WHAT IS THE EVIDENCE ON THE DEMAND SIDE?

Take a look at prices in some popular European cities. According to Numbeo, in April 2024, prices per metre² for city centre apartments were, in Paris £10,179, London £14,113 and Luxembourg £9,093. In contrast, property of the same type in Genoa was just £2,308, Valencia £2,195 and Porto £2,159, barely achieved 25% of this level. So, buy in Porto, right? Not necessarily. A buyer needs to know why otherwise you may find that you bought cheap but have to sell even cheaper.

Before you buy you may need to do some more research. If two fundamentals – population and available space – underpin average property prices, we need to compare France with its near neighbours. Belgium Using 2022 population estimates Holland (Area 41,000 KM² and 18MN people) has a population density of 439 people per KM². 383, the UK 277, Germany 233 and France 118 (64.66MN people on 547,557 KM²). Normandy shows the same pattern. It covers 30,600 Km2 and is home to 3.3MN people so has 109 people per KM², 8% below the national average for France. So, the first conclusion is that French property prices are often relatively lower because they have more space per person than their neighbours.

Because people recognise that fact, often they move from high density areas to lower ones to get better value. This explains why the majority of foreign buyers of homes in France, especially second-home owners, are from the UK and its near neighbours to the north rather than from the south. People generally don’t come from further south because, like Spain (90) and Portugal (110), they have lower population densities than France. In their case it’s more expensive to move from lower to higher.

CREDIT POLICY & RENT CONTROLS

But this is not where the story ends. There is another very important reason why prices are lower in France.

French Government policies and banking regulations dis-incentivises buyers, especially younger ones, because first, they restrict their access to credit and second, they limit rent rises. The result is that this makes renting cheaper than buying in most locations.

Take a look at some more evidence from the Numbeo website which measures the affordability of mortgages and the cost of buying vs. renting across the globe. On these and other statistics, France has ranked poorly for several years, while their neighbouring countries are moving in the opposite direction. The figures below in Table 1. tell the story.

The first statistic, Price/Income, divides the average apartment price by the average annual disposable income. The lower the multiple, the better from a buyer’s point of view. In this case, France is the least attractive for buyers. The second divides the average mortgage by the average after-tax income. That works in the same way and again France is the least attractive. The third compares the typical costs for a home buyer to those for a renter. Unsurprisingly, with rent controls, buyers are penalised here as well.

The last statistic Affordability shows average income as a multiple of your mortgage payment. Why is that so low…or why are mortgage payments so high? To begin with, in France, there are legal credit rules to ensure that people don’t become overly indebted. The first rule is that mortgage repayments plus insurance payments cannot exceed 35% of your income. Second, except in special cases, the maximum loan term is 25 years. Finally, in order to meet the first two criteria, you need to find a deposit of around 15% or more. For young buyers that can often only be achieved by borrowing or a gift from the ‘bank of Mum and Dad”. So, in the interests of helping buyers to stay solvent, they are restricted on how much they can borrow. The most severely restricted group are younger buyers who are – as you would expect – the group who most wish to enter the housing market.

What these statistics suggest is that if you’re Belgian or British, for example, you can get a property mortgage more easily and afford the re-payments. On top of that, it will be financially better for you to buy rather than rent compared to your fellows in France. By the way, the trend in these figures remains true if you are Austrian, Swiss, Irish, Spanish or Dutch.

One outcome is that France has fewer property owners, as compared to renters, than most of its neighbours. According to Eurostat, the EU’s official statistics database, only 63.4% of French residents own their own home, which is 4^th from bottom in the 27 member countries of the EU.

WHAT IS THE MOST IMPORTANT FACTOR IN HOUSE DEMAND?

The Numbeo web-site surveys and weights a range of factors -purchasing power, pollution levels, housing affordability, cost of living, safety, healthcare quality, commute times, and climate conditions – to produce a standardized ‘Quality of Life’ Index. France scores well.

But, based on what happened across Europe following the Covid Pandemic, the key factor is interest rates. According to the ECB the EU housing market was growing annually 4% before 2019. As Interest rates fell… and the cost of borrowing fell with it, both house sales volumes and prices rose. The opposite is also true. As the ECB raised interest rates from 2023 onwards, the property volume fell and so did prices.

So much for key factors on the demand side. Next….and finally is the evidence that I reviewed on the supply side.