According to a recent article in the Wall Street Journal, subscription required of course, France’s housing market has been rather healthy through the global financial crisis. As Spanish and U.S. real estate markets tumbled following the fall of Lehman Brothers Holdings Inc. in 2008 and the credit default swap shenanigans of Wall Street, French real estate prices fell un peu and not for long. In fact, by the end of 2009, French home prices were recovering, led by a surge in Paris.
What did they do right? Or is this a case of being dealt Aces, as Republican presidential candidate Romney said of candidate Perry when he rides on the coattails of the Texas economy.
The Journal says French homes prices began to fall in the third quarter of 2008, hitting a low of 188.7 according to national statistics in the second quarter of 2009, but actually rising above pre-Lehman highs in the fourth quarter of 2010. The provisional reading for the second quarter of this year is 215.4.
In France, investors did what I was so sure they would do here: put their capital in real estate, even if it was expensive. That kept prices up and created a little bubble.
Why did that NOT happen in the U.S. Because, I think, federal regulators put the brakes on the banks, though French banks are also conservative. U.S. banks increased reserve requirements and chilled lending like a giant cooler.
Then in France there was a lack of new building, the construction sector hampered by a scarcity of land and tons of government regulation, barriers to new construction. Think San Francisco on steroids. There’s also a rising elderly population in France who, despite the likes of Dominique Strauss-Kahn, prefer to live alone and cohabit less, this undoubtedly what happens after way too many years of free love.
France, like us, has low interest rates and more conservative lending practices. Apparently, French banks grant loans on the ability of the household to repay, not on the future value of the asset property. Credit does not exceed one-third of income, interest rates are fixed and max at 25 years.
France also instituted tax breaks for buyers of new properties, who buy then lease them. When it was first created, says the WSJ, “the tax break allowed buyers of a €200,000 property to shave €50,000 off their declared taxable income over nine years.”
But alas, that has been whittled and whittled down, 10% au revoir in the 2011 budget, and considering more chop chop in the 2012 budget.
French developers say that will really kill off new home building. The French government is also limiting a tax break on capital gains from the sale of second homes. If you sell a second home you will only get the full exemption after 30 years of ownership. Apparently this has already taken a huge bite out of planned property sales. French economists want to treat real estate as a safe haven investment and avoid a bubble. But that may not be possible. Prices this year, say French economists, are already heading upward, demand is falling and people are moving away from equities but putting cash into precautionary savings, not real estate.
There are way fewer defaults in France real estate. But French experts are concerned that a fall in prices coming at the same time at the same time as big troubles for the banking sector, could end up, well, can you say merde?
French experts and economists say the outlook is not bright:
“A year ago we were talking about recovery. We thought we were moving out of the tunnel, and the banking crisis was coming to an end,” says Mr. Ciuch of Immogroup Consulting. “It’s not at all the case today. Unemployment has risen, inflation remains at a low level, proving there is a softening in consumption. There is no reason for real estate to be an exception.”