As house price woes hit France, could Paris resist?

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By Brian Rohan (Reuters)

Ewa Filipiak, an economist who's been apartment-hunting in Paris for six months, has decided now is not the time to buy.

"It's a good time to wait and see — I think chances are getting better for finding something exceptional," said the 29-year-old.

House price falls in Britain, Spain and Ireland have made headlines and now the slide has reached France. But several factors suggest the French market may prove more resilient than some, and Paris could even defy the trend.

People returning from August vacations who had become used to seeing a steady appreciation in the value of their homes were in for a shock when they unpacked their suitcases this year.

A national notary office report earlier this month showed existing home sales fell 25 percent outside the French capital in the first half of the year, and Paris figures show transactions within the city's "peripherique" ringroad dropped 20 percent over the 12 months to June.

Nationally, average prices in France more than doubled in the decade to 2007. Now they're appreciating at their lowest rate in 10 years — and even falling in some areas — so buyers are holding back.

While 10 years of boom preceded the slowdown, in France, taxes and stricter banking rules had kept the rally more discreet than in more free-wheeling British and Spanish markets.

And just as the surge was less spectacular, so may be the slump, partly because mortgages are at fixed interest rates and cautious French households have kept debt in check.

Against a backdrop of stalling economic growth, tougher access to credit, record-low confidence and eroding purchasing power, sales data suggest falls could be right ahead.

Economist Alexandre Mirlicourtois from Xerfi consultancy predicts French prices will drop in coming months as the market corrects from years of rapid expansion, and as banks with weaker balance sheets tighten their purse strings.

"Everyone knows French banks were hit by subprime, and now the pressure on their margins is playing out at home… They are lending less, and it's more expensive," he said.

He estimates prices will drop nationally by 15 percent before rising again in 2012. HSBC France sees prices falling at an unspecified rate through 2009 before firming again in 2012.

Though prolonged, that may be less steep than in Spain, where some analysts expect homes could lose 30 percent of their value in real terms over the next few years.

In Britain, data from the country's biggest mortgage lender HBOS showed prices already fell for the seventh month running in August to stand 12.7 percent below year-earlier levels.

RETURN TO REALITY

Realtors are also admitting signs of a shift.

"Prices have been disconnected from the economy, so now they're set to correct and return to reality," said Rene Pallincourt, president of national realtors group Fnaim.

Now, the general mood is one of worry, he said: slowing growth prospects are hitting real estate. Earlier this month, the government cut its 2008 growth forecast to about 1.0 percent, from 1.7 to 2.0 percent.

But several factors suggest price falls in France would be moderate. Mortgages are generally shorter than in Britain or the United States. A high birth rate generates regular, baseline demand. And then there's the debt factor.

OECD data shows the debt of French households amounted to only 89.1 percent of income in 2006. In Britain and the United States that ratio stands at 168.5 percent and 139.7 percent respectively.

"This all points to good potential for a rebound, especially since home ownership is low and still has room to grow," Xerfi's Mirlicourtois said. He added that with 57 percent home ownership, France was 10 points below the euro-zone average.

Fnaim's Pallincourt pointed out that lost value to some means opportunity to others.

"Nowadays, prices are often negotiated down 10 percent, so it's a buyers' market," he said.

PARIS HOLDING UP?

Most agree that Paris, propped up by the monuments, museums and leafy avenues so attractive to high-end buyers, is well positioned to avoid the worst of a market slump.

Wide boulevards and a harmonious design imposed 150 years ago by urban planner Baron Haussmann have been largely enshrined in law, and almost no new building is allowed in the city.

With space so limited, old homes are priced several times above the national average, and demand for housing is robust as students and young professionals see it as a top destination.

And to some, Paris is cheap. It places below the top 10 in global real estate price rankings: a small flat can be rented for roughly the cost of a parking spot in London's financial district.

The French capital is also less exposed to both financial sector earnings and the commodity-fuelled millions that have powered London's more exclusive districts: notaries say foreigners account for just one in 10 purchases.

"Generally as transactions drop, prices do too, but for the moment, it looks like Paris is holding up," said realtor Alexandre Deschamps.

But from his office in the 11th Arrondissement, a former working-class neighbourhood where gentrification and the housing boom drove prices to the city's mid-range, Deschamps said he saw difficulties ahead.

"I hadn't seen a mortgage refusal in five years, and now I've just had my first — normally when buyers sign a commitment we're almost sure they'll get a loan from the bank."

First-time buyer Filipiak says she will follow the market and test the reach of new negotiating powers with low offers.

"I'll try 10-15 percent below price — it's worth a shot," she said. "All the realtors say Paris will hold but I think they're just trying to reassure the market."