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Europe’s ‘sick man’ fights housing crisis

Ludovic Marin | AFP | Getty Images

France has in recent weeks unveiled a slew of measures to boost its ailing construction sector and revive growth for the euro zone's "sick man", but analysts warn the measures will fall short.

The country's construction sector is currently going through a deep crisis as new building reaches historically low levels. The latest official figures reveal that new housing starts in the twelve months to May were at the weakest level since 1998.

It comes as growth in the euro zone's second-largest economy stalls and France is labeled the "sick man of Europe".


Read MoreEuro zone recovery losing steam as France struggles

Some 8.5 percent of the country's jobs come from the construction sector. The decline in the sector -- activity fell 1.4 percent in the first quarter, well below overall economic output – is expected to continue for the third consecutive year.

Charles-Henry de Marignan, senior analyst at IEIF, an independent real estate research agency, notes that the decline in the construction sector represents a significant obstacle to economic growth in the country.

"From a purely mathematical point of view, housing starts are insufficient as the population increases quickly", Philippe Waechter, head of economic research at Natixis told CNBC in a phone interview.

Last week, the government unveiled its latest action plan to stimulate the sector with an extension to interest free loans which had been set to be scrapped by the end of 2014.

The "0 percent interest loan", introduced in 2011, was meant to help middle and low-income first-time buyers by offering them cheap financing. The repayments could be deferred for five years. That figure has now been raised to seven years.

Initially restricted to new-build homes, their use has now been extended to old properties in need of renovation in certain areas and access to the loans has been increased. The government believes that the number of beneficiaries will be increased by 60 percent a year from 40,000 currently to 70,000.

But analysts doubt the measures will have much of an impact, given the value of the loans available is fairly modest, especially if you want to buy in Paris, where prices are the highest in the country.

While they are meant to boost construction, such fiscal measures usually have "a perverse effect", Laurent Quignon, economist at BNP Paribas told CNBC by phone, as they often "have more impact on prices than on volumes".

"If increasing volume is the aim, it's not necessarily the type of measure to put in place", the economist said.

Another key priority for the government is to simplify construction rules and regulations, which had been an obstacle to housing starts. Some rules, denounced as superfluous or confusing, added to construction costs and led wary developers to scrap or delay new projects fearing they might not be sold.

Cutting back on red tape is positive, said Waechter, but in the latest proposals "there's not much that is geared towards construction".

Furthermore, "people want to live where there are jobs", he continued, but those areas – often big cities – are crippled by high prices and lack of available plots to build on.

A German-style solution of creating productivity hubs away from big cities would be one of the solutions to the housing crisis France is facing, Waechter said.

Quignon agrees that while reducing construction costs is a good initiative, "the real variable" to kick-start construction is the price of land, on which these new measure will have no impact.

"The measures announced in this plan to boost real estate are not revolutionary and will therefore have no immediate effect", concluded IEIF's de Marigan.

Existing home sales struggling too

To add to the woes, sales of existing homes are also suffering from weakness.

Century 21 – one of France's leading estate agents – said sales at its agencies were 2.8 percent lower in the first quarter of this year than they were in the same period last year, despite "vigorous demand".

A new law introduced in March is partly to blame, according to the agent. It requires more paperwork which the agent says slows down transactions. Sales of apartments across the agency's network dropped by 6.8 percent year-on-year in the first quarter.

"Sale agreements are now 650 pages long, when they used to be around 100," Laurent Vimont, president at Century 21 told CNBC by phone. He has openly mocked the new rules.

Read MoreBuilding in France: Like building castles in Spain?

New regulation has also impacted property investments. Sales of existing homes to buy-to-let investors fell for the fifth consecutive quarter and were 8.4 percent lower than in the first quarter of 2013.

"There's been a big collapse in buy-to-let investments. Nationally, we are 20 percent below 2011 levels and within Paris, about 30 below", Vimont stated.

And the prospects are not necessarily getting better. The government is looking into more measures to put a cap on rent increases "which is the complete opposite of what must be done", Quignon from BNP Paribas said. He argues it removes any incentive to make more properties available on the rental market, exacerbating the current shortfall in housing.


Read MoreLooking for a bargain? Property prices in Paris plummet

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