PARIS Real Estate Finders (PREF)

PREF 2008 -- 2009 MARKET OUTLOOK FOR PARIS REAL ESTATE:

Firm Facts, Wishful Thinking, our Wild Guesses

Like everyone else, we're looking at the Paris real estate market and the broader economic picture for 2009 with a strong dose of trepidation and some hope that the reality will be better than worst expectations. We've tried to cull opinions in France and the U.S. to offer you our "guidance" and to avoid the double-headed pitfalls of too much optimism or pessimism.

So here are our thoughts:

What are Paris prices going to do?

The general consensus is that Paris prices will decline somewhat. Recent articles in Le Figaro (December 2008) predict that there will be a "soft landing," nothing like the free fall experienced in the early 1990's. Some official estimates look to a decline throughout France up to 15%. The national association of realtors (FNAIM) predicts 5-6% for 2008 and an additional 8% in 2009. But neither of these estimates is specific to Paris, and Paris definitely represents a "unique case."

Looking deep into our crystal ball (read: we are not fortune-tellers), we think there will be more margin to negotiate at the highest price levels, for apartments priced between 1-3 million Euros. Buyers may expect reductions up to 10%, especially if the property has flaws or major compromises. To the extent that the property has everything -- condition, neighborhood, layout, classic characteristics -- even at the top of the price scale, there will be less negotiation. Parisians are very smart sellers and they are often prepared to wait to sell their property rather than accept a price that they consider undervalued.

For properties within the 300-900,000 Euro price bracket, we think there will be some but relatively less price negotiation, especially at the lower end of the bracket. The reason is that this is where most of the properties are bought and sold, and the seller has more inclination to wait for another prospective buyer.
What approach do we recommend to a potential buyer? Most important is to be prepared as a serious buyer. Pre-approval for a loan or the ability to purchase for cash makes you a much more attractive prospect and can enhance the possibility of price negotiation.

Where is the Euro going relative to the U.S. Dollar?

We read the dire predictions that the Dollar will decline to 1.60 or even more to the Euro. We certainly recognize the volatility of the Dollar- Euro exchange rate. The recent jump of the Euro by 12% against the Dollar when the Fed lowered its base rate to near zero was dramatic, to say the least. However, there are factors working against a further short-term decline in the Dollar. One is the recession in the Euro zone -- manufacturing activity fell to historically low levels in the last quarter of 2008 and the European Central Bank is grudgingly expected to lower interest rates in 2009.

Our opinion is that there will be a very gradual recovery of the Dollar in 2009, but not even approaching parity (blame the U.S. enormous trade and budgetary deficits). We would feel positive about the Euro in the 1.25-1.30 range and ecstatic if it broke through the 1.20 range, but frankly, we're not holding our breath! Long term we are worried about the Dollar because of the print-and-spend nature of the American financial crisis bailout. This is an argument to hold a long-term asset in a currency other than the Dollar.

Our recommendation is that you consider a Paris property with a French mortgage that in effect spreads the exchange risk over the term of the mortgage, and additionally, to consider the product offered by our recommended mortgage banker, Banque Patrimoine et Immobilier, in conjunction with Cholet-Dupont. This product effectively offers 100% financing with a security deposit in the "home currency" so there is no immediate exchange rate risk.

The wait and see approach:

Many people who have considered buying in Paris have adopted the strategy that "if I wait, this will sort itself out and I'll get a great deal." Maybe, but don't count on it. There was an exceptional window of opportunity in 1998/99 when the Dollar was historically very strong and Paris real estate was still emerging from the dark ages (ten years of zero appreciation). We don't expect these two factors to converge again. Like investing in stocks, it is almost impossible to win at market timing. We work to help our clients make rational and informed choices in their purchase decision. We think this is still possible in Paris and we invite you to contact us for further information.
Best wishes for success in 2009.