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18 Oct 2017

French Real Estate: Taxation and Low-Income Housing

Michel Albouy, professeur de finance à GEM

Interview: The French government recently suggested it would ask landlords to lower their rent by five euros in order to compensate a decrease in government funding for low-income housing. Michel Albouy, a professor of finance at Grenoble Ecole de Management, recently published his diverging point of view on this issue. In an article published in Les Echos, he outlines his criticism of the Macron presidency’s proposal.

Interview: Michel Albouy

Could you explain your point of view?

Emmanuel Macron declared that he is neither “right nor left”. As a result, his proposals get inspiration from liberal perspectives and at the same time apply conservative directives. This makes it hard to read his political actions. Let’s talk about the problems behind this proposal. The French government is going to lower the aid given to low-income renters by five euros. And the request is for landlords to lower their rent in compensation. However, landlords take financial risks when they invest. They’re economic actors like anyone else. Would anyone consider the idea of asking Renault or Peugeot to lower the price of their new cars by five euros?

You oppose this proposal because you consider it to be based on a surrealist vision of economics. Why?

The goal of the government is to kill real estate income. There have been many policies such as modifying the wealth tax, housing taxes or low-income housing subsidies. All of these initiatives create worry among real estate investors. The result will be a slowdown in real estate investment. If the government intervenes like this on the real estate market, it will translate to investment losses for landlords. For example, the modification of the wealth tax led to lower investments, that’s a fact isn’t it?

Could you explain your perspective on how these proposals should be modified?

The first goal of President Macron was to encourage capital and investors to re-enter mid-caps. The goal is now to ensure the wealth tax only affects real estate and not capital that is invested in companies (in particular, mid-caps). We can all agree that castles, yachts and works of art are not productive in terms of economics. But real estate is run by investors who are economic players. They're creating wealth. Having them pay a wealth tax makes no sense!

The solution would be to modify these proposals so that they focus on the economic activity and not the type of good. We should segment them by economic contribution. A home, a country house, a castle or life insurance all present no risk. But the act of entrepreneurship should be exempt from wealth tax if we want to bolster the country's economy.

The government recently spoke of the importance of building faster to provide housing for low-income renters. Their program is based on modernizing the aid system to provide better results at lower costs. Do you think these policies are coherent and in line with increasing future investments in real estate?

The idea of building faster and faster brings up the issue of construction standards and construction permits. It's true that today standards have increased the cost of construction and many local authorities are not delivering enough construction permits to satisfy demand (in particular around metropolises). Subsidies for low-income housing also probably need to be reworked, but you also have to modify the laws regulating investors in order to have long term gains for public money. Only more housing will increase supply and lower the pressure on rents.

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Michel Albouy

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