France: So, was it worth investing in residence?, IRED

Simeon Mitropolitski is a Canadian analyst, of Bulgarian descent, and former syndicated columnist with the Bulgarian News Agency (BTA). He is the author of several hundred articles dealing with the hot political and economic topics, both Bulgarian and international. ("A Royal Solution." World Press Review. June 1997, provides English versions).

He was part of the first group of Bulgarian intellectuals that began the opposition movement that finally put an end to the communist regime in the country, and in 1996-1997 participated in the international monitors' teams during the elections in several Balkan countries - Romania, Albania and Bulgaria. In 1999 he was among the few Bulgarian journalists that supported NATO military operation against Yugoslavia. In 2002 Simeon and his family emigrated from Bulgaria to Canada where they now live in Montreal, Quebec.

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6 April 2007

France: So, was it worth investing in residence?

These days the French daily 'Le Monde' published an interesting graph about the evolution of the local residential market since 1995. According to the data, borrowed from the National Real Estate Federation of France (FNAIM), the average price per sq. meter (1 sq. meter is approximately 10 sq. feet) has took off from 1,126 to 2,647 euro. Therefore, the difference between 1995 and the early 2007 is the staggering 130 percent. The implicit conclusion is that those who have invested in residential real estate in France before 1995, can now cash enormous profits. Independent research, however, shows that these seemingly enormous profits were more moderate in reality; and that some alternative investment strategies during the same period could have brought similar if not better returns.

Behind the numbers

A difference between the residential prices in 1995 and the early 2007 in France is really significant. It, however, may be a bit misleading without making some additional corrections. A growth of 130 percent in the 12-year period represents in fact a growth of no more than accumulated 8 percent per year. During the same period, France had an inflation of almost 2 percent each year. This brings down the annual profit of the residential investments to mode moderate 6 percent. In addition, however, for those who invested in residences, which aren't the first residences for the buyers, there is a flat 27 percent tax on capital gains. What remains, therefore, is no more than 4.5 percent annul profits, which in fact are higher between 2002 and 2006, and lower for the other years between 1995 and 2007. Thus, 4.5 percent annual profit isn't negligible number, but is far from 8 percent before the additional corrections.

Was it worth investing in bricks?

All conclusions on this point should involve comparison with other countries during the same period, and also with some other possible investment strategies outside the residential real estate market. The average residential price in New Zealand has risen during the same period by approximately the same rate as in France. In Ireland, however, the market has gone up by more than 10 percent annually. The ex-Soviet Baltic States, now European Union members, have also shown better performance. Additional points in their favor are the lower taxes on capital gains.

Looking at alternative approaches for investment may make French residential investment comparatively not very worthy. What about buying stocks on NASDAQ? Everybody knows about the bubble before 2000, but how many know that even after it these investments were worth holding? Let's take the same period, 1995-2007. The average index rose from 750 to almost 2,500, without mentioning the brief peak of 5,000 in early 2000. For those, who didn't sell out, the total profit now is more than 200 percent, or at least 11 percent each year. What's true for NASDAQ is equally true for the NYSE, where Dow Jones index rose from 4,000 to 12,500 between 1995 and 2007.

With hindsight, it's easy to say that the best investment strategy for the period 1995-2007 was to buy corporate shares in 1995, then sell them off before the crash in early 2000, then buy a real estate, and sell it in 2005/06 and again buy corporate shares. In fact, however, most people are conservative by nature, they buy because many buy and sell when many sell, which means they follow the tide instead of anticipating it. Many people buy when it's already too expensive and sell when it's already too low. Those, however, who held corporate obligations since 1995 throughout 2007 made a better decision than those who invested in real estate in some political risk-free nations. It might have been different in some high-risky states, but it's another story.

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See also the directory of companies providing real estate services in, and general real estate information of France.

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