The Price Predictions are a Downturn…But Here’s Why They Can Be Wrong! And Why It Doesn’t Matter…

This evening I am speaking briefly at the Property Investors Network conference providing a French Property Market Update. To prepare the presentation, I scoured the Internet for the latest market figures and opinions and came up with more than one could ever use. In fact, the information took me full circle, which is exactly what I’ll be presenting this evening.

First we’re going to look at what took place the last few decades in France, in the Ile-de-France, and in Paris.

After the economic crisis in 2008, property prices in France experienced a small dip and then did the opposite of what the U.S. and others did…they shot up!…then in 2011, leveled off and are now showing a slight downturn. Fourth quarter 2011 was stable with a small increase of 4.3% (+6.7% for apartments and +2.6% for houses).

In the Ile-de-France region, prices climbed and following suit with the rest of France, dipped during the crisis and then regained strength by the end of 2011. The Capital Gains Tax reform of February 1, 2012 gave a boost to the volume of sales — 11% higher November 2011 to January 2012 compared to the same period the year prior and 18% the same period between 1999 and 2007. (The reform to reduce the tax of zero from 15 years of ownership to 30 years provided incentive to place property on the market at bargain prices…but for a very short time.)

The downward trend in prices began late last year — existing homes in Ile-de-France have declined only 0.6% from October 2011 to January 2012, with the largest decrease in the Seine-Saint-Denis area (-1.4% in three months)…but the decline is not significant considering the enormous previous gains. 

In Paris, as expected, the sale price per square meter began to decline from 8,370 euros in December to 8,340 euros in January, representing a monthly decrease of 0.4%. The latest price projections calculated on pre-sale agreement confirm the downward trend, with a projected sale price of between 8,100 and 8,200 euros per square meter at the end of May 2012. We do not yet have these results.

 

Now let’s look at how France compares to other markets. Since 1990, French property not only has had more growth than other countries in Europe and the U.S., but is still climbing and outperforming the others with the exception of the U.K.

J. Friggit, of the CGEDD (Conseil Général de l’Environnement et du Développement Durable) made certain predictions about a future downturn in prices in October 2010 based on the information he had about the market at the time. He said that:

• From 1965 to 2000, home prices rose in parallel with income.
• 2000 to 2010, home prices outgrew income per household as well as rents by 70%
• Mortgage debt doubled in 10 years from 30% of their income to 58%.
• By 2030, it would reach 85% if home prices were to continue to increase in the same manner.

According to Friggit, the increase in price until now was created due to:

• Changes in supply and demand.
• Aging. More households over 56 years old who are more likely to sell than buy.
• Foreign buyers contributing (minimally) to add to the decrease in number of persons per household.

Mortgage variables affected home prices, too:

• A 1% decrease in the lending rate allowed a 6% home price increase.
• A 5-year increase in mortgage duration allowed a 12% home price increase.
• Therefore, since 2000, the 2% decrease in interest rates and the 7-year increase in mortgage duration explains why prices rose relative to income.

So, I asked myself if we can predict the next thirty years based on the last 75?

Friggit predicted in 2010:

• Interest rates will return to their long run level – about 3%.
• Longer mortgage durations will be ‘dampened’ by additional monthly payments reducing purchasing power.
• Rental return will have to increase, but is unlikely with respect to household income.
• Therefore home prices will have to revert toward their initial levels with respect to household income.

And then realized that NO, we can’t and his predictions are likely to be wrong. Why?

Consider what factors would affect Friggit’s prediction:

Economic factors:

1. unpredictable rates of exchange — aren’t you watching them change daily right this minute giving you more purchasing power?  
2. interest rate increases or decreases affected by political and economic situations — how will the European crisis in Greece and other countries affect the Euribor?  
3. changes in taxation — will people have more or less money to spend?  
4. unemployment levels — purchasing slows when unemployment increases, no?  5. others?

Legislative factors:

1. changes to tax laws — look how the capital gains tax law affected the market, even if for a short period!  
2. rental restrictions — what happens if the large cities seriously outlaw short term rentals?  
3. building restrictions — how would it affect property if the city officials vote to allow high-rise buildings to alleviate the housing problem?  
4. political shifts — how the new president François Hollande handles his Socialist policies could change the entire outlook of the nation.  
5. others?

Banking and lending factors:

1. policy changes, level of risk-taking, availability of money, etc. — the banks are getting tighter, lending less, restricting to whom they lend — will they continue to lend to foreigners?

Immigration factors:

1. immigration policies — will there be restrictions on who can purchase?  
2. fluctuation of amount and type of immigration, etc. — and will there be special taxes for foreigners that will affect their buying power?

Acts of people, nature and god:

1. war — watch how that changes the market!  
2. natural disasters — remember how Katrina affected New Orleans?  
3. terrorism — 9-11 was a long time ago, but it changed New York property and world travel — we were never the same.  
4. others?

And here’s the kicker. After all the research and all the effort to make a prediction — it doesn’t really matter!

What matters is profitability.

If you have invested in a property that provides a revenue that covers the costs, then it really doesn’t matter if the value of the property increases or decreases…until you wish to sell the property. As long as the revenues cover the costs, and better still if there is a profit, even a small one, then there would be no reason to sell the property other than your own personal choice. If you can purchase during a down market, then you can profit greater, as long as revenues continue to cover costs.

So, buy right. Invest in the right kind of property that will yield a good return, and don’t worry too much about the market…unless you need or want to sell. That’s the bottom line.

At the next PIN meeting on June 25th, I’ll be talking in depth about: Financing your French property — how to use other people’s money, how to get the best return on investment from your French property and what the truth is about the legislation prohibiting rental of property! You may want to plan to attend if you can, but FPI will be addressing these issues, too, so stay tuned!

A bientôt,

Adrian Leeds
Editor, French Property Insider
Email: [email protected]

 P.S. You are now getting a glimpse of the presentation in today’s FPI…as readers, you are privileged to this information virtually in advance of the Property Investors Network conference, or at about the same moment it will be taking place here in Paris. If you wish to attend, it’s FREE the first time for readers of our newsletters! All you have to do is register using the promotional code “Adrian.” For more information about how to book your free seat for tonight or the others in the future, visit Conferences and Workshops.

P.P.S. The latest House Hunters International, “Sizing up the Parisian Suburbs, Episode HHINT-3803H” is airing May 29, 2012 at 10:30 PM e/p and 1:30 AM e/p, so be sure to tune in. Visit House Hunters International for more information on all our episodes. And to any of you who have the ability to record it so we can see it (it doesn’t air in France), please do so and send it our way! Many thanks!