The French residential real estate market posted a spectacular rebound in 2010, both in terms of new homes and resale properties. The number of transactions increased sharply, with estimates of 6% and 26% respectively, thus returning to their pre-crisis levels. However, there is a risk that the drivers of this recovery may partially, or even totally in some cases, dissipate in 2011.

This sharp recovery went hand in hand with price increases of around 10% in the Greater Paris region and other major French cities, and as much as 18% in Paris in the fourth quarter of 2010. As such, the improved solvency that households were able to achieve in 2009 was virtually wiped out, despite the sharp drop in mortgage rates in 2010. After hitting an all-time low of close to 3% in late 2010 for the best qualified customers, mortgage costs have since been on an upward trend in light of rising market rates. This increased cost of lending will exacerbate the negative effect of high prices on households’ repayment capacity, in addition to curbing transaction growth against a backdrop of relatively sluggish household income and limited room to extend loan terms.

Moreover, the scaling back of tax breaks on new investment properties (Scellier law) and principal residence purchases (interest accrued on mortgages is no longer deductible) will also drag down the residential real estate market trend. Many households have pushed forward their purchases in order to benefit from these windfalls, which contributed to the pick-up in activity in 2010. The impacts of these early purchases are likely to be more substantial on the new home market, where more than two-thirds of transactions are investment properties, especially as rising rates and the stock market pick-up could prove to be somewhat of a reality check in terms of real estate’s attraction as an investment option.

However, several factors are likely to mitigate the negative impacts previously mentioned. First of all, the irrational desire to attain owner status in light of the record price/rent ratios reached. In addition, the no less irrational perception that real estate is a safe-haven asset. Lastly, the introduction of the Zero Interest Plus Loan (Prêt à taux Zéro +) later in the year could improve first-time buyers’ solvency on a broader range of projects and involve higher amounts than the previous format.

After a first quarter which continues to be driven by deals which had been signed in late 2010, but were yet to be finalised, 2011 is expected to be a calmer year for the real estate market, both in terms of volume and price trends. The price levels reached in high-demand areas are a major stumbling block for would-be homeowners, even among the well-off. As a result, transactions are expected to take longer on average and there will be more room for negotiation.