Pop Goes the French Housing Bubble

Posted by: Carol Matlack on October 09

For months now, France has largely escaped the real estate woes of its neighbors Spain and Britain, where house prices are falling and the pace of sales has slowed to a crawl.

Now, its luck seems to have run out. The national association of real estate agents estimated this week that French home prices will sag 7% to 8% this year, with a cumulative decline of as much as 15% by the end of 2009. A quasi-governmental body that tracks real estate sales says the number of transactions during the first half of 2008 was down 25% from the previous year. Yet another study, by the credit-insurance group Euler Hermes, shows that bankruptcies of real estate firms soared 28% during the first half of the year.

Nexity, a leading French real estate developer, issued a profit warning on Oct. 9 and said it had frozen one-third of its planned construction projects, after orders slumped 29% during the first 9 months of the year. “The downturn of the real estate markets is sharper than could have been anticipated at the beginning of the summer,” the company said.

Nexity’s chief executive Alain Dinin told the newspaper Le Monde that the real estate sector could shed 180,000 jobs in the next few months, adding to an already worrisome 8% unemployment rate.

Politicians are taking notice: Last week President Nicolas Sarkozy announced plans for the government to buy as many as 30,000 unfinished homes for which developers have been unable to find buyers.

The construction sector, which accounts for 6% of France's economy (compared to 5% in the U.S.), is starting to hurt. Shares in construction giant Bouygues have lost half their value since the beginning of year; Nexity shares are down even more steeply. The French affiliate of U.S. homebuilder Kaufman & Broad recently announced layoffs. The pain also has rippled through to French construction-materials groups Lafarge and Saint-Gobain, already grappling with slowdowns in other markets.

To be sure, France doesn’t face a U.S.-style mortgage crisis. French banks are generally conservative lenders, nearly all home loans are fixed-rate, and foreclosures are rare. But the housing market had clearly overheated, with prices rising 210% from 1995 to 2008. That’s not quite on a par with the 270% rise in Spain during the same period – but it’s more than the 190% growth posted in the U.S.

One big factor in the French boom has been an influx of foreign buyers, particularly from Britain and the U.S., who snapped up everything from Provençal farmhouses to apartments in swanky Paris neighborhoods. Will they keep coming in droves? It seems unlikely. And those who bought that dream French property in the past few years may now regret it.