The Next Shoe To Drop In France

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France’s economic foundations are cracking. Unemployment hit 10.5% and is incessantly rising. The private sector is becoming comatose. Car sales sank 13.9% in 2012, from a lousy 2011; sales by its native automakers plunged even more: PSA PeugeotCitroën down 16.6%, Renault Group down 19.8%. Now home sales are grinding to a halt. And the finger-pointing has already started.

In the lofty realm of apartments in Paris that are valued at €2 million or higher—€2 million doesn’t buy all that much in Paris anymore—a game of chicken is apparently transpiring. The number of transactions crashed by 42% in 2012.

Barnes, a British real estate group that specializes in high-end properties in France and certain tony locations elsewhere, based its study on data gleaned from lawyers (notaires) who engage in real estate transactions. Prices of high-end homes in Paris dropped by 10-15%. For properties under €2 million, transactions screeched lower by 28%, but prices remained stable.

The study blames “the confluence of the euro crisis, the elections, and taxation.” Harsh words.

“Elections,” of course, refers to the events last summer that elevated Socialist François Hollande to President of France and that put the Socialist Party in control of parliament. “Taxation” refers to the layers of new taxes that they have since proposed, debated, and passed, though one of them, the 75%-income-tax bracket, has been knocked out in court (a more legally acceptable version may soon rise from the ashes).

For the rich, the climate has become hostile, the rhetoric poisonous. So they’re bailing out en masse, and not just the super-rich. These unfortunate circumstances—the rich bailing out—”incited sellers to speed up the process of putting properties on sale, just when there are few buyers,” Barnes reported gloomily.

Optimism is hissing out of the French real estate bubble. For 2013, Barnes sees a market that remains “hesitant” during the first quarter of 2013, “with a low level of transactions,” that would gradually recover, somehow, with a “slow correction in prices”—rather than a sudden correction, or a crash even. Other industry insiders see darker clouds on the horizon.

“Sellers still haven’t understood that they have to lower their asking prices drastically, even though prices in Paris have already fallen more than 10%,” said Philippe Chevalier, CEO of Emile Garcin, another high-end real estate outfit. He blamed foreign buyers, or rather the sudden scarcity thereof—foreign, because few French can still afford to buy a nice home in their capital. They’ve been effectively priced out of the market. But foreign buyers have gotten cold feet, he said, due to the “accumulation of tax pressures on real estate.”

And not just in Paris. In the “provinces”—outside the metro area of Paris—sales of existing homes during the third quarter plummeted 20% year over year, accelerating from the 16% decline of the second quarter (PDF, released January 10). And new homes sales in France plunged 25% in the third quarter, a dizzying acceleration from the second quarter’s 14% decline.

Yet, prices in France, at least in the third quarter last year, haven’t budged much to the downside as sellers are still clinging to the hope—proven illusory in every real-estate bust so far—that this too shall pass. And despite mortgage rates that averaged 3.31% in November over an average term of 208 months, home mortgage originations plunged 32.6% from prior year.

The Economist stuck its finger into it—with a study of international real estate prices. It wasn’t aimed at France directly, unlike some of its other articles. But it hit France over the head.

The study used two measures and compared them to averages going back to 1975: the price-to-rent ratio and the price-to-disposable-income-per-capita ratio. It found that French real estate was massively overvalued: by 50% based on the price-to-rent ratio, behind Canada (78%), Hong Kong, (69%), and Singapore (57%); and by 35%, based on disposable income, just ahead of Canada (34%). It made France the most overvalued real estate market in the world based on disposable income, and the fourth most overvalued one based on rents. Overvalued housing in a teetering economy: bon appétit.

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