Jul 6, 2011
Overheating fears in France
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A file picture picture shows apartment buildings near the Eiffel tower in Paris. According to data released on May 26, 2011 by the Paris Notaires, the average price of older apartments overtakes a record high of 8.000 euros/m2 (11.343 USD per square metre). - AFP
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PARIS: Bubble or not, France's buoyant housing market is fuelling high-level fears that a post-crisis boom could turn to bust.
From the central bank to the International Monetary Fund and rating agencies, officials are careful to avoid describing the eurozone's fastest growing house prices as a bubble, but they do not hide concerns about the risks to the broader economy.
Underpinned by particularly strong growth in the Paris market, French property prices rose 8.7% year-on-year in the first quarter of 2011 more than any other Organisation for Economic Cooperation and Development country for which figures are available.
Ratings agency Moody's Investors Service believes the French housing market is overheating and that while French banks can absorb a likely moderate house-price correction, the least cautious lenders could face steep losses in a more severe drop.
“French banking groups' inherent exposure to the country's housing market is the principal reason why a potential correction in house prices poses material credit risk,” Moody's analyst Stephane Herndl said.
The French central bank warned this month that financial stability could be at risk should the market suddenly tank, but also said high prices were contributing to middle-class misery and distorting the economy.
“The continual rise in property prices is contributing to a perceived loss of purchasing power which in turn is fuelling wage claims,” Bank of France governor Christian Noyer wrote in a letter to President Nicolas Sarkozy accompanying the central bank's annual report.
“Indeed, rising property prices are a source of social malaise and economic rigidity because they prevent household mobility and exacerbate social inequalities,” he added.
Racy growth in French house prices in the first quarter contrasted with a more subdued 2.6% year-on-year rise in Germany, while big price falls occurred in peripheral states plagued by debt woes 11.1% in Ireland, 5.6% in Greece and 5.3% in Spain.
Stagnant purchasing power regularly ranks as a top concern for French households, which are the biggest engine of growth in France's consumption-oriented economy.
In his 30 years in the business, real estate agent Paul Abib has never seen a market as buoyant as today in his posh corner of Paris, the leafy seventh district around the Eiffel Tower.
Although property prices rose 27% in his district in the first quarter over one year, he thinks the market can hold up even as mutterings about a housing bubble grow louder.
“As long as people don't sell just for the sake of doing deals, things will stay stable,” he said.
French house prices fell harder during the economic crisis than the average across the eurozone, dropping nearly 10% in 2009 compared with a decline of 3.7% for the whole shared-currency bloc.
Since then, French prices are bouncing back more strongly than elsewhere in the eurozone. Price growth hit a post-crisis peak of 9.6% in the last three months of 2010 compared with the same period in 2009. The average increase for the eurozone in the same period was 2.8%.
With prices growing faster than the long-term average of 6.8%, INSEE statistics office head JeanPhilippe Cotis told reporters that there were sound economic reasons for the boom.
“Prices reflect without doubt scarcity and not speculation, and the fact that interest rates remain low,” he said. - Reuters
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