Most soothsayers believe house prices in France will increase this year, but the economic and political outlook still leaves room for some doubt.

There is definitely a whiff of uncertainty in the air in a spate of house price forecasts that have been released in the past few weeks.

Although no one is predicting that prices nationally will fall, there seems general agreement that there will be a gentle retreat in sales and house price growth, particularly in the second half of the year.

Not surprisingly, it is the economic outlook that is on everyone's mind. Most also consider interest rates will have to rise in order to fund the debt burden, fiscal incentives are lower, and there is concern about the impact of the possible taxation of capital gains on the sale of the main home (although see later article).

The forthcoming presidential elections in 2012 also seems to be throwing a spanner in the works, with most forecasters arguing that it will cause some instability in the market.

Although HSBC France offer no price forecast for 2011, they consider that an increase of 1% in property prices will lead to a reduction in the purchasing power of households of around 5.5%. On this basis, they consider that the number of sales this year will be lower than in 2010.

A similar view is expressed by Credit Agricole, who consider that property in France has become overvalued. This is not a point of view shared by FNAIM, the national association of estate agents, but only because interest rates have been at an historically low level.

Strength of Market in 2010 a Surprise

Against the backdrop of economic malaise and high unemployment most analysts have expressed surprise at the rapid improvement in the market in 2010. Sales were up around 25%, and although there is some disagreement on just how much prices increased, all seem at one that the movement was generally in the ascendant.

The notaires have yet to publish their final figures for 2010, but in their recent review of the market for the third quarter of 2010 they report that house prices had risen by an average of 9% for the year ending 31 Oct 2010. However, there were significant variations between the regions, as can be seen from the following table.

Indeed, the notaires argue strongly that the market is not homogeneous, and they are critical of 'average' national increases and forecasts (although this does not seem to have stopped them forecasting an increase of between 3% and 5% this year for the regions outside of Paris and main cities!)

Our own general feeling is that there is also a certain element of 'trompe d'oeil' in their own figures, due simply to the fact that the majority of transactions that are analysed occur within the major cities, and include a large number of new built investment properties that have sold well this year. These factors inevitably distort the overall picture.

FNAIM, for one, seem to consider that the notaire figures do not say enough about the sluggishness of the market in some rural areas of France, and amongst properties in the range €300K-€750K. They recently reported that prices had risen by only an average of 1.3% in 2010, and that in some regions of France prices had actually gone down.

Nevertheless, they also have refused to provide us with information on the weighting they attach to the particular case of Paris in the calculation of the average national increase, so it remains difficult to judge just what is happening.

The following figures from the notaires do contrast somewhat sharply (in most cases) with those of the estate agents, albeit final year figures from the notaires are not yet available, so the comparison period is not the same.

Source: Notaires de France

Despite the differences, there seems no doubting the general increase in prices of properties at the lower end of the market in most areas of the country.

Credit Agricole consider that one of the main reasons for the upturn was the underlying strong structural demand for housing, supported by the conjunction of a number of exceptional factors favourable to stimulating demand:

• the safe haven status of property at a time of huge uncertainty in the financial markets;
• the various measures of fiscal stimulation given to new housing development, notably through the loi Scellier;
• interest rates at their lowest level since the war;
• a low level of supply of homes for sale on the market, as sellers preferred to sit tight in their property.

Along with pretty much everyone else, they consider that this coincidence of catalysts will be less apparent this year, with the result the market will slow.