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Expat Briefing Editorial Team
07 July, 2014
Appropriately enough, with the world’s most famous bicycle race due to start in Yorkshire on July 5 before crossing the Channel three days later, we follow up last week’s feature on the UK residential property market by surveying the property scene in France.
On the surface, the English and French markets appear to be at two very different places in the market cycle, with the former bouncing rapidly from the slump encountered during the financial crisis, and the latter more or less going sideways. Take London’s meteoric rise as a world property investment hotspot out of the equation however, and there isn’t a great deal to distinguish between them in terms of price movements: although most regions of England and Wales outside of the South East recorded modest house price increases in the year to the end of May, some areas, mainly in the Midlands and the North have actually seen prices fall away this year. A similarly mixed pattern is being observed in France.
According to the most recent Notaires-INSEE index, in the fourth quarter of 2013 prices for older properties in France had fallen by 1.7% compared with the fourth quarter of 2012. When measured against the previous quarter though, the picture is more mixed, with a fall of 0.4% for apartments and a rise of 0.3% for houses.
In the greater Paris region prices for older properties fell by 1.9% for apartments and 1.2% for houses between the fourth quarters of 2013 and 2014. During the fourth quarter of last year prices for apartments fell more slowly at -0.8% while house prices rose by 0.3%.
In the French provinces, the price indexes are stable for apartments (-0.1%) and slightly up for houses (+0.3%) compared with the previous quarter. However, they remain down over the year in both cases: -1.5% for apartments and -1.9% for houses.
Roughly half of the French départements reported falling prices in the final quarter of 2013, with one-third seeing prices rise and the remainder no change. On the other hand, in almost half of the départements, prices changed direction between the third and fourth quarters. For example, the Ain, the Hautes-Alpes and the Puy-de-Dôme recorded price falls in the fourth quarter of 2013 of around 5% whereas the trend was up the previous quarter. Conversely, the Alpes-de-Haute-Provence, the Eure-et-Loire and the Sarthe saw their median prices rise in the fourth quarter reversing falling prices in the previous quarter. For houses, the number of départements reporting price falls over the year fell from 50% in the third quarter to 40% in the fourth. For apartments, prices in the Ardennes, the Pyrénées-Orientales and the Loire fell in the final quarter, but rising in the previous quarter. The opposite occurred in the Orne, the Haute-Loire and the Côte d’Or.
For the major cities in the French provinces (14 towns and cities with more than 200 sales per quarter), Montpellier and Rennes (which were reporting annual price rises for apartments of 2% in the third quarter of 2013) saw their median prices fall by 2% in the fourth quarter. The trend is also heading downwards in Saint-Etienne, Dijon, Lille, Marseille and Grenoble. Toulon and Strasbourg are the only areas to record a slight increase. In Nice, Lyon, Toulouse, Bordeaux and Nantes, prices have remained stable. For houses, prices in Bordeaux continue to rise, at 5.5% during the last quarter. Prices are also up in the urban areas of Rouen, Nantes, Béthune, Lille and Orléans. On the other hand, prices are falling in Toulon, Tours, Valenciennes, Le Mans and Nice, and have remained stable in Toulouse, Marseille, Lyon and Douai.
ALUR Law Not So Alluring
New legislation concerning access to housing and urban renovation, known as the ALUR law, took effect on 27 March 2014 and is expected to have a large impact on the French property market.
The ALUR law requires sellers to attach extensive documentation to a preliminary sales contract. These include, among other documents, building regulations and a division description; general meeting minutes of the past three years; a technical evaluation of the building; building maintenance records; and the amount of current expenses paid by the owner in the two fiscal years prior to the sale.
Additionally, property advertisements concerning the sale of a plot or a fraction of a plot of a condominium building development must contain much more detailed information about the property.
Tenants also enjoy increased protection under the ALUR law, particularly regarding notice to leave issued by the landlord. The acquirer of an occupied building may only give notice to the tenant upon expiry of the lease currently underway.
In the case of the sale of a rented property, the new law obliges the new landlord to provide the tenant with their contact details or those of the authorised representative acting on their behalf.
The French national real estate federation FNAIM warns that concluding a real estate transaction under the ALUR Law means the production of a “voluminous package” of information, with some documents needed in duplicate or even in triplicate.
Also, FNAIM points to shortcomings in the ALUR Law which fail to address what happens if the preliminary contract does not contain all required attachments.
Tax Considerations: CGT Break and Rising Transfer Taxes
As part of the Government’s plans to reform the taxation of real estate capital gains in France and to boost the housing market, a 25 percent reduction applies to capital gains realized following the sale of a residential property or rights relating to that property, from September 1, 2013, to August 31, 2014.
The 25 percent exceptional reduction is calculated from the net taxable base of the real estate capital gains, namely once the tax reduction for the holding period has been calculated and deducted. The 25 percent reduction applies when determining the taxable base for both income tax and social levies.
Despite the complexities, the new tax regime for real estate capital gains, other than gains derived from the sale of land for development, is more favorable overall than the previous system. This is in terms of the amount of income tax and social levies that will be due, irrespective of the holding period of the property (after five years).
For the calculation of income tax, the Government aims to progressively increase real estate capital gains tax reductions, by 6 percent per year, from the sixth year of the holding period to the twenty-first year. A further and final reduction of 4 percent will then be accorded for the last year, bringing the cumulative CGT reduction to 100 percent. Total exemption from real estate CGT is therefore granted after a 22-year holding period, instead of 30 years as was previously the case.
When calculating the social levies due on real estate capital gains, the Government aims to progressively reduce contributions by 1.65 percent per year, from the sixth year of the holding period to the twenty-first year, by a further 1.6 percent for the twenty-second year, and by another 9 percent a year until total exemption is granted after a 30-year holding period.
Transfer taxes have however, risen in about two-thirds of French departments. According to the French Tax Administration, 66 out of the 101 departments in France elected to increase their house transfer tax rate from March 1, 2014. The tax is imposed on transactions involving older property.
Notarial fees have risen from 7 percent to around 7.7 percent in the majority of departments in France, thereby significantly increasing the cost of buying an apartment, house, or office.
Specifically, an individual purchasing an apartment for EUR300,000 (USD411,828) will have to pay EUR2,100 more this year in tax compared to 2013, while the purchaser of a EUR400,000 house will suffer additional costs of EUR2,800.
France's 2014 finance law provides that local authorities may raise their departmental transfer tax from 3.8 percent to 4.5 percent between March 1, 2014, and February 29, 2016. The measure is intended as a revenue-raiser for cash-strapped departments, hard hit by budget cuts, and soaring welfare costs.
It is expected that most of the other departments that have frozen their levies will – eventually – raise their fees.
Property Market Outlook
Based on the figures for the last quarter of 2013, there are no clear trends to discern in the French property market. This leaves the future somewhat difficult to predict in terms of property prices. However, with many buyers having adopted a “wait and see” approach to buying property, don’t be surprised if the market doesn’t pick up again anytime soon.
Certain factors are supporting France’s property market to a degree. For instance, the ongoing low interest rate environment is keeping first-time buyers in the market by giving them access to cheaper mortgages. The imminent expiry of the Government’s capital gains tax break could also give the market a short-lived boost in the coming weeks. But there are also factors weighing down the market. Prominent among these are the new ALUR Law, banks applying stricter lending criteria, and rising costs, including transfer taxes and notary fees.
The Notaires-INSEE report also suggests that buyers are today much more discerning than before the market downturn. Properties that are less than perfect are unlikely to sell for their initial asking prices, and this means that properties in need of renovation, particularly in rural locations, can be acquired at significant discounts.
The report concludes however, that even in the current uncertain environment “attractive opportunities now present themselves for those who remain attentive”.
“Buyers now have the upper hand and plenty of choice. A certain number of vendors keen to sell before 31 August 2014 to benefit from the 25% discount off the capital gains will be prepared to lower their sights and perhaps inject some much-needed dynamism into the market”.
Whether that dynamism will dissipate come September remains to be seen.
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