With house prices falling in France, and credit more difficult to obtain, cash buyers hold all the cards.

Last week, FNAIM, the French estate agents association, reported that house prices in France dropped by 3.5% in the third quarter, and that prices were now on average 5.9% lower than they were in the same period in 2007.

The price of apartments dropped by 2.3% in last quarter, and by 3.1% in the past twelve months.

Worst affected have been larger properties whose prices have dropped by around 9% over the same period in 2007. Smaller, cheaper houses seem to have resisted better, with French estate agents reporting continuing demand, and prices that remain broadly flat.

The tightening of credit conditions has been an important factor affecting market conditions, with interest rates having risen from around 4% a year ago to nearly 6% today, and a far more strict application of loan terms being adopted by the French banks.

No figures are available for regional property prices in France over the last quarter (when conditions will have clearly become more difficult) but when considered over the year there remains a surprising level of price stability. Biggest drop has been in Centre and Alps areas, where prices have dropped by 2.5% in 2008, whilst those in South East France have remained stable.

Prices in South West France are down 0.2% in the year, whilst in the North and East 1.0% and in the West 1.7%. Paris seemed to still be holding up, although in the Ile de France prices have fallen by 1.9% in 2008.

Within the French towns and cities the largest fall in average prices in the year has been at Rodez (-9.7%), Toulon (-5.2%), Grenoble (-4.5%), Marseille (-3.3%) and Bayonne (-2.8%). Conversely, towns that have held up better include Montauban (+9.0%), Annecy (+7.1%), Strasbourg (+7.1%), Lyon (+6.2%) and Orléans (+5.8%).

There are no statistics available for rural properties, although agents report that the market is difficult, with many French buyers increasingly concerned about the cost of travel and seeking closer proximity to a town. As properties in the countryside have been the main beneficiaries of the price growth over the past decade (circa +170%), it is hardly now surprising that the correction in their prices might be greater than will occur within urban areas.

In Marseille sales dropped by around 30%, whilst it was nearer 15% in Toulouse and Lyon. The market was not much better in Paris, with sales down by around 15% in the same period.

Such has been the severity of the collapse in sales that last month FNAIM released a somewhat unusually alarmist communiqué stating that ‘the brutality of the slowdown in activity for both new and older property has surprised informed observers’. They appealed for ‘urgent action’ in order to avoid a blockage on transactions.

Recent figures from the French Ministry of Housing also show sales of new homes went down by 34% in second quarter of 2008 over the same period in 2007, with a drop of up to 50% in some regions – notably Limousin, Aquitaine, Burgundy and Lorraine.

Planning permissions for new homes have also plummeted by around 20% in the three months ending August. New starts on site are also down by 13% over the same period compared with 2007, a figure that is likely to increase. Two of the largest developers in France, Nexity and Kaufman & Broad, recently froze several hundred proposed new developments, and they will be followed by others, with the prospect of thousands of job losses.

Whilst these figures look spectacular, and problematic, they come off of a record year for new build activity in France in 2007, so some perspective is needed when trying to interpret them.

Outlook for French Property Market

Nevertheless, if viewed within the framework of a normal property market cycle, no-one is now doubting that a market correction is in process, but also overdue.

Until recently, most pundits have taken the view that it will be a relatively soft landing.

Indeed, the French property market has been gradually slowing down for the past three years, when the rate of price growth went from 9.5% in 2005, to 6.6% in 2006 and to 2.5% in 2007. Most forecasters were expecting a fairly flat year for 2008.

As we stated in our article 'Why the French Property Market Will Not Collapse', market conditions in France are very different to those in many Anglo-Saxon countries, notably with a far lower level of household debt, and strong demographic growth.

However, with the financial markets in a coma these past few weeks, and with a weakening economic situation, a more serious downturn in the market now looks inevitable.

There are contrasting views on just how long the slump in the market will endure. Most pundits consider that, against the backdrop of a shaky economic outlook and tight credit conditions, no upturn is likely until around 2011. Whilst banks may soon start lending again they are going to be more selective. Lending periods will also be reduced and a higher deposit will be required. It is also doubtful rates will come down for some time as banks seek to rebuild liquidity.

Other commentators suggest there are factors that may lead to an earlier upswing, notably strong demographic forces creating a substantial demand for housing. This demand is currently being held back by a lack of purchasing power and available credit, but with signs that the heat is being taken out of the level of inflation, and the banks now underpinned by the government, these barriers are being dismantled.

Whatever the outlook, it is certainly clear that there remains strong aspirational demand to buy, with most French estate agents reporting a steady stream of telephone enquiries and visits to their offices. Activity levels on our own site, and on French property internet sites within France also show continuing interest in entering the market, provided the right property can be found at the right price.

Michel Pouré, founder of the French web site www.bulle-immobilière.org summaries the current situation. ‘The property market rests on the expectations of the main actors. When the market rises buyers are pressed to buy their home in order to avoid paying more in six months time; when the market drops, they prefer to delay their purchase in order to benefit from lower prices six months later.’

That wait and see attitude seems to be happening amongst both buyers and sellers. A recent survey by polsters l'Institut Français d'Opinion Publique (IFOP) showed starkly the blockage in the system, with 93% of buyers stating that they expected to be able to negotiate on the purchase price of their property, whilst no less than 78% of sellers were unwilling to consider a serious reduction in their asking price.

In the end, however, sellers are also buyers, but only if they can sell! More than at any other time in this present decade, cash buyers are in a strong position over the next couple of years, and sellers are going to have to realise that if they want to sell, they will have to be prepared to negotiate.