Tuesday, October 14, 2008

Johnny Depp's Pied-A-Terre Won't Save Paris From Property Slump

Source : The Business Times, October 14, 2008

Tougher lending norms and rising interest rates expected to depress prices

(PARIS) Faycal Fouad, a real estate agent at Century 21 Chaumont in Paris, says the global credit shortage has finally wound its way to his doorstep.

'Clients are seeing loan applications refused by banks,' said Mr Fouad, who sells apartments in the 19th arrondissement, the French capital's least-expensive district. 'I've never seen that before. There's difficulty obtaining credit.'

Paris has avoided price declines that hammered property markets in capitals such as London, which had a 9.4 per cent drop this year, thanks to fewer available apartments and demand for pieds-a-terre, lodgings used only for part of the time.

Buyers of apartments that go for as much as 11,010 euros a square metre ranged from French teachers and doctors to actor Johnny Depp and US singer Lenny Kravitz.

Now, tougher lending criteria and higher interest rates may start eating into the city's property prices, economists say.

While the national statistics institute Insee on Oct 7 said prices rose 2.4 per cent in the second quarter, a shrinking number of transactions will throw the market into reverse, said Bruno Cavalier, an economist at Oddo & Cie in Paris.

'Prices will decline in the third or fourth quarter,' said Mr Cavalier. 'Demand might still be there, but the solvency of households has diminished and banks are making fewer new loans.'

Growth in property loans slowed at the end of the second quarter to 8.9 per cent from 11 per cent a year ago, according to the Paris-based French Banking Federation. For the third quarter, more than half of the banks in a survey by the central bank, Banque de France, said they will tighten lending criteria.

'In 2007, asking for a loan was just a formality,' said Christophe Cremer, chief executive of Meilleurtaux, an online lending company based in Levallois-Perret, on the outskirts of Paris. 'Fifteen per cent of buyers who would have got a loan then are refused today. That's contributing to the slowdown.'

A steady rise in prices in Paris helped chalk up average annual gains of about 12 per cent in the past five years.

While London has had similar gains, prices there have had wilder swings. They fell 6 per cent in the second quarter, according to Edinburgh-based mortgage lender HBOS plc. Prices slid 2.1 per cent in Madrid, said Idealista.com, the biggest drop since the website began tracking Spanish property in 2000.

Paris's urban development rules restrict high-rises, making the city a metropolis of seven-storied buildings along tree-lined boulevards designed by Baron Haussmann in the 1800s.

'Paris is small and there can't be much new construction,' said Lilian Cellier, an agent at the Laforet Immobilier agency in Paris. 'There will always be a lot of demand.'

Still, that demand might not be enough to maintain Paris property prices. The French economy likely slipped into recession for the first time in more than 15 years in the third quarter and consumer confidence is at a record low, according to Insee.

The average interest rate for property loans increased to 5.5 per cent in the second quarter, from 4.8 per cent in the same period a year before, the Banking Federation said.

'Banks are now much more restrictive,' said Mr Cavalier. 'The price is the last thing to go, but when it does, it can be strong.'

The volume of apartments sold fell 20 per cent in the year to May, according to statistics from Chambre des Notaires de Paris, an association of notaries.

The city's most expensive district, the fashionable 6th arrondissement known for cafes where Ernest Hemingway wrote and a magnet for foreign buyers, might feel the pain more. The average price for a 185 sq m apartment in the 6th arrondissement is about 1.8 million euros (S$3.6 million).

'The problem with the 6th is that a lot of Americans bought there and now they can't,' said Century 21's Mr Fouad. 'Parisians can't afford to buy there so prices may stagnate.'

Pedro Pereira, director of the Orpi Luxembourg agency in the 6th, said 30 per cent of his clients are foreign, and fewer and fewer of them are American. Property prices in US cities tumbled amid bank writedowns and credit losses of about US$600 billion spurred by defaults on sub-prime mortgages.

'Life is getting more difficult there,' said Mr Pereira. Some sellers are cutting prices by five to 10 per cent, he said.

Robert Price, a Texas lawyer who owns a pied-a-terre in central Paris's Marais area, says desirable apartments are still too expensive.

'I thought things were going to sour and apartments would go on sale,' Mr Price, 60, said. The market for choice apartments remains 'tight', he said.

Prices in the 19th and 20th districts, on the northern and eastern fringes of the city, may gain as buyers look for bargains farther from the centre, said Jean-Marie Montazeaud, president of the Chambre des Notaires statistics commission.

Alexandre Malige, 32, a trader at Natixis Securities in Paris, says although he expects prices to drop about 5 per cent, it might not be enough to draw people like him to the market. 'Buyers aren't getting credit,' he said. 'So deals aren't being done.' - Bloomberg

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