Current Situation (February, 2009)
Although house and property prices have seen dramatic declines recently in some countries (e.g. USA and UK), prices have been relatively stable in France. In fact, in January of 2009 there was a slight increase (0.6%) compared to the previous month. Furthermore, 2008 saw prices decline by only 2.5%, which did not even offset the 2007 increase of 3.8% (figures from FNAIM, France's national association of estate agents).
Unlike certain other countries (e.g. USA, UK, Spain), France is not experiencing large property price reductions. Instead, it has seen over the past 4 years a reduction in the rate of house inflation, with last year a moderate price reduction. The many predictions of a large fall of French property prices in 2008 have been proven incorrect and more recent predictions for a large fall in 2009 will likely prove equally incorrect (see remainder of article for discussion).
French Property Price Stability
Historically, France has had relatively stable prices. In any given year property may increase or decrease by a small amount, but traditionally prices have been broadly in line with inflation over both the medium and long term. From 1999 to 2006 there was a change from this traditional pattern, but market fundamentals are now reasserting themselves and the French property market has returned to its normal behavior since 2006.
Expectations that this will be followed by a period of large property deflation are based largely on the experiences in other countries (such as the UK, USA and Spain). However, such predictions do not take sufficient account of the important differences between these markets and the French market. To begin with, price inflation in France has been much lower than in these other countries, so the French property prices have not reached the excessive levels to be found elsewhere and consequently are under much less pressure to drop.
Limited Property Speculation
In France, property investment is generally much more conservative than in other countries. Property tends to be purchased as a long-term investment for a number of reasons:
Historically, France has had a stable property market, rather than the boom-bust trends found elsewhere. Consequently, there is not a perception that property can be used to make quick or easy money. Instead, it is purchased for one's own use, often later in life when one is settled and intends to remain in the same place for a considerable period of time. Alternatively, it is purchased as a long-term investment.
The costs of buying and selling property are relatively high in France, with estate agent fees typically double or even triple that found in the UK, while Notaire fees and taxes can consume 10% of the price of a property. Consequently, the price of a property needs to rise by up to 15% just to cover these fees, so one must hold onto a property for a longer period of time in order to profit.
French banks have substantially more conservative lending practices than elsewhere. A substantial deposit is typically required (as opposed to the 100% mortgages found in the UK), as is insurance to guarantee repayment. Furthermore, the large-scale lending to high risk borrowers (as found in the USA sub-prime mortgage market) is not to be found in France.
This view of property as a long-term investment, both by property owners and by banks, adds considerable stability to property prices. In the current economic crisis, the fact that France does not have a large number of high-risk borrowers is equally important. In the USA, as the economic situation has declined, many borrowers have defaulted on their mortgages and consequently a large number of properties are forced sales. These forced sales have reduced property prices, resulting in further mortgage defaults and additional forced sales. Thus, in the USA one sees a large increase in the supply of property, at the same time as demand for property is dropping due to the economic issues. The large drop in USA, UK and Spain property prices is due to this imbalance of supply and demand.
Although France, like all countries, has speculative property purchases and mortgage defaults, the levels are far lower than in other countries due to the reasons discussed above. Consequently, it has not seen a large increase in property supply and consequently is not experiencing the property price issues found elsewhere.
Property Demand
Although the French property market has been largely free of the issues found elsewhere in terms of property speculation, mortgage defaults and forced sales, it is suffering from a substantial decrease in demand. Within France, this decrease is partly due to economic issues and partly due to people holding off purchases due to lack of confidence about the future economic circumstances.
There is also a very significant drop in purchases of property by foreigners. Partly this is due to the global economic crisis, with associated economic difficulties and concerns. However, changes in currency rates also play a substantial role; for example the drop in the UK pound from its historical average of 1.5 euros/pound to the current 1.1 euros/pound means that French property is now far more expensive for UK buyers. Furthermore, in addition to making property more expensive, those who are dependent on a UK income find that the currency rate changes make the cost of living in France much higher than a year ago. Finally, for those who would sell their UK property to fund the purchase of a French property, the drop in UK property prices mean that they would have less money. Similar difficulties are faced by potential buyers from USA and a number of other countries.
Although the decline in foreign purchases has only a limited effect on the overall market, it has a disproportionate effect on certain types of properties where the foreign buyer makes up a substantial segment. These include character properties (e.g. farmhouses in need of restoration, chateaux) and high-end properties in areas particularly favoured by foreign buyers (e.g. Provence). Consequently, the significant reduction in foreign clients has contributed to these types of properties falling more than the market average (in some cases, drops of 20% to 30% versus the market average decline of 2.5%).
Outlook for 2009, 2010
The overall French property market should continue to be relatively stable. Overall, it is likely there will be small declines over the next two years, although there will be months in which prices increase (such as January, 2009). However, in property segments where foreign buyers have a significant influence, prices will remain very depressed until the international economic situation improves.
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