Hollande's taxes threaten to end Paris home price boom
Bloomberg in Paris
Home prices in Paris, up 37 per cent since 2009, are set to end their upward streak as President Francois Hollande cuts property subsidies and raises taxes.
Government support for the housing industry ranges from lodging subsidies for students to tax breaks for renovation works and public construction, which totalled €45 billion (HK$450 billion) in 2011, or 2.25 per cent of gross domestic product. Hollande is withdrawing some of that help as Europe's second-largest economy is on the brink of a third recession in four years, hurting property investors such as Bouygues SA.
"It's probably the trigger for a price decline which could reach 30 per cent to 40 per cent in five to 10 years," said Pierre Sabatier, chairman of PrimeView, a Paris-based firm offering research in areas such as real estate, financial markets and demographics. On top of government budget cuts, the market will suffer because of an ageing population and stricter mortgage rules, he said.
Amid the worst economic crisis since the second world war, French housing prices in the last decade outpaced growth in household incomes, sparing France from a similar property crash as in Spain, Ireland and the UK. In Paris in particular, prices have surged as households fled falling stock markets and used real estate as a haven. In London, prices have rebounded 11 per cent since 2009 and are still 17 per cent below a 2007 peak. Madrid housing prices are down a third from 2007 records.
Hollande, a socialist and the country's most unpopular French leader in over 30 years, needs to find an extra €5 billion in spending cuts next year to keep shrinking the budget deficit.
He has raised the capital-gains tax on real estate as well as income and wealth levies last year, following similar moves by his predecessor in 2011. The president also tightened requirements for tax reductions for buy-to-let investments and interest-free loans for first-time home buyers, increased taxes on vacant properties, and is considering capping rents.
The measures are already having an impact.
The average price of previously owned apartments in the French capital fell 2 per cent in the fourth quarter of 2012 from the previous three months, when values peaked at a record €8,440 per square metre, according to Paris notaries and government statistics office Insee. The number of sales slumped 21 per cent in the quarter from a year earlier.
The prospect of lower prices is already hurting demand. Residential property reservations at Bouygues' real estate unit fell 30 per cent last year. To revive sales, Bouygues Immobilier is now offering a discount of €7,500 until April 14 for five-room apartments it plans to build. The company will also pay the transaction tax that's normally paid by the buyer.
While real estate investors may suffer, other people will benefit from declining prices, according to Laurent Quignon, an economist at BNP Paribas.
"To attract workers to cities like Paris, employers have been forced to offer bigger salaries," he said. "Tenants also had to save to pay for their rent, which was detrimental to consumption."
Paris home prices have tripled since 2000.
The need to pay higher wages for Paris-based employees also made some made businesses less competitive than rivals in countries such as Germany, where slower real estate inflation has helped cap labour costs.
Still, Bernard Cadeau, chairman of Orpi, the country's largest network of real-estate agencies, saw strong future demand.
"Prices in Paris won't collapse because the market is imbalanced; everybody in the world wants to buy in Paris. But outside of Paris, they have to go down by 5 per cent to 15 per cent."