Will the New Loi Duflot Backfire?

Like most major international cities in the world, Paris is in a dilemma. The new socialist administration doesn’t want Paris to be only for the rich, but it’s having a hard time taking a different path from its other counterparts where the value of real estate is on the rise.

We foreign investors have profited from the price boom. I make no bones about being a part of the city’s low-cost housing problems having promoted the benefits of property ownership and investment in the City of Light for more than 10 years. In the past we’ve joked about how, because we’ve been responsible for bringing in many millions of euros into the economy from foreign sources, we’d be awarded a medal of honor. Now, I’m not so sure it will be appreciated.

As capitalists, we see the injection of foreign investment as boosts in the economy and benefitting the growth of the city, but the socialists don’t see it that way. They have strongly-held view points on that which benefits the most basic of needs — affordable housing for all, particularly for those who live and work in the capital. There’s nothing wrong with these ideals, but it’s a balancing act from my personal point of view. Why can’t we have both?…As we can’t really successfully have one without the other.

Housing Minister Cécile DuflotThe new lawmakers are introducing a host of new laws to control, control, control…control of rents, control of real estate agent fees plus creating even more tenant-biased measures while trying to encourage ownership of the kinds of properties the city needs most. Housing Minister Cécile Duflot is at the head of such reforms which include an insurance system for landlords against unpaid rents and reducing taxes for landlords who offer rental properties where offerings are the most scarce.

Up till now, landlords have been risk averse, thanks to laws which have overly protected the tenant, and therefore making it difficult for the less well-heeled to find suitable housing. For example, a tenant cannot be evicted during the winter and it takes months, sometimes years to legally evict a dead-beat tenant.

Ask anyone trying to secure a long-term rental apartment in Paris. Available properties are snapped up before the ink on the ad is dry and often landlords won’t sign a lease without proof of one year’s payment of rent held in an escrow account.

Named “the Loi Duflot,” the laws effective this coming 2016 will apply to all of France, but will be especially restricted in certain areas including Paris, Marseille, Lyon, Montpellier, Ajaccio (Corsica) and Arcachon. Paris is at the top of the list, where good rental apartments are the most difficult to find and rents are highest. There is a sentiment that “international absentee landlords have soaked up much of the better stock,” but this is based on sentiment, not fact. The foreign market counts as only about 8% of all property sales, therefore it’s a gross overstatement to blame the city’s housing shortage on us foreign investors.

“Les locataires” – the rentersThe new laws are designed to battle the problem head-on. Agents’ fees will be capped, rental lists accessible by fee-only will be outlawed and landlords will not be able to demand as many proof-of-income documents from prospective tenants. Caps will be placed on rents: new contracts cannot exceed 20% per square meter above the “quartier’s” median rent, a figure assessed annually by a “local rent observatory.” Even existing contracts will have to be reviewed and reduced if necessary upon renewal.

This is short sighted from my perspective. Placing more restrictions on landlords will mean even fewer properties on the market, not more. Why would someone want to be a landlord if achieving a reasonable return on investment is difficult or low? And to protect themselves against losses, the landlords may universally increase rents to bring the median rent up! Again, it’s a matter of balance. If landlords are not happy, neither will be the tenants. But this administration is only looking out for who they believe are the ‘underdogs.’

Yes, landlords will receive some benefits, such as a cap on the tax they pay, but a large black market of undeclared rents is already well rooted in the system. The insurance against unpaid rents will protect the landlords against squatters and dead-beat tenants which will hopefully make it easier for those less-wealthy to find proper housing. Still, the legislation is tenant-friendly. This doesn’t necessarily translate to a healthier rental environment…at least not from my perspective. If landlords felt safer to take the risks of property ownership, there would be more properties on the market, thereby providing competition within the rental market, bringing rents down!

In all honesty, I believe the new laws will badly backfire, making rents even higher and properties even more scarce while reducing foreign investment and creating an even saggier economy. But I’m no economist. I’m simply a landlord.

Rents on long-term rentals are approximately 30€ per square meter and higher for furnished properties — at about 35€ per square meter. Rents have remained static since May 2002, but just watch what will happen when the landlords are squeezed! Paris rental contracts have increased by 11% since June 2012, but tenants seeking properties has risen to 13%. Properties remain empty on the average only about 15 days.

If my prediction is right, that their plan will backfire, then smart landlords could reap the rewards of these new laws which will reduce taxes and bring rental revenues up!

For more information (in French), visit duflot.org.

A bientôt,

Adrian Leeds

Editor, French Property Insider & Director of The Adrian Leeds Group, LLC

Email:  [email protected]

P.S. Because long-term rental properties are so difficult to find in Paris, we offer a service much like finding a property to purchase. For the price of one month’s rent (a minimum of 1,490€), we can locate the apartment that fits your needs most, help negotiate the rent and the process and get you to the point of moving in. Without help, you may be chasing the proverbial rental rainbow for a long time to come! For more information, visit Long-term Apartment Search or email [email protected].

P.P.S. Tune into House Hunters International this month and enjoy episodes featuring Adrian Leeds! First, on July 22/23, see “La Vie en Paris France” where Abby Gordon wants to buy an apartment that reflects her personal style. Then, on July 24th, “Starting Over in Paris” has Mimi Chang will decide whether to settle for a small apartment or spend thousands over her budget to make her dream a reality. You’ll find full details at Adrian Leeds and House Hunters International.

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