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Kimberley Cameron and David Brody's Eiffel Tower Pied-à-Terre
Featured in the January 2011 Issue of Architectural Digest
Photo Credit: Derry Moore

Is Paris Really 20% More Expensive in 2010?

French Property Insider
Volume VIII, Issue 48
December 16, 2010
Paris, France
adrianleeds.com/frenchproperty/insider

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Last week, the Chambre de Notaires de Paris issued its monthly report on property prices in Paris and the Ile-de-France creating headlines touting a 20% rise in prices for the past year in Paris.

As with most headline news, the headline is designed to attract readers and one should not simply 'write' the rest of the story for oneself without studying what lies behind the headline in greater detail. This is not to suggest that the headline is false, but only that there are reasons for the news that require a look at the bigger picture.

Yes, prices have reached an all time high in the capital. No one is surprised by this. Low interest rates have contributed to demand and a one-time leveling of the market encouraged sellers to hold off selling, thereby building demand to an excruciatingly painful position for buyers. In the last year, there is so little property on the market, particularly in central Paris where demand is highest by foreign buyers, that just about anything sells at asking price (sellers are 'morally' obligated to accept asking price). We have found that if our purchasing client is not the first visitor to a property, that there is no chance of acquiring it, as the second visitor will surely have made a full price offer, thereby securing it very quickly.

But, let's look at the statistics. According to the Notaires de Paris, through third quarter 2010, the average square meter passed 7,000€ with an increase of 13.8% for the previous 12 months and 5.1% for the quarter. This is a far cry from the headline of 20%, so why and how do they claim the big jump?

The property price figures for Paris and the Paris region (Ile-de-France) are reported quarterly by the INSEE, the French National Institute for Statistics and Economic Studies. The statistics are released about two months after the closing of the quarter based on the selling price noted on the "Acte de Vente" or sales deed. Given that the properties to which the statistics relate were purchased about three months earlier than the deeds were recorded (the time between the signing of the Promesse/Compromis de Vente and the Acte de Vente), you can assume then, that these figures are already out of date by at least five months.

Other factors that contribute to a variance are:

1) the reduction in the purchase price, which can be attributed to direct payments made to the sales agent (agency commissions) to help reduce Notaire fees,

2) the listing of inventory of fixed furniture such as built-ins and appliances,

3) the under-the-table cash transactions, which are illegal but do occur,

4) and finally, the figures are diluted as they are reported by an arrondissement in its entirety and do not account for differences by neighborhoods or quality of properties.

This time, they did something different. They asked the Notaires to report on the estimated prices based on the pre-sale agreements -- the Promesse and Compromis de Vente -- in order to make certain more accurate predictions. Therefore the statement made by the Chambre de Notaire was a prediction that by the end of the year, prices would reach a 20% appreciation with an average per square meter rate of 7,500€. They continue to say that if the trend continues, that by the beginning of 2011, prices will approach an average 8,000€ per square meter in Paris.

The report can be found in pdf form at this link: http://www.paris.notaires.fr

For a very detailed look at the third quarter prices reported by arrondissement and even more refined, by "quartier" within each district, visit: http://www.paris.notaires.fr/

It is possible that this new method of analyzing the market creates a more factual prediction, but for headline purposes, it certainly created a surprising jump from what is normally reported...hence, reader beware!

In one article, the press notes that overseas buyers are "driving up demand," particularly with the Chinese and Italians, but further down in the same article, they attribute it to Russians, Brazilians and Americans. Confusing, no? And at the same time, they are predicting a 'bubble' that would burst if interest rates were to rise. So, who or what are they blaming? Interest rates? Foreign buyers? Both?

In "Libération," a daily newspaper founded under the auspices of Jean-Paul Sartre, positioned politically at the extreme left, last week offered five suggestions to quiet the market:

1. Tax vacant properties. They claim that landlords prefer to keep their properties empty rather than pay taxes on their capital gains. Sorry, I don't believe that. Knowing how the laws favor the tenants, so that squatting is an ever-increasing issue for landlords, my guess is that landlords prefer to keep a property empty rather than take the risk that occupancy will actually COST them money. I'd rather see the laws change to create a better balance between the landlord and tenant so that more properties can be more profitable for their owners.

2. Convert some buildings for social housing. They recommend that social housing be mixed in even the wealthiest of neighborhoods and that buildings can be converted to house those less fortunate. There are hundreds of abandoned buildings, which for reasons connected with complex inheritance rules, have been in legal limbo for decades, some since before World War II. I suppose, depending on the building and those that reside within it, that could definitely bring the value of property down in certain areas of the city. Do you recall the fire in the building on rue Roi d'Oré in August of 2005 where seven people died, four of which were children? This is one of the most expensive parts of Paris, yet the building was one of the "most insalubrious" with no running water, no central electrical system and had become cockroach and rat-infested.

3. Require the home owners associations ("copropriétés") to allow individual apartments in their buildings to be designated for social housing to further accelerate the mix. This has more appeal to me than an entire building, although I've seen this backfire in a couple of occasions, even with just one owner that doesn't fit well into the social and economic mix of the home owners.

4. Simplify the building regulations. This is a high priority in the government which is reluctant to use taxation as a solution. This suggests that it is better to simplify the building regulations than hinder the construction of new housing projects. You may recall that the introduction of the Tour Montparnasse on the landscape of Paris created negative response and a 30-year ban on high-rise construction in the capital, further reducing the potential for available housing, helping reduce supply while demand has increased.

5. Implement new housing better. They do agree that "There is a real problem of matching supply with demand." The reality is that the housing market has not taken into account the growth of the French population and that they must find ways to increase the supply of housing.

Even with prices skyrocketing, people are still buying. Who? And how? Executives of large companies are paying cash. Sellers who have profited are purchasing smaller apartments or larger apartments in outer districts at lower per square meter prices. Young buyers are finding help from their families. And of course, there are the foreign buyers on which much is blamed.

It's true that the Paris property market has suffered less than most other European capital cities and this 2010 recovery proves that to be true. Russian buyers were sparked with 2010 was officially declared as the Year of Russia in France and France in Russia. The Italians come with suitcases of cash they had hidden in their mattress (they have been blamed for skewing the market in London, too!). The Chinese are the latest wave of foreign investors in Europe, signified by the recent opening of the Bank of China in the heart of London.

But can the foreign buyer be to blame for the rise in prices? If you say "yes" than you think that only the foreigners have enough money to pay the high prices, but we know this isn't true, when you consider the unfavorable rate of exchange, particularly between the euro and dollar. International buyers will always be attracted to low-risk investment opportunities, and Paris and France have always been that -- low risk.

What would change the landscape of the market drastically, in my opinion, would be an increase in interest rates, but think about it...in today's market, the seller is profiting from the increased value and the state takes 5.09% on each transaction (part of the closing costs), so the state benefits, too. If interest rates were to increase and demand were to decrease, thereby leveling or reducing the price of property, then you know who would be 'laughing all the way to the bank?'

The bank.

A bientôt,

Adrian Leeds
Editor, French Property Insider
Email: fpi@adrianleeds.com

P.S. Be sure to watch House Hunters International TONIGHT!...
***"Vacation Home in Paris" - Episode HHINT-1A05 December 16, 2010 7:00 p.m. e/p House Hunters International. Scroll down for more information.

P.P.S. And pick up a copy of this month's Architectural Digest to read all about French Property Insider and Parler Paris readers Kimberley Cameron and David Brody's Eiffel Tower pied-à-terre, renovated and decorated by designer Jean-Louis Deniot, who "conjures a couture-qulity Paris flat that makes an American client's childhood dream come true...

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