"A significant rebound seems unlikely"
"Who is buying today? How are mortgage conditions evolving? To what extent can property prices continue to increase? And finally, is there a risk of a property bubble in France today?" These are questions that experts from the major agency networks, developers and mortgage brokers sought to answer during our round table. In short, their conclusion was that the French passion for real estate remains intact and could even strengthen, due to a fall in profit in liquid investments and concerns about retirement. Although the market is evolving more or less depending on the region, our experts do not envisage a significant drop in prices, even in the most rural areas. Maintaining low interest rates remains the key to maintaining an increase in transactions and prices.
The real estate market witnessed record prices and volumes of sales in 2019. How would you explain this?
Christine Fumagalli, Orpi network chief executive
This exceptional activity confirms that the French passion for real estate remains intact. First-time buyers, who had somewhat disappeared over recent years, are back in force and they are today more often in their thirties than in their forties, including in the capital itself. Overall, demand exceeds supply in many areas, with the latter becoming increasingly scarce due to the lack of new build as well as buyers who are looking for city-centre locations. In the Orpi network, 21% of transactions are rental investments. Among investors, 11% are renting their main residence owing to the level of prices and/or for reasons of mobility. These are not investors speculating, these are cautious investors wishing to build up their wealth for the future and/or seeking to bring in an additional income. Real estate seems to be an attractive investment in this period of uncertainty, with concerns about pensions a further motivation.
Laurent Vimont, Century 21 chief executive
In the Century 21 network, 27% of acquisitions last year were investments, whereas this category represented some 15% a decade ago. The major surprise is that blue-collar workers are the most active socio-professional category with some 24% of purchases, just ahead of middle managers. This reflects the French concern about retirement. Thanks to low interest rates, they are rediscovering an investment tool with two main virtues: on the one hand, the progressive building up of assets thanks to a mortgage repaid in part by the tenant, and on the other hand the possibility to benefit from an additional income when they reach retirement age. Money has never been cheaper and home loans are becoming a must-have, a significant change from the situation a few years ago.
Bertrand Gstalder, SeLoger Management Board chief executive
It would be possible to draw an inverse parallel with the online stock market, where volumes over the past few years have collapsed despite the good performance of the stock index. People are seeking reassurance, and preparation for retirement has become a major concern for the French. The money that is no longer going into the stock market has been redirected to real estate, with an additional incentive being the fact that one can borrow to buy, which is obviously impossible for stock market investments.
Jean Benucci, Nexity Immobilier Residential Deputy Managing Director
In new build, we are also witnessing many younger buyers either looking for a place to live or an investment opportunity in both collective and individual housing. Regarding interest rates, it is clear that they are very low and can only go up in the future. As for the age of buyers, the investment decision is now taken at around 30, with under 40's today involved in 48.4% of transactions... and this is new.
Have lower interest rates offset higher prices to keep investments profitable? And where is the strongest demand compared to supply?
Laurent Vimont. Profitability is no longer a priority. We can no longer systematically expect a 5% return on real estate. The most important thing is to gradually build up financial security which will be available at between 55 and 60 and bring in a monthly revenue to supplement pension. Prices have risen all over France, even in rural areas. Many people living in these areas don't want to relocate, preferring to stay close to family and friends, and possibly be able to call upon grandparents to help with looking after children. Across France, it is interesting to note that the difference between the amount of credit to be paid back and the cost of rent has reduced, notably because the latter has not decreased. Buying has become increasingly attractive, and not just in major cities such as Paris. In the Île-de-France, we are seeing more and more investments in departments bordering the capital, such as the Hauts-de-Seine or the Val-de-Marne. The Seine-Saint-Denis department is also in great demand. The only counter-example would be the Seine-et-Marne where, although just 35 kilometres from Paris, prices have stagnated at around 2,300 euro/sqm for several years due to the longer travel time required to reach the capital.
Bertrand Gstalder. The city in which demand most exceeded supply in 2019 was Lyon, not Paris. This is reflected in higher prices: +7.7% in Lyon at 5,065 euro/sqm, and more in neighbouring Villeurbanne with +12.7% and 3,450 euro/sqm. Demand is still strong in big cities such as Nantes or Rennes. As the population increases, so does the time required for transport. There is a need to get closer to the city centre, which explains significant price variations, for example, in Angers. Aix-en-Provence is particularly dynamic and benefits from a TGV station which is much more functional than that in Marseille. Consequently the number of inhabitants continues to grow, making the city increasingly attractive. Over five years, the increase in Bordeaux, Lyon and Nantes has exceeded that in the Ile-de-France region.
Nicolas Pettex, Daniel Féau and Belles Demeures de France managing director
In Paris, for quality family apartments the market is different because the stricter regulations regarding rentals and the tax on property wealth can discourage some investors. We note, however, some cases in which those who cannot acquire their main residence in the capital but still want to invest in real estate target smaller surfaces. Another interesting trend is for families with young children buying with what is known as the dispositif du démembrement. The idea is to pass on the bare ownership of Parisian apartments to children while keeping the usufruct. Parents are making this decision at an increasingly young age, planning for the very long term and even taking into consideration their death and succession. This system offers a real alternative to the classic donation, safe in the knowledge that a Parisian apartment cannot lose value while development is more or less static. We also observe that Parisians are increasingly attracted to cities such as Versailles or Saint-Germain-en-Laye, with their pleasant environments and quality schools. This is also true in Aix-en-Provence for the same reasons.
Have the stricter regulations regarding rentals in Paris and in major cities like Lille changed the situation?
Laurent Vitnont. Although many were worried at the time of the announcements, stricter rent controls have not deterred real estate investors. However, the regulations are not always respected, and especially with leases drawn up without professional assistance. Some are abandoning traditional investment to move towards seasonal rentals in order to escape the system.
Nicolas Pettex. For quality Parisian family apartments, again it’s different. When a tenant leaves, the owner looks carefully at his tax situation and almost systematically studies the possibility of selling the property rather than re-letting it. The stricter regulations are tending to further accelerate the gradual decline of the Parisian private rental stock of fine family apartments.
Christine Fumagalli. Psychologically, investors didn't appreciate the notion of stricter controls and sought to circumvent them. With real estate investment the notion of profitability is obviously taken into account when assessing risk. Many therefore decided to adopt seasonal rental which is deemed more profitable or to rent the property themselves, as entrusting management to a professional increases the probability of being controlled.
What is the supply and demand situation in your networks?
Laurent Vimont. At Century 21, demand increased by 30% in 2019 after having already recorded a 25% increase in 2018. The number of sales agreements remained about the same. Consequently the stock of properties available in our network decreased from 45,000 to 37,000.
Christine Fumagalli. Incoming stock increased by 31% in the Orpi network with sales increasing by 13%. We have had great difficulty in obtaining new stock in city centres where demand exceeds supply. We are observing a tendency for potential buyers to widen their search area, accepting that travelling times will be longer, for example up to an hour or an hour and a half from the workplace. Cities like Orléans and Evreux are as a result beginning to benefit, particularly since they have put in place active development policies.
Jean Benucci. In new build, the towns and cities involved in the Greater Paris project are becoming increasingly attractive. Elsewhere in France, prices in certain city centres such as Lyon or Nantes have increased in similar proportions, and on occasions even more than in Paris due to a drop in supply in the run-up to local elections. Most building permits have been frozen for almost a year; the catch-up may well be significant during the last quarter. The average price of new apartments exceeds 4000 euro/sqm. As well as a general price increase, we are still suffering from an increase in construction costs linked to structural problems and the disappearance of a number of subcontractors notably due to an obvious lack of manpower.
Could credit conditions be stricter after the warning from the Haut Conseil de stabilité financière?
Philippe Taboret, Cafpi Deputy Managing Director. Thanks to the absence of negative signals from central banks, the interest rate outlook remains very favourable. Since last December, it is true that banks have somewhat tightened their policy. The average rate recorded by Cafpi was 0.96% for a twenty year period in January. Banks granted 258 billion euro in credits last year, an increase of over 60% in ten years. Hence the Ministry of Finance's reaction to reduce access to credit. Interest rates have actually slightly increased to improve margins and initially this had an impact on part of the population. I think it would have been better to focus on the phenomenon of exclusion due to the borrowing rate. If a young person encounters just a minor insurance problem, it may suffice to block his or her project over a long period. Today owing to regulatory restrictions, we’re witnessing a 25% refusal rate compared to 10% a few months ago. In the Cafpi network, the percentage of investors remains a minority, but it has nonetheless increased from 10% to 20% over a year. First-time buyers now represent 67% of our business.
Is our government's housing policy adequate?
Jean Benucci. We would like to be able to build "a city upon the city" with the possibility of going higher than current local urban regulations authorise and developing more ambitious projects. The priority is to lower the price of housing. This means tackling the root causes head-on: the burden of taxation and property tax.
Philippe Taboret. The main problem is construction. Only 400,000 new dwellings emerge each year, while at least 500,000 are needed. The total deficit is estimated at between 800,000 and one million. There are too many constraints of all kinds. In major cities like Lyon, Nantes, Rennes or Toulouse, on average five square metres less are acquired for a monthly payment of 1000 euro when compared to a year ago, and especially among first-time buyers.
Nicolas Pettex. It is difficult to imagine new construction in Paris where the situation is completely frozen. Despite a French co-ownership system that they do not like as well as a lack of services in buildings, foreign investors remain very active. There are only 3,000 transactions at prices in excess of a million euro per year in Paris out of a total of 40,000 transactions, and as we attain the near 4 million euro mark, international demand is increasingly dominant. In such a small market, the return of French nationals who have been living abroad, for example in Great Britain, is enough to further unbalance a market that was already lopsided, and especially for fine family apartments. The ultra-luxury segment - that is to say apartments sold at prices in excess of 10 million euro - may be compared to the art market; apartments and private mansions are both rare and inimitable, and potential buyers are well aware of this. Consequently buyers cross the globe when a long-awaited opportunity finally appears.
Can we talk of a property bubble?
Laurent Vimont. Theories predicting a crash don't take into account lower interest rates or longer credit repayment periods. Buyers today don’t speculate. They are looking for somewhere to house their family or for a safe investment for which they are prepared to get into debt and have to repay a loan. These are not acquisitions for short-term resale. Also, as soon as there is an excess on the supply or demand side, the market adjusts but to a limited extent. The case of Bordeaux is interesting: prices stagnate after a sharp rise, they do not fall. Nationally, it seems likely that 2020 will be similar to 2019 as long as interest rate levels hold. Keep in mind that the average price per square metre has only just caught up with that of 2011. With rates at 4% at the time, it was possible to borrow 172,000 euro over twenty years for a 1,000 euro monthly repayment. At 1%, you can now borrow 215,000 euro for the same monthly payment. This is enough to drive up prices.
Bertrand Gstalder. In large cities, demand is more than likely to continue to increase essentially due to transport issues and the environment. There may be adjustments, but the long-term trend remains positive. Nonetheless, some markets are stagnating. In Limoges for example, prices have only increased by 1% over five years, which taking into account inflation may be considered to be a decline.
Jean Benucci. Our clients know that their pensions will probably not suffice to maintain their standard of living. This encourages young people to buy increasingly earlier as a rental investment in order to move into the property later on. In this context of shortage of supply, activity remains buoyant at the start of 2020. First-time buyers and investors are still dynamic and benefit from very attractive mortgage conditions. There should be a slight increase in the cost of new build, and by the end of the year following the municipal elections there should also be a revival of commercial activity.
Philippe Taboret. The scare tactic does not work. The problem in France is that savings are frozen, particularly in real estate and life insurance. Some would like this money to be redirected into the economy. The current government also seems to uphold a fallacy which appears to suggest that owners are to some extent responsible for society stalling. As for credit, interest rates should remain low and we may even see a return to a phase of unbridled financing from March on, once the Government's instructions have been more or less forgotten. Competition between banks is expected to intensify.
Christine Fumagalli. A significant adjustment seems unlikely since we are not dealing with a speculative market. In the Orpi network the major drop observed in 2019 was in the city of Evreux where prices have fallen by 4%, which is far from exceptional. January followed on as last year finished... The problem stems mainly from the lack of a real housing policy. How to put supply back on the market? How do you recreate an appetite for town centres in rural areas? How can we solve the property tax problem? Towns and cities located an hour from major conurbations should fare well in 2020.
Nicolas Pettex. Last year, prices in Paris increased by between 6 and 7%, but the increase could have been higher given the high demand and lack of supply. So far this year the situation remains unchanged. In January, the number of sales agreements signed in our agencies even increased by over 50% compared to January of the previous year. I would expect a moderate price increase in Paris in 2020 and a very good year for cities such as Versailles or Saint-Germain-en-Laye. "