PARIS Bubble or not, France's buoyant housing market is fuelling high-level fears that a post-crisis boom could turn to bust.
From the central bank to the International Monetary Fund and rating agencies, officials are careful to avoid describing the euro zone's fastest growing house prices as a bubble, but they do not hide concerns about the risks to the broader economy.
Underpinned by particularly strong growth in the Paris market, French property prices rose 8.7 percent year-on-year in the first quarter of 2011 -- more than any other OECD country for which figures are available.
Ratings agency Moody's Investors Service believes the French housing market is overheating and that while French banks can absorb a likely moderate house-price correction, the least cautious lenders could face steep losses in a more severe drop.
"French banking groups' inherent exposure to the country's housing market is the principal reason why a potential correction in house prices poses material credit risk," Moody's analyst Stephane Herndl said.
The French central bank warned this month that financial stability could be at risk should the market suddenly tank, but also said high prices are contributing to middle-class misery and distorting the economy.
"The continual rise in property prices is contributing to a perceived loss of purchasing power which in turn is fuelling wage claims," Bank of France Governor Christian Noyer wrote in a letter to President Nicolas Sarkozy accompanying the central bank's annual report.
"Indeed, rising property prices are a source of social malaise and economic rigidity because they prevent household mobility and exacerbate social inequalities," he added.
Racy growth in French house prices in the first quarter contrasted with a more subdued 2.6 per cent year-on-year rise in Germany, while big price falls occurred in peripheral states plagued by debt woes -- 11.1 percent in Ireland, 5.6 percent in Greece and 5.3 percent in Spain.
Stagnant purchasing power regularly ranks as a top concern for French households, which are the biggest engine of growth in France's consumption-oriented economy.
The government dropped tax relief for interest payments on mortgages at the start of the year. But with presidential elections due in April, the government is steering clear of bigger changes to the host of incentive schemes that encourage home ownership.
In his 30 years in the business, real estate agent Paul Abib has never seen a market as buoyant as today in his posh corner of Paris, the leafy seventh district around the Eiffel Tower.
Although property prices rose 27 percent in his district in the first quarter over one year, he thinks the market can hold up even as mutterings about a housing bubble grow louder.
"As long as people don't sell just for the sake of doing deals, things will stay stable," he said.
French house prices fell harder during the economic crisis than the average across the euro zone, dropping nearly 10 percent in 2009, compared to a decline of 3.7 percent for the whole shared-currency bloc.
Since then, French prices are bouncing back more strongly than elsewhere in the euro zone. Price growth hit a post-crisis peak of 9.6 percent in the last three months of 2010 compared to the same period in 2009. The average increase for the euro zone in the same period was 2.8 percent.
With prices growing faster than the long-term average of 6.8 percent, INSEE statistics office head Jean-Philippe Cotis told reporters that there were sound economic reasons for the boom.
"Prices reflect without doubt scarcity and not speculation, and the fact that interest rates remain low," he said.
But a research unit tied to the prime minister's office is less certain a bubble is not in the making given that growth in property prices has outpaced rent rises by a large margin over the last 20 years.
"The possibility of an over-valuation of real estate assets cannot be ruled out," it said in a recent study.
Paris is still cheaper than London though: a house in greater Paris now costs on average 302,000 euros, compared to 342,000 pounds, or 380,000 euros, in the London region, according to official figures.
FINANCIAL RISKS, MARKET DISTORTIONS
A likely trigger for a correction would be rising interest rates, the head of the national real estate agents association FNAIM, Rene Pallincourt, said.
"If interest rates keep rising, that will have the effect of squeezing clients, which will automatically cause a fall in prices. But we are not there yet," he said.
Even if the property market does correct, the impact on the French economy would probably not be as dramatic as the U.S. housing market slump during the 2008-09 financial crisis.
"Risks to banks seem limited, as French households have comparatively low levels of debt, and lending standards are generally conservative," the IMF said in a report on France.
Nevertheless, it advised the government to keep pressure on banks to maintain sound lending. In France, banks typically require sizable down-payments and do not grant mortgages if monthly payments exceed a third of a household's income.
Home ownership stands at 57 percent of households in France, below the nearly 66 percent average for OECD countries, despite a wide range of housing benefits, building subsidies, tax breaks, soft loans and regulations.
The Bank of France and the IMF have warned that such government policies are having the unintended effect of contributing to price increases and recommended that they be reviewed.
But with a government not inclined to embark on reforms ahead of next year's election, real estate agent Paul Abib said market stability now hinged on people simply being sensible.
"I've got to hold back my clients. 'Come on, be careful', that's what I tell them," he said.
(Editing by Geert De Clercq and Stephen Nisbet)