14 reasons AGAINST a Real Estate Investment in Paris - The Wandering Investor
Feb 2, 2020 | International Real Estate Investments
One of the few, truly global cities, Paris has been the “capital” of Europe for centuries. Surely, making a real estate investment in Paris is wise and would count as a great store of value.
Paris is beautiful and well connected. Paris is a center of culture and education. It has it all right? Maybe it does, but not for the non-resident real estate investor.
Here are 14 reasons why your hard-earned capital should stay away from Paris.
According to the UBS global real estate bubble index 2019, Paris has reached bubble levels.
Bubble time in the City of Lights
A typical 60m2 apartment is the equivalent 15 years of average salary, which is a terrible price/income ratio. New York for example, hardly a cheap real estate market by any measure, stands at 11 years for the same ratio. If local people cannot afford to buy, who can? Only speculators and people willing to pay more than the other guy.
2. Extremely low interest rates for locals
Locals have access to fixed sub-1% interest rates with, in some cases, 0% down, so leveraged up to 110% to include buying costs. Non-residents can also get leverage but interest rates are typically two times higher and one must provide at least 30% down.
As a non-resident foreigner, do you really want to compete with people who get the property for almost free? This is a very unhealthy situation. By choice, I prefer to invest where my money has value. If locals can borrow for free, my money is unlikely to see good yields.
3. A high price point
At over 10,000 euros per square meter, you’ll need a large cash outlay, for not much. Typically a 30m2 studio in a good area would easily be 13,000 euros per m2.
With 390,000 Euros my money can go a lot farther in other markets internationally. You can find a “deal” in Paris at 7500 euros per m2, but you’ll end up in an area with crime and refugees camping out on the streets. 7000 euros per m2 gets me a view of the Budapest parliament on the main square, a true triple A location. What would you rather get? What is a better store of value?
This view is cheaper per m2 than the shabbiest apartment in Paris. What is a better store of value?
4. Low gross yields for long term rentals
In the cheaper arrondissements, you’ll get about 3.4% to 3.6% gross yields, and in the better arrondissement between 2.8% and 3.2%.
5. Extremely low net yields
Pay for your property tax (easily one month of rental income), your building common charges (the landlord pays for these), agency fees to find tenants & manage them, as well as maintenance costs, insurance, and you can slash your gross yield by half. Expect to earn about 1.4% to 1.8% net yield before income tax.
And I’m being nice here, in reality labour is extremely expensive (due to taxes of course) so your maintenance costs will shock you. Redoing a bathroom can add up to a year’s rent for the average place.
6. Yields that are likely to become lower for your real estate investment in Paris
Property taxes in Paris went up 80% between 2008 and 2018. The “taxe d’habitation”, which is a tax that occupiers of accommodation pay, is being phased out by the government. Instead, they plan on “reevaluating” the property tax in a few years. The burden of taxation on property will further shift to the property owners.
The government is working on various schemes such as a centralized system for tenant deposits. You won’t control your tenant’s deposit anymore; a government institution will, and will charge you for the privilege.
More green laws on insulation, etc, which owners will need to pay for. One must now also pay for a “regulatory check” in between tenants, imposed by the government. Some company comes into your apartment and points out all the features in the apartments that are not in line with the ever changing regulations. And of course, need I even add, you will be charged for that privilege.
Rent control is now in place in Paris since last year.
7. A city that is run by Socialists
All the above was enacted by Socialists, and Paris is staunchly Socialist. As the Paris Government increasingly spends on social housing, more voters aligned with Socialist values move in.
Think what you want of European Socialists, but they have never been a real estate investor’s friends.
8. Bad demographics
The city of Paris is actually losing inhabitants, as skyrocketing housing has pushed normal tax payers away. The city lost 53,000 inhabitants between 2012 and 2017.
This does not take into account the influx of social housing people moving in, so the shift is even worse in reality. If taxpayers cannot afford to live there anymore, how is this going to be good for your yields long term? Something will need to take place. Either people will become richer, or landlords will get squeezed. Do you reckon people will become richer in a country with 100% debt to GDP and trillions of Euros in unfunded liabilities?
9. Transaction costs are very high for a real estate investment in Paris
Notary public costs and various taxes amount to about 8% of the purchase price, paid for by the buyers. Then, when selling, you’ll also have to pay 3% or so agency fees and capital gains taxes. Just to get your money back you’ll need prices to increase by 11%, in what is already a bubble.
10. The highest tax burden on real estate in the OECD
Let me quote the Tax Foundation:
France, by contrast, ranks lowest in the ITCI’s property tax component. In addition to relatively high real property tax collections, France imposes taxes on net real estate wealth, inheritances, real estate transfers, equity of banks (so-called systemic risk tax), and financial transactions.
11. Non resident real estate owners get plundered with taxes
If you earn less than 27,519 euros per year in France, expect to pay 20% income tax + 17.2% social security taxes. If you happen to earn more than that amount, the flat tax moves to 30% from that threshold + 17.2% social security taxes of course. Residents of other EU countries get a lower social security tax of 7.5%.
Divide by half to count running costs
Pay your 37.2% income tax & social security (20% & 17.2%)
Best case scenario net yield 1.04%
And what if you have a month in between tenants? Lower your yields.
And what if your tenant stops paying and you can’t kick him out (a possibility in France with its strong tenant protection laws)? Lower your yields.
And what if any of the yield depressing trends due to the socialists materialize (which they will): lower your yields.
In reality you can probably expect your yields to hover around 0.7% or 0.5% for the nicer arrondissements. If you want to leave you apartment empty, there is a special tax on secondary homes.
12. Airbnb is public enemy number one
The long term yields are too low for you, so you want to do Airbnb with your real estate investment in Paris? Tough luck, the government keeps raising taxes on short term lets, limiting the number of days per year (120 days) and is even discussing lowering it .
The city even has a special task force dedicated to catching delinquent landlords and handing out punitive fines.
13. And in case you make capital gains on your real estate investment? You’ll get plundered
Capital gains taxes on property in France are extremely high, and phase out over 22 years, but weighted towards the end. And don’t forget the social security taxes on your capital gains, you have to pay those too, and they get phased out over….30 years, also geared towards the end.
Sources: https://www.journaldunet.fr/
14. And guess what? Even more taxes
You thought those terrible yields and taxes are it? There’s more!
France has the world’s 3rd highest inheritance taxes.
There’s a wealth tax for those who have over 1.3 million Euros of real estate in France. If you pass that threshold, you will have to pay a wealth tax of the equivalent of 0.5% of the net value retroactively from 800,000 euros to 1.3 million euros, and from there 0.7% and even more.
So yes, if you buy expensive, luxury real estate in Paris and have to pay the Wealth Tax, you easily end up making close to 0% yield.
Conclusion: should you make a real investment in Paris as a non resident?
With yields like this, the only reason to invest is for:
Speculation for capital gains. Sure the European Central Bank can continue printing money and prices can continue rising, but you’ll start making money only after prices rise 11%, and after that you’ll have very high capital gains taxes.
A store of wealth because “Paris is Paris”. Apart from a debt fueled bubble none of the metrics are positive. And why would you want to store your wealth with European socialists? Historically, this has been a terrible mistake. People also invested in London as a store of wealth, but prices have been dropping since 2016.
The only reason I could find for making a real estate investment in Paris is if I wanted to avoid paying rent, and had access to that 0% down-payment & sub-1% interest rate. In that case, why not? In case the market crumbles you can default on what you thought was a piece of gold, yet wasn’t.
So what should you do instead of a real estate investment in Paris?
There is a World of Opportunities out there. Higher yields, higher capital gains, welcoming governments, and much better value. Just be open. My blog mentions many such opportunities.
CEDRIC on March 8, 2021 at 09:43
As a Paris resident i’d say you got very good points. We are very likely in the midst of a massive bubble fed by overseas investors and over leveraged local households. I’ve indeed witnessed number of people around me getting 35 years mortgages with 0% down payment which calls for caution.
A couple of points you didn’t mention which are essential are rent increase and capital appreciation. Appreciation has been around 70% over the past 10 years which is decent but subpar compared with major US or Chinese metros. Rents have only increased about 20% which is basically the inflation, resulting in extremely low yields.
Considering the overall poor performances, the very high taxes and the government’s hostility toward real estate, i agree with your analysis and don’t see any valid reason for a foreign investors to invest in Paris.
The Wandering Investor on March 8, 2021 at 12:47
Very good points. Thank you for sharing Cedric.