2019, France’s rent index increased by 1.7% from the same period last year – an improvement from a 1.05% rise in Q1 2018 and an average growth of 0.5% from 2013 to 2017, according to INSEE.
Currently, average apartment rents in Paris range from €21 (US$ 24) to €31 (US$ 35) per square metre (sq. m.) per month. Smaller apartments tend to rent for proportionately more.
Round trip transaction costs are high on residential property in France.
The impact of the LoiDuflot rent control law
In France, initial rents have till recently been freely determined, but revisable only once a year, and not by more than the (new) INSEE housing rent reference index.
However on 19 February 2014 the French Parliament passed a new bill, the Loi pour l’accès au logement et un urbanisme rénové (ALUR: improving access to housing and updating town planning), also known as the ‘LoiDuflot’, after housing minister Cécile Duflot. The bill, which was passed into law on March 24, 2014, set new rules regarding housing and property rentals:
- The law put a rent cap on long-term rentals. Rents should not be higher than 20% above the median rent set by the Prefect in the urban areas. This new rent control, imposed on 28 cities with more than 500,000 inhabitants, will affect areas with high demand for rental properties, such as Paris.
- Short-term rentals still need to seek authorization from the City of Paris, or the local town hall in areas with housing shortages.
- Property owners are required to grant exclusivity to one letting or property agent.
- A new mechanism for the Universal Guarantee of Rents (GUL) was introduced; tenants will no longer provide guarantors or pay a deposit, since the government will underwrite any non-payment of rent.
The Global Property Guide has long been firmly against rent controls, which harm tenants and landlords alike. "It is the surest way to destroy a city without bombing it" noted our former chief economist Prince Cruz in The pros and cons of rent control. We however approve of rules tending to increase security of tenure, without seeking to control rents, so long as the security is only medium-term.
By early-2018, around 57.7% of France’s housing stock belonged to owner-occupiers, which means that almost half of France’s population are renting, according to the ECB. Of primary residences, around 22.9% are privately rented, while 19.4% are socially rented.
Around 97% of French private rented dwellings have private individual landlords, while only 3% are owned by companies or institutions, according to Dr.Joris Hoekstra, researcher at OTB (TU Delft).
When combined with the significant protection given to tenants, who can stay in their properties long-term, these new laws are persuading landlords to sell their buy-to-let properties, thus putting downward pressure on prices and increasing transaction volumes.
The housing stock in France, excluding Mayotte, increased 1.7% y-o-y to reached 36.3 million units in 2018, up from a 0.8% growth in the previous year, according to INSEE. In the past 30 years, the housing stock increased by an average of 1.1% annually in Mainland France while it grew by an annual average of 2.5% in the overseas departments.
Residential construction is falling
The number of new dwellings authorized in France, excluding Mayotte, fell by 6.9% in 2018 from a year earlier, in sharp contrast to growth of 5.8% in 2017, 14.3% in 2016 and 6.5% in 2015, according to the Ministry of Ecological and Solidarity Transition. Likewise, dwelling starts also declined 4% y-o-y to 419,000 units over the same period – after annual rises of 14% in 2017, 10.5% in 2016 and 2.7% in 2015.
The weakness in residential construction activity continued this year:
- Authorized dwellings fell by 7.3% to 134,400 units in the first four months of 2019 compared to the same period last year.
- Dwelling starts dropped 5% y-o-y to 124,400 units in the first four months of 2019.
Existing home sales rose by 2.6% to an annualized 985,000 units in Q1 2019, following increases of 0.1% in 2018, 14.1% in 2017, 5.9% in 2016 and 15% in 2015, according to the General Council for the Environment and Sustainable Development (CGEDD).
In contrast, new home sales fell slightly by 0.4% to 30,863 units in Q1 2019 from a year earlier. New apartment sales increased slightly by 0.2% to 28,798 units while sales of newly-built single-family homes dropped 8.1% to 2,065 units.
Mortgage rates continue to fall
In April 2019, the average interest rate on outstanding housing loans fell to 1.92% from 2.07% a year earlier, according to the European Central Bank (ECB).
By original maturity:
- Up to 1 year: 1.45% in April 2019, down from 1.54% a year earlier
- Over 1 and up to 5 years: 1.45% in April 2019, down from 1.57% a year earlier
- Over 5 years: 1.92% in April 2019, down from 2.08% a year ago
The decline of mortgage rates is partly attributable to the ECB’s reduction of its key rate to 0.00% in March 2016, where it has remained since.
The French mortgage market is mostly fixed rate, helping housing market stability.
Over the past 15 years, the French mortgage market has expanded tremendously - from 18.4% of GDP in 2000, to 43% of GDP in 2018. Over 80% of all owner-occupied dwellings in France are bought with mortgages. In April 2019, total outstanding housing loans to households rose by 6.2% to €1.03 trillion (US$1.17 trillion) from the same period last year, according to the Banque de France.
Due to the dominance of fixed rate mortgages, France’s housing market is likely to be much less prone to sharp upturns and downturns than housing markets in other countries, where floating rate housing loans are a major source of instability.
Floating-rate loans only make up 6% of new loans in France, and around 15.6% of outstanding housing loans, according to the Autorité de contrôleprudentielet de résolution (ACPR).
Economic growth to slow further; budget deficit to rise again
The French economy grew by 1.6% in 2018, a slowdown from the prior year’s 2.2% growth, amidst social unrest and a broader eurozone slowdown. The growth was primarily driven by exports, which helped offset a slowdown in consumer spending after violent “yellow vest” protests forced many stores in Paris to close on key year-end shopping days.
On an annual basis, GDP rose by 1.2% during Q1 2019, at the same pace as the previous quarter.
Macron’s tough economic agenda was strongly rejected by the working class, resulting in more than six 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.
Desperate to contain the uprising testing Macron’s authority, the government unveiled a €10 billion package in December 2018, aimed at increasing wages for the poorest workers and providing tax cuts for most pensioners.
From 2004 to 2007, the French economy expanded by an average of 2.3% per year. In 2009, real GDP fell by almost 3%, the country’s sharpest recession since World War II. The French economy expanded by 1.9% in 2010 and by another 2.2% in 2011.
In 2012, the economy stagnated, with growth of 0.3% as President Francois Hollande squeezed the budget deficit and firms slashed thousands of jobs. France’s weak economic expansion continued in 2013 and in 2014, with growth rates of around 0.6% and 0.9%, respectively. The economy has bounced back somewhat in the following years, with real GDP growth rate of 1.1% in 2015, 1.2% in 2016 and 2.2% in 2017.
France’s economy is expected to expand by 1.3% this year and 1.5% in 2020, according to the European Commission.
In May 2019, inflation stood at 0.9%, down from 1.3% the previous month and the lowest level in two years, based on figures from INSEE. Inflation is expected at 1.3% this year, from 2.1% in 2018, 1.2% in 2017, 0.3% in 2016, 0.1% in 2015 and 0.6% in 2014.
France’s budget deficit was about 2.5% of GDP in 2018, down from 2.8% of GDP in 2017 and the lowest level since 2006, according to INSEE. It was the second straight year that the deficit was below the EU’s 3% limit. However, the shortfall is expected to rise again to 3.2% of GDP this year, as payroll tax credit scheme becomes a permanent tax cut.
Despite this, France’s government debt remains one of the highest in the eurozone. In 2018, government debt was 98.4% of GDP, unchanged from the previous year but up from 95.6% in 2015, 93.4% in 2013 and 87.8% in 2011, according to INSEE.
Unemployment falling, amidst labour market reforms
France’s unemployment rate continues to fall. In Q1 2019, the nationwide jobless rate stood at 8.7%, down from 9.2% in Q1 2018 and 9.6% two years ago, according to INSEE. Despite this, France’s unemployment rate remains above the EU’s average of 7.7% in March 2019 and the eurozone’s average of 6.4%.
Over the same period, jobless rate was just 3.2% in Germany and 3.8% in the UK.
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.
“France’s problem is that it has had mass unemployment for 30 years,” Macron said. “The reality is that we are the only big European country that hasn’t won the battle against unemployment.”
The new labour laws make it easier to hire and fire employees, in an effort to reduce the financial and legal risks of layoffs that discourage businesses from hiring more workforce. In addition, the new rules also increase sanctions against those who failed to look properly for work.
Macron also plans to cut the country’s unemployment benefits and extend the period that people must work to qualify for the aid, in an effort to encourage work and investment. The government is also expected to increase payroll taxes on companies that use to many short-term contracts.
- House price index (new and second-hand) - Base 100 = annual average of year 2015 (INSEE): https://www.insee.fr/en/statistiques/serie/010001868
- Real Estate Price – Long Term Evolution (CGEDD): http://www.cgedd.developpement-durable.gouv.fr/prix-immobilier-evolution-a-long-terme-a1048.html
- World Economic Outlook Database (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx
- Interest rates (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691382
- France – Building Permits (European Central Bank): https://sdw.ecb.europa.eu/quickview.do;jsessionid=D9595123530029F94347A9293FBD7620?SERIES_KEY=132.STS.M.FR.S.BPER.CC1109.4.000&periodSortOrder=ASC
- Rent reference index (RRI) - Base 100 on the 4th quarter of 1998 (INSEE): https://www.insee.fr/en/statistiques/3532379?sommaire=3530679
- Rental returns in Paris are disappointing (Global Property Guide): https://www.globalpropertyguide.com/Europe/France/Rental-Yields
- Housing stock in France at 1 January 2018 (INSEE): https://www.insee.fr/en/statistiques/3733235
- Loans to households (Banque de France): http://webstat.banque-france.fr/en/browseBox.do?node=5384963
- Economic forecast for France (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/france/economic-forecast-france_en
- France cut its budget deficit to 12-year low in 2018 (Reuters): https://www.reuters.com/article/us-france-budget/france-cut-its-budget-deficit-to-12-year-low-in-2018-idUSKCN1R70S1
- France Government Debt to GDP (Trading Economics): https://tradingeconomics.com/france/government-debt-to-gdp
- France unemployment rate (Trading Economics): https://tradingeconomics.com/france/unemployment-rate
- Macron Reboots French Economic Overhaul as Yellow-Vest Protests Fade (The Wall Street Journal): https://www.wsj.com/articles/macron-reboots-french-economic-overhaul-as-yellow-vest-protests-fade-11560869888
- Yellow Vest: Shock stats reveal depth of Macron chaos - 50,000 on streets and 11 dead (Express.co.uk): https://www.express.co.uk/news/politics/1141568/yellow-vest-protests-emmanuel-macron-protests-france-news-gilets-jaunes
- France profile – Timeline (BBC News): https://www.bbc.com/news/world-europe-17299605
- French economy ended 2018 on a firmer footing than feared (Reuters): https://www.reuters.com/article/us-france-economy/french-economy-ended-2018-on-a-firmer-footing-than-feared-idUSKCN1PO0I7