What Recession?: Why France's Housing Market is Soaring

Picture taken of apartment buildings on October 11, 2010 in Paris

Jacques Demarthon

Score another one for l'exception française. First, France-bashers were forced to admit that the nation's oft-criticized labor regulations, enormous state sector, and generous social-welfare system had spared the French much of the pain experienced elsewhere during the world's economic meltdown. Later, those same factors were credited with helping France exit recession far faster than most of the rest of the world. Now the French are enjoying another piece of news likely to turn "Anglo-Saxon" critics green with envy: As real estate prices continue to slump in many other countries, the value of French homes is on the rise, with appreciation in Paris set for a whopping 20% in 2010 alone.

A new study by the Paris Chamber of Notaries (PCN) found that, unlike in countries such as the U.S., Britain, Ireland and Spain — where burst housing-price bubbles have caused values to plummet — prices for French homes already sold or contracted for sale before the end of December had increased by nearly 6% nationwide in 2010. The predicted rise ranges from 10% in the suburbs surrounding Paris to 20% in the capital. And the PCN projects the first months of next year to bring similarly robust activity, which — barring any sudden pikes in interest rates — could make 2011 as profitable to French property owners as 2010 has been.

The advances in France's housing market over the past year were, in part, a natural adjustment after national price declined by 5.6% in 2009. But French homeowners still have more reasons to smile than most of their international counterparts. The U.S. real estate market continues to struggle from the freefall it experienced when the housing bubble exploded in 2007, with reports putting the decline in U.S. house prices at 10% this year. British homeowners saw nearly 25% of their property value evaporate in the wake of the 2007 financial crisis, and though prices have risen since, that progress has plateaued. And the Spanish and Irish real estate sectors still haven't recovered from the utter ruination they suffered when the global financial system almost collapsed.

Back in France, however, housing investors — especially those in Paris — are still loving life. The reason: price gains in 2010 pushed the median square-foot price in the capital to over $650 for the first time ever — a level that's set to increase to $742 within a year. Though it's difficult to make an accurate comparison with larger and far more diverse housing markets, existing numbers suggest Paris is creeping closer to the prices seen in notoriously expensive London and New York City. But experts warn that isn't necessarily a good thing.

"Paris is above all a classic example of a glaring shortage of supply in the face of roaring demand," says Christian Lefebvre, president of the PCN, noting that a similar, though less severe, shortfall of around 800,000 homes is what's lifting the real-estate market nationwide. "Annual construction targets for new units in the Paris region of 60,000 typically produce half of that," he says.

That means the current effervescence in France isn't due to the kinds of speculative bubbles that created so much economic damage when they popped in other countries. But the downside is that the rising value of French real estate is only good news to those who already own housing — a group that makes up only 57% of the French population. Thanks to the price hikes, a growing number of people are finding themselves locked out of a housing market they can't afford to enter — and which will only get tighter until both government and developers summon the will, and the finances, to build more homes.

Meeting the housing demand in France means not only taking a risk on building in areas that people currently don't inhabit — and may not want to live in — but also could require municipalities to alter zoning laws that have long limited new construction and kept historic French city centers, primarily Paris, looking so charming and unchanged for decades. In other words, it would mean making France's housing market more like the real-estate markets in other countries — for better and worse. "There are some very difficult choices policymakers are going to have to make in the coming years to build more housing, because the current tension isn't sustainable," says Lefebvre.

But new construction — if and when it starts — will take a long time to produce habitable dwellings. Meaning, for the time being, French homeowners can looked at the sorry situation their foreign counterparts are in and feel a tad smug.