Autumn in Colorado
Yesterday, I came across two interesting articles, both British based, about real estate prospects in France, and Paris in particular. One was a commentary in the Financial Times, which you can read here. The other was on BBC – America television. Both highlighted the differences between the French real estate market and that in America and the UK.
As is well known, the American housing market is in a severe downturn, resulting from overbuilding, rampant price speculation and lenders feeding the process with poorly underwritten loans to unqualified borrowers. All of this started to unwind in 2006 and the process could take another year or two to resolve itself – if credit is available to purchasers. Right now, the credit markets are all but dried up, and if that continues, there will be no loans available under any terms to allow the free market to resolve the situation. Simply put, banks have no money to lend, because all of their reserves have been set aside for the bad loans they currently own. Many are on the brink of failure.
The situation is not much different in the UK, albeit on a lesser scale. The UK and Ireland experienced their own version of the housing bubble. They are going through the same process of rapidly falling house prices and lack of available credit. Their banks are looking for government bailouts. Banks are merging in a last ditch effort to survive. Barclay’s is no more, Bank of Scotland is gone, and the taint of the poisoned US subprime market permeates the portfolios of all of the remaining UK banking institutions as well.
So why has Paris, and the rest of France to a lesser degree, survived this housing meltdown relatively unscathed? There are several underlying reasons, as pointed out by the BBC. First, there is not the fever in France to get into the “home ownership” game. France traditionally has been a country of renters, and much of the property that is owned has been in the same family for generations. Speculative “flipping” is simply unheard of. Second, the French people have no credit card debt. They are a country operating under the philosophy that you do not buy something if you do not have the money to pay for it. Of course, that financial philosophy went out the window long ago in the US. Most French credit cards are actually debit cards. If the funds are not in the account to pay for the transaction, it simply does not happen. Third, French banks are and have traditionally been far more conservative than their American and British counterparts. Home loans are amortized for 15-20 years and usually require a minimum 20% down payment. No 125% financing here. Loan qualification is a rigorous process.
As a result, the financial underpinnings of the French banks and the French real estate market are more along the lines of what we in the US knew in the 1970’s and 1980’s. This is also why, to a large degree, French real estate has appreciated much more slowly in the last 10 years than, for example, the US or UK housing markets. The Spanish housing market is a totally different creature, having been overbuilt, rife with corruption and now crumbling. That reality adds a double whammy to the many Brits who bought a 2nd home in the sun there with the suddenly realized home equity in their homes in Great Britian. Now, they are upside down in both Spain and at home, and for many this represents the loss of their entire pension savings.
The French real estate market is not immune to what is happening in the rest of the world, of course. Unemployment is increasing, their trade exports are dropping due to the recent strength in the dollar, oil and food price rises are impacting the everyday Frenchman, and tourism is way down. Home prices in many parts of France have seen a downturn, particularly in the southwest regions like the Languedoc.
In Paris, buyer demand for properties has tapered off dramatically. Most Parisians cannot afford to live in their own city. Foreign demand is also down. However, like London and New York, demand for premium properties continues to remain strong. Notwithstanding the volume slowdown, the prices in Paris continue upward, to the astonishment of most of the rest of the world. The most recent study shows Paris prices appreciating 9% in the last year. I do not think this will continue indefinitely. I would suspect Paris prices to flatten out or even drop slightly in the short term, until the global economy gets back on its feet. After all, Paris is an international city, and international money, particularly oil money at the moment, continues to play a key role in sustaining this market. Paris too is not totally immune to what is happening with the rest of the global markets. However, with beautiful architecture, a rich and colorful history and a fixed supply of real estate, Paris will continue to be in high demand, so long as it does not follow down the road of mistakes made by other real estate markets.
Perhaps, for those of us who feel more comfortable with our investments in real estate instead of the stock market, Paris may be the last truly safe haven for rational long term real estate investment, at least until there is some stabilization in the markets we have been more familiar with in the past, whether they be in the US or elsewhere. Whether we like it or not, the French got it right, and we didn’t.
