April 2011

Paris property prices continue their strong performance

As a unique real estate market, Paris has performed exceedingly well, particularly given the current economic climate.

The Paris real estate market experienced unparalleled price increases throughout 2010, ending the year with a record high average apartment price of €7330/m2* (Chambre des Notaires de Paris). The performance of the Parisian market was, in many ways, an anomaly in the French market as a whole. In France in general, the apartment prices rose a solid 9.1%, but Parisian prices far outstripped the national average, rising 17.5% by the end of 2010 (INSEE).

When the economic crisis initially hit, investors were advised to avoid the real estate market, with the expectation of a price slump to debilitate most funds invested. The market did suffer relatively in both 2008 and 2009, with prices rising only modestly and the number of sales falling significantly. However, 2010 was a turning-point for the Paris market.

The basic situation in the Paris market is a high demand and a limited supply, with the differential between the two forcing prices upwards. Following the initial cracks in the global economy, sellers held on to their property while buyers waited for the impending price drop. In essence, a backup of supply was created, thus allowing prices to shift up.

The Paris market fared well as real estate continues to be seen as a solid, even safe, investment choice. Prices in the Paris apartment market increased by 115% between 2000 and 2009 (Global Property Guide). This relative confidence in the Parisian market comes in light of the volatility in financial markets, concerns about financing retirement, and uncertainty in bonds markets, providing a safe alternative (Credit Agricole Bank). Interest rates that are at record-low levels and a greater tendency for banks to grant longer-term loans contributed to the increased desire for acquisition of real estate (Business Week). The strength of the euro too has been an attractive factor as the currency has fared well in spite of the global economic crisis. The Paris real estate market has been particularly seen as a high value investment, especially when concerned about retaining the value. Further, France has a tightly controlled mortgage market, which has helped limit the value losses experienced in Spain and the UK (PropertyWire).

Although foreign property investors are often cited as a driving mechanism behind the exploding real estate prices in Paris, the Chambre des Notaires de Paris finds that this is not the case. In fact, foreign demand for apartments in 2010 was, on average, at historically low levels in all districts. The record high prices instead can be linked to a relatively local market, with the vast majority of purchasers being Parisian residents as apartments sales to non-Parisians were at 33% of the total volume (Chambre des Notaires de Paris).

Large apartments were overrepresented on the market in 2010, making up half of sales, in spite of the historical trend of the market to be dominated by smaller apartments (of 2 or fewer rooms) (Meilleurs Agents). However, the demand is again rising for small apartments, which are becoming increasingly difficult to find in certain areas of the city. The historical demand for small apartments, which are primarily found in the first eight arrondissements, will contribute to the continued retained and heightened value of these properties (Immobilier Danger; L’Express).

In 2010 Paris apartments maintained and indeed improved in their market value. The first quarter of 2010 saw price increases of around 1.7%, but prices grew by subsequently greater margins each quarter. Overall, Paris apartment prices rose by 17.5% in 2010, and have climbed 39.5% over the past five years (Chambre des Notaires de Paris). Price increases were seen in every arrondissement of Paris, as the scarce properties faced heightened demand.

Several regions in Paris have seen exceptional increases in value. For example, in 2010 alone, apartment prices in the 6th arrondissement went up by an average of 23.2%, with Odeon specifically seeing values increase by 26.4% over the year. Over the past five years, the Chambre des Notaires de Paris noted an average rise of 49.5% in the value of apartments in this arrondissement, while prices in Odeon jumped 67% over the same period. Similarly, the popular 3rd and 4th arrondissements experienced average value increases of 42.5% and 46.3%, respectively, over the past five years, with raises of 15.8% and 19.0% in 2010. Further, the five year outlook for most properties in central arrondissements is very optimistic (Chambre des Notaires de Paris).

The prices of apartments are projected to continue on an upward trend, however this will be at a decelerating rate, and certainly lower than the surge seen in 2010. In the last 15 years, home prices have risen by 250%, whereas salaries have only increased 160% (NuWire Investor). The substantial difference between changes in salaries and home prices would suggest that a slowing of price increases is forthcoming. HSBC France is already projecting a slight decrease in volume during 2011 with the continued rising prices.

FNAIM suggests that the price growth during 2010 was only 15.7% versus the price increase of 17.5% determined by the Chambre des Notaires de Paris. According FNAIM, the average price of a Parisian apartment was €7645/m2 by the end of 2010. This association anticipates that prices will continue to rise, although nowhere near the extent seen last year. Rather, the price increase will only be between 3% and 6% in 2011. The remaining concerns in other areas of the economy include tensions on the bonds market and a minimal gain in purchasing power in spite of limited inflation.

The sales from January 2011 and purchase contracts signed through the end of February indicate a continued upward movement of prices. As an early projection, the average cost of an apartment in February 2011 was €7753/m2* (Meilleurs Agents). As far has been forecasted by the Chambre des Notaires de Paris there is no reason that prices should go down in 2011, and indeed the prices in Paris are anticipated to rise by around 10%.

Interest rates are expected to rise in 2011; while the rates will still remain relatively low compared to historical values, the raises will be introduced in waves. The extent to which the interest rate changes affect demand remains to be seen. FNAIM anticipates that if the rise in interest rates is below 1.5%, prices will trend towards their upper estimate of 6% price growth for 2011, while an interest rate adjustment above 2% would restrict price increases to 3%.

Flat Hunter® and its clients expect to find the market for apartments in Paris to remain very competitive with a consistently high demand in stark contrast to the relatively low availability of apartments for sale. The prices of apartments are expected to increase, though at a decelerated rate. In a time of uncertainty on financial markets, with expectation of strong holding value, a Paris apartment is still seen as a safe investment. Let Flat Hunter® Property Search Experts help you find your ideal Paris apartment.

Analysis by Flat Hunter® Property Search Expert, April 2011

*Note: The quoted prices are average price estimates only. While drawn from the most current available sources at the time of publication, the figures may be up to 6 months out of date as a result of delays in information availability. Further, the average prices are based on values of all apartments on the market, from ground floor apartments to upper level flats with a view. From the experience of our Property Search Experts in the field, we have observed an average of €10,000/m2 for the most desirable apartments.

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