Paris real estate broker Kerstin Bachmann warned clients two years ago that the global financial crisis would trigger a slump in the city's home prices. Last year they rose at their fastest pace in at least two decades.
Residential values in the French capital climbed almost 18 percent in 2010 following 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 and Manhattan was almost flat. Since 2005, Paris prices are up 40 percent, while values across France are little changed, according to the brokers' lobby, FNAIM. "Paris proved itself even more as a safe and sustainable investment option," says Bachmann, a partner at Paris Property Group, which last year handled 25 deals worth €40 million ($56 million).
It's the locals—not American or English couples looking for a pied-à-terre—who are driving up prices. The French are shunning stock and bond markets and putting money into Paris real estate at a time when fewer owners are selling properties and little new stock is coming into the market. Transactions last year were 9 percent below the average for the past decade, Chamber of Notaries research shows. Says Roger Abecassis, president of Consultants Immobilier Group, a chain of 10 brokerages: "It's a French market."
The upshot: The City of Light is becoming ever more unaffordable. "We have reached prices that are so high that there are no first-time buyers," says Sebastien Kuperfis, a director of property brokerage chain Junot Investissements. Data compiled by Jacques Friggit, an economist with the French government, show that Paris prices are rising at their fastest rate relative to disposable income since World War I. Record-low interest rates and banks' willingness to grant longer-term loans are part of the reason for the runup. Paris, with its strict zoning laws, also suffers a chronic shortage of new housing stock. Last year construction companies broke ground on just 2,785 new homes in the 20 districts, or arrondissements, of Paris, which has a population of 2.23 million.
The biggest price gains were in the "Triangle d'Or," a fashionable neighborhood in the 8th arrondissement bordered by the Champs-Elysées and Avenue Montaigne. Prices there advanced 38 percent in 2010, according to the notaries' chamber. The priciest Paris properties fetch upwards of €30,000 a square meter, according to Philippe Menager, co-founder of the property brokerage of the same name. Menager says he sold two apartments overlooking the River Seine near the Musée d'Orsay for €50,000 a square meter and one near the Bois de Boulogne for a similar price.
A lack of transparency is helping drive the surge in values. Property title deeds aren't public, and data compiled by notaries, who handle the legal paperwork in real estate transactions, are as much as six months out of date.
Friggit predicts home values across France will likely decline for at least five years, to return to pricing levels relative to incomes that have prevailed since 1965, though he could not say when the adjustment would begin. "Naturally I'm getting a bit worried," says Kuperfis, "because trees can't keep growing to the sky."
The bottom line: Increases in Paris property prices are outstripping gains in income, setting the stage for a decline.