Is France in a real estate bubble?

With prices and sales volumes on a record pace for this year, are we looking at a real estate bubble that will pop? 

A recent blip in Paris’ strong price growth which is currently around mid-7% has not stopped observers asking if the market is in a bubble. The Paris Notaires are predicting that by the end of year, appreciation in the capital will reach double-figures.

Anxiety about this and a reminiscence of the years 2008 to 2011 in French property are not unreasonable. Existing apartment prices in France fell 7.4% in the three years following the American sub-prime mortgage crisis. This was after a decade of property price growth that exceeded 150% – more than 250% in Paris – at a time when wages only grew 30%.

It led to predictions by some economists that prices would not grow for the next ten years. The market had to wait a few years to prove them wrong, finally picking up in 2015 with the first signs of a recovery. Some argue that the recovery is based on artificially low mortgage rates. But Kathryn Brown of Paris Property Group, says that Paris’ unique market conditions discourage a bubble from developing, and that real estate investment nationwide is still a very safe long-term bet.  “The relatively high closing costs in Paris of around 7.5% keep speculation and house flipping to a minimum in France, preventing the usual bubbles from forming.  An investment in property in France is typically an excellent long term investment that appreciates over time, offering an attractive hedge against equities.”

Another important factor affecting the wider Paris region is the Greater Paris project which is greatly increasing the fundamental factors affecting property values in once badly-connected pockets of the suburbs. A sure sign of a real estate bubble is properties appreciating with no easily explainable pickup in demand: new transport links and an increase in the quality of housing are long-term supporters of strong price growth.

Last month, annual price growth remained strong in suburbs like Val-de-Marne (3.7%), Seine-Saint-Denis (3.3%) and Hauts-de-Seine (4.4%). Average prices in the suburbs can be less than half those in the capital and so there is plenty of room to move upwards. The volume of transactions are growing even faster, reaching double figures in pockets like Montreuil, Saint-Denis, Villejuif and Val-de-Marne.

A recent 0.1% month-on-month fall notwithstanding, price growth in the capital remains strong in a market with little room for speculative investment as Kathryn Brown explained. And nationwide, aside from outliers like Bordeaux and Nantes, prices are moving up slowly and even falling in some major cities. Not great news for everyone, but a sure sign the current trajectory is not an artificially manufactured one as arguably in America in 2007.