France: Real estate market gains a boost with interest rates at low levels

The boom on many real estate markets that started at the end of the 1990s has sent valuation levels in France spiralling upwards. Within ten years, purchase prices for houses and apartments surged by some 150 percent. The outbreak of the global financial market crisis represented a setback for the market, but did not unleash a major correction as was the case in Spain or Ireland. As interest rates started falling, the market quickly registered positive levels again. Prices reached their highest levels to date at the end of 2011. After this, prices started crumbling despite the further decline in interest rates. Demand eroded in response to the deceleration in the aggregate growth rate to way below one percent p.a. and the consequent rise in the unemployment rate into the double-digit region. From 2012 to 2015, prices fell moderately by 8 percent in total. They have now started climbing again, but the pace is subdued.

A closer look at the market clearly reveals a distinct acceleration. The sales figures for existing properties are reaching record levels at 850,000 residential units – 30 percent more than in 2013. But newly-constructed properties are also selling „like hot cakes“. The fact that the transactions here have not come close to their previous maximum values has less to do with a lack of interest than primarily with the subdued new construction activity. But what are the reasons for the swing in sentiment on the French housing market? And what are the causes of this „anomaly“ of very high transaction figures in conjunction with stagnating prices?

The main reason for the market recovery is that real estate has become more affordable. The years of stagnating or slightly declining real estate prices have contributed to this as have the continuously falling mortgage rates. Despite high prices for houses and apartments, the current burden on income for financing property purchases has fallen to a historically low level. However, the likeliest reason for the brisk interest in real estate purchasing is the expected deterioration in purchasing conditions given the prospect of rising interest rates and prices. This means that it no longer pays to wait for more favourable conditions before making a purchase. Housing starts are also profiting from state subsidy measures: For rented apartments, the tax deductibility has been improved for the period 2014 to 2017. For first-time buyers, the programme of interest-free loans has been extended.

There are various reasons why prices are not rising more strongly, despite the strong demand for purchases. One aspect is the already relatively high price level reached that makes price increases difficult to assert. The market development outside the metropolitan areas is more subdued and is halting the price development as a whole. There is also more real estate on offer. On the one hand more is being constructed again; on the other hand, potential sellers who had refrained from selling in the falling market of recent years will likely exploit the greater demand for real estate in order to sell their properties at comparatively good prices.

Finally, the fact that prices are not rising, despite the brisk demand, is not necessarily a bad thing given that prices are already at quite a high level. On the other hand, a further rise in prices heightens the risks of a correction on the housing market that, unlike other highly-valued housing markets, has not happened until now. Furthermore, the foundation of housing demand is still not sufficiently solid to warrant a further upward price trend on the housing market. Once a visible increase in prices – but not in incomes – can be noted, the already high relative valuation level would in any case further deteriorate. A stronger economic momentum would not be harmful anyway, given that the current driver of demand – the low interest rates – cannot be lastingly relied on. France’s economy in terms of growth momentum and unemployment is on a par with the average level of the Eurozone, albeit thanks only to high state expenditure. Moreover, the unemployment is only falling slowly. Among the French under 25-year olds, the unemployment rate has been stagnating at just below 25 percent, contrary to the falling trend in the Eurozone.

To begin with, the currently high sales figures could rise further if many of those wishing to make purchases still opt to secure the favourable financing conditions. But apart from this we see a probability of sales figures giving way slightly. Nor are there any signs of triggers for an accelerating price development. Faced with unfavourable leads, housing prices could fall again slightly. The main causes for this could be above all rising interest rates but also the possibility of an unfavourable outcome to the presidential election in May. Our base scenario expects stagnating to at most slightly rising purchase prices. The financing side does not pose a major risk, given the moderate debt levels of private households. The fixed-interest rate loans granted on the basis of conservative conditions also have a risk-reducing effect.

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