Property in France: Market report

According to recent reports, for the first time in 10 years the price of French property is starting to fall. Not by a great deal and not everywhere, but enough to make buying, selling or renting property an even more interesting exercise.

In its April issue, the French economic journal Capital (www.Capital.fr) devoted nearly 30 pages to a recent and perhaps surprising phenomenon – the accumulating evidence that property prices are at last starting to fall. After 10 years of steady climb – by a total of 130% since 1997 – two independent reports and research undertaken by the magazine itself show that even by December last year, the price per square metre had fallen by an average 3% (from €3,367 six months earlier to around €3,316 per m²) across a broad spectrum of French properties.

One of the consequences of the price rises that lasted up to the end of 2007 has been an overall slowing down of the market for both primary and second homes, as occupiers decided to say put, and potential purchasers found that the cost of buying property had risen from an average 3.8 to 5.1 years equivalent family income.

Government figures for the first quarter of 2008 show a dramatic slowdown, particularly in the sale of new-build properties, down overall by 27.9% compared with the same time last year, with three departments (Limousin, Lorraine and Auvergne) showing reductions of more than 60%. The country’s stock of new-build properties awaiting buyers now stands at 105,600 – an all time record.

French banks had been responding cautiously with mortgages being extended from an average of 17.8 years to 21.3, with 30 years not uncommon. Interest rates continued to rise however, from 4.10% to 4.85% during 2007 alone, partly as a reaction to the US sub-prime crisis and bankers anxious to ensure that borrowers were not extending themselves beyond the traditional 30% of income rule. As in Britain, French banks are now also looking for higher initial deposits.

Good news for renters

Renters also are now hoping for greater price stability; and landlords, the reports argue, will no longer be able to demand automatic rent increases each time a lease comes up for renewal. New renters armed with an impeccable dossier (steady income, permanent jobs) can expect to negotiate a discount, sometimes up to 10% of the rental asked.

This is on top of the widespread failure of many buyto- let schemes promoted by the French government (Borloo, Robien) that have not lived up to their promises of guaranteed but controlled rents, and secure returns for investors. This is partly because too many overvalued properties were hastily built and sold, often in inaccessible areas where land was cheap, and have failed to find tenants. Desperate ownerinvestors are now trying to sell, at a discount and often to the original promoters, creating a surplus of properties that in some areas are already in over supply.

The time is right

As a result, now is a good time to buy, particularly if you are not in a rush, and are prepared to do your market research thoroughly. The surplus of certain types of property varies from area to area, with some towns experiencing a lack of studios and one-bed apartments, while in others there is a shortage of the larger, family type property.

On the French Mediterranean coast where I live, near Perpignan, we are experiencing a shortage of smaller holiday-type properties, as sales have recently picked up and the supply has not been replenished. There are a number of new-build programmes due for completion in late 2008 and 2009 but the stock of existing, smaller properties is restricted.

Across France many owner occupiers wishing to move, for family or employment reasons, have long been forced to stay in place until they can sell their existing home, often at a reduced price. Although some properties remain obstinately over-priced in defiance of local market conditions, buyers can routinely expect to negotiate reductions of 5%, 10% or even 15% of the asking price, particularly if they can produce convincing evidence to justify their demand.

Co-ownership concerns

There are signs at last that buyers are doing their homework and generally becoming more cautious, and are not afraid to negotiate. For example, many now take into account factors such as the cost of renovations, or future works scheduled by the syndicate in the case of co-ownership properties, the costs of which since 2004 have become the responsibility of the incoming co-owner, even though he or she may not have voted for them.

Co-owners are notoriously reluctant to spend money on the building’s common parts, but new regulations concerning electrical wiring, gas installations and lift maintenance mean that long delayed essential works may have to be carried out in the near future – and paid for by the co-owners.

Some 18% of syndicates are also reported to be in debt as a result of bad payers, which will increase the burden on existing and new owners. Potential buyers can check the records of the co-ownership syndicate before committing themselves to purchase, and the papers should be available from the property’s agents or direct from the owners, showing what works have been voted for or are planned, and at what cost.

Buy to let opportunities

There is evidence too that investors looking for a rental income are taking more time and doing their sums before buying. Out of 11 conurbations researched by Capital, all but four showed that average rents had risen in 2007 – the highest being Lyon (5.8%) due to the lack of smaller apartments, and Nantes (3.1%) where the opposite is the case and there is a shortage of larger family apartments.

Of the other cities showing a rise, these were in the order of less than 1%; while Lille (-2.5%), Marseille (-2%), Bordeaux (-1.1%) and Montpellier (-0.8%) all showed modest decreases. Among the reasons cited include a glut of older properties requiring extensive renovation and competition from newly built apartment blocks that are ready to move into.

Part of the potential buyer’s calculations should also include the cost of refurbishment and here investors – usually French and eligible for subventions and tax deductions – are at an advantage. Together these two factors can raise the percentage return by one or two points, particularly in the case of larger, derelict properties, where grants are available for improvement.

This can make all the difference if buying with a longterm mortgage. The cost of credit can typically double the price of a €100,000 studio bought over 30 years or add 50% to the cost of a €500,000 property bought over 20 years. These costs are in addition to maintenance, renewals and letting charges, and have to be weighed against the likelihood of reasonably stable rental incomes from reliable tenants.

Not surprisingly, properties are generally taking longer to sell as potential buyers are tending to take longer to make up their minds before committing to purchase. But even the whiff of possible future price reductions may be just the fillip the market needs to pull itself out the doldrums. Story by, Peter-Danton de Rouffignac MA LLM who is a French property consultant based near Perpignan. www.francemediterraneanproperty.com

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