While the number of new homes available for purchase continues to grow, and transactions in the existing housing market are plummeting, prices are not falling. Here's why.

In a perfectly functioning market economy, a decrease in real estate transactions should theoretically be followed by a decrease in prices. Yet, this adjustment is not occurring at all in France.
In the new-build sector, apartment prices fell by only 1.3% in the first quarter of 2013 compared to the same quarter in 2012, and by 7.3% for detached houses. This occurred while the number of homes available for sale increased by 18% over the same period, reaching nearly 100,000 units.

The cost price for developers is not decreasing 

Emmanuel Ducasse, Director of Research at Crédit Foncier Immobilier, explains this anomaly by several factors affecting the economic balance of projects and forcing developers to sell at high prices.
Mr. Ducasse notes, firstly, no decrease in land prices. This could, however, occur if developers were to abandon more projects or negotiate harder on their purchase terms.
Land costs in the most strained areas can now reach 50% of the total cost.
The new government's amendment to Article 55 of the Law on Solidarity and Urban Renewal (SRU), which increases the minimum proportion of social housing per city from 20% to 25%, also drives up prices in the non-social housing sector, according to Emmanuel Ducasse. "Given that developers are selling 25% of their production to social housing providers at a price below their cost, they make up for it on the non-social housing portion," he explains.
The new 2012 thermal regulations, accessibility standards for disabled people, and the increased construction costs in collective housing (labor and materials) are also factors that prevent sales prices from decreasing.

In the older market, prices are stagnating, but transactions are falling

In the existing housing market, the paradox is even more pronounced. While transactions fell from 805,000 to 709,000 in 2012, Crédit Foncier Immobilier forecasts only 630,000 in 2013. But during this time, prices in the first quarter of 2013 stabilized compared to the first quarter of 2012 across the country: stable in Paris, they fell very slightly in the inner and outer suburbs (between 0.7 and 1.2%) and even increased slightly in the provinces.

Buyers and sellers are waiting

The sluggish market is a consequence of the rigid positions of both buyers and sellers. Sellers want to sell at the right price in order to buy again, while buyers are waiting for a bargain…
The quality and location of the property are now two key factors in determining the transaction price. A well-located, flawless property will see its price increase regardless, unlike an isolated, low-quality property on the outskirts of town.
In fact, "if supply is mismatched with demand, price negotiations become difficult and sales are harder to finalize," explains Emmanuel Ducasse. "This increases the time required and the scope for negotiation," he adds.

 

Source: La Tribune