Paris Properties Suffer Set-Back

Paris - Home prices in the French capital, which have risen 37 percent since 2009, are ending their upward streak as French President Francois Hollande cuts property subsidies and raises taxes.

Government support for the housing industry has ranged from lodging subsidies for students to tax breaks for renovation works and public construction. This totaled 45 billion euros ($59 billion) in 2011, or 2.25 percent of gross domestic product.

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Hollande is withdrawing some of that help, as Europe’s second-largest economy is imposing stricter austerity measures.

“It’s probably the trigger for a price decline which could reach 30 percent to 40 percent in five to 10 years,” noted Pierre Sabatier, chairman of PrimeView, a Paris-based research company.

On top of government’s budget cuts, the market will suffer because of an aging population and stricter mortgage rules, he said.

Amid the worst economic crisis since World War II, 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 U.K.

In Paris, prices surged as households fled falling stock markets and used real estate as a haven. In London, prices have rebounded 11 percent since 2009 and are still 17 percent 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 more than 30 years, needs to find an additional 5 billion euros in spending cuts next year to keep shrinking the budget deficit.

Wealth Levies

The French President 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 on the property market.

The average price of previously owned apartments in the French capital fell 2 percent in the fourth quarter of 2012 from the previous three months, when values peaked at a record 8,440 euros per square meter, according to Paris notaries and government statistics office Insee. The number of sales slumped 21 percent in the quarter from a year earlier.

Persisting Scarcity

Still, a scarcity of apartments may partly offset concerns about the economy and recent increases in taxes. Bernard Cadeau, Chairman of Paris-based Orpi, the country’s largest network of real-estate agencies, sees strong future demand for Paris homes.

“Prices in Paris won’t collapse because the market is imbalanced; everybody in the world wants to buy in Paris,” he said in an interview.

While prices in Paris might not collapse, a buyer now would have to wait a lot longer for a return on his investment, according to PrimeView’s Sabatier.

“Don’t buy at these prices if you’re a first-time home buyer,” he said. “It would take 31 years for a buyer to be better off than remaining a tenant in Paris.”