March 15, 2011, 2:57 AM EDT
March 15 (Bloomberg) -- Paris property broker Kerstin Bachmann warned clients two years ago that the global financial crisis would trigger a slump in home prices. Last year, they rose at the fastest pace since at least 1991.
Residential values increased by almost 18 percent in 2010 after a 4 percent decline a year earlier, according to Paris Chamber of Notaries data based on prices per square meter. By the same measure, London had a 1 percent increase.
“All that happened was a small dip” after the financial crisis hit, said Bachmann, a partner at Paris Property Group, which handled 25 deals last year worth 40 million euros ($55 million). “Paris proved itself even more as a safe and sustainable investment option.”
French investors are putting more money into Paris real estate, shunning stock and bond markets, at a time when fewer owners are selling properties and insufficient homes are being built to meet demand. Transactions last year were 9 percent below the average for the past decade, Chamber of Notaries research shows. Prices in the city are rising at their fastest rate relative to disposable incomes since World War I, according to data compiled by government economist Jacques Friggit.
Real estate values in Paris, France’s administrative, financial and political center, have become disconnected from the rest of France. That mirrors London’s premium over the rest of the U.K. and New York’s stronger performance than the U.S. as a whole.
Paris property prices have risen 40 percent since 2005, while values across France are little changed in the same period, according to the national residential real estate brokers’ lobby, FNAIM.
‘World of Difference’
“There’s a world of difference between Paris and the rest of France,” said Roger Abecassis, president of the Consultants Immobilier Group, a chain of 10 brokerages covering the more affluent western half of Paris. “It’s a myth that overseas buyers are driving the market. It’s a French market.”
Construction companies broke ground on just 2,785 new homes in Paris’s 20 districts, or arrondissements, last year and new- home sales totaled only 510 in a city with a population of 2.23 million. That contrasts with the 39,255 of housing starts in the surrounding Ile-de-France region with 11.7 million people.
Transactions fell more sharply in Paris’s most expensive neighborhoods, where wealthy foreigners compete for space in a market dominated by French buyers. The number of properties for sale at Consultants Immobilier fell to 320 from about 700 two years ago, according to Abecassis.
“I’m working with half the inventory, but my revenue has doubled,” he said in an interview at his office in Passy, a neighborhood in the 16th arrondissement.
Trading Up
Most purchases are by existing owners looking to trade up or investors purchasing a rental property, said Sebastien Kuperfis, a director of his family’s Junot Investissements brokerage chain.
“We have lots of investors buying at ridiculously low income yields, but people want security,” he said. “We have reached prices that are so high that there are no first-time buyers.”
The biggest gains were in the “Triangle d’Or” neighborhood in the 8th arrondissement, which lies south of Avenue des Champs-Elysees. Prices advanced 38 percent and have doubled in five years, according to the notaries’ chamber.
The most expensive arrondissement is the 6th on the Left Bank of the River Seine, where the average is 14,105 euros a square meter ($1,829 a square foot), according to Databiens, which compiles its estimates from sales reported by brokers.
Top End
Homes in the district, which incorporates the Luxembourg Gardens, cost more than twice as much as in the 19th arrondissement in the northeast corner of the city, it said.
“The better the location, the less stock there is,” said Laurent Lakatos, the head of Databiens.
The most expensive Paris properties fetch 30,000 euros a square meter, according to Philippe Menager, co-founder of the luxury property brokerage of the same name. He and his associate Nicolas Hug sold two apartments overlooking the River Seine near the Musee d’Orsay for 50,000 euros a square meter and another near the Bois de Boulogne for a similar price, he said.
French “myopia” in choosing property over stocks and bonds is behind the increase, according to government economist Friggit.
“What sticks in their minds is the poor performance of the stock markets over the past 10 years, when there were two crashes, and they expect it to happen again,” Friggit said.
Record-low interest rates and the increased willingness of banks to grant longer-term loans have made purchasing a home more affordable, contributing to the price increases, he said.
Retreat Predicted
Friggit said home prices across the country will likely decline in the next five to eight years as they return to their values relative to incomes. In Paris, that happened in the 1990s after prices surged in the late 1980s, he said.
Paris Chamber of Notaries data show it took almost 11 years for average prices to return to the levels reached in the first quarter of 1991.
A lack of public information on prices is also driving the surge in values, according to Lakatos at Databiens.
Property title deeds aren’t public documents and data compiled by notaries, who handle the legal paperwork in all real estate transactions in France, are as much as six months out of date and distorted by small probate sales of undesirable properties, he said.
France lacks a multiple listing service to provide an accurate view of the market, said Bachmann at Paris Property Group.
Avoiding Brokers
More owners advertise properties themselves to avoid paying brokers the average 5 percent sales commission and profit more from the surge in prices. About half of sales don’t involve a broker, compared with about 30 percent two years ago, she said.
This results in price swings, a significant number of sales falling through and sometimes litigation, she said, because individual owners lack the overview of the market and aren’t bound by the legal constraints that apply to brokers.
“It’s the Wild West, where there are no rules,” she said, referring to sales that don’t involve a broker with a professional licence.
The high prices and limited supply are forcing less affluent buyers to look for properties in lower-cost neighborhoods in the northeast of the city or the inner suburbs, pushing up average values across the city, according to the Chamber of Paris Notaries.
“I like to think that Paris’s uniqueness and the fact that the French have healthy finances will support the market,” said Kuperfis at Junot Investissements. “Naturally I’m getting a bit worried,” about the price increases “because trees can’t keep growing to the sky.”
--Editors: Ross Larsen, Andrew Blackman.
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