Many misconceptions about the Real Estate market in France and the so called housing bubble. The French market is very special indeed. The solvency of French households, for example much higher than that of Spanish or American households before the consolidation of their respective markets. This will not play on the magnitude of the fall in property prices in France, but its duration.
A simple regression to the mean income on price ratio would mean a drop in prices of about 35% (or 4.2% per year for 10 years) with a growth assumption of reasonable income 1% per year. The decrease could be of the order of 5% in 2014, of the order of 8% in 2015, followed by a long erosion.
Real estate protects us from inflation but not deflation. The graph below represents the distribution of capital in France on very long, clear as ever in the economic history of our country, real estate has weighed in as the wealth of French households.
1. The lack of housing supports property prices.
According to some experts, the housing bubble would originate the housing shortage. The lack even reach 800,000 to 1 million of goods … In reality, it is not. Between 1960 and 1995, the construction of new homes has far exceeded the growth in the number of households. Since then, the two parameters change relatively simultaneously, the differential being a few tens of thousands of homes (in excess or deficiency depending on the year), a very small percentage of the total fleet of 33 million homes and apartments.
However, a potential demand on the rise is not necessarily synonymous with price increases: for this he must need to be solvent. And here lies the explanation of the figure often of 800,000 to 1 million units missing. This is in fact the number of people “at the gates of housing”, that is to say, who can not afford housing and are therefore insolvent especially at the current price level.
2. When you are a tenant, you throw the money away, especially as the rents are very expensive.
First, rents have increased overall in line with income, which is not the case of real estate prices. Except in special cases, so there is no overheating of rents relative to household income. In addition, the cost of an owner are more important than those of a tenant for the same property, which offer the tenant a monthly savings capacity greater than that of the owners. In the end, the assets of the tenant is higher than that of the owner for many years.
Take the case of a first-time buyer in Paris: the capital held by the lessee (the savings that would have served as a contribution in case of purchase) is always equivalent to the owner (his property) between 23 and 35 years after purchase (depending on the economic scenario and real estate prices). The tenant does not throw more money after the owner, he just chooses to hold cash rather than good, provided of course that makes the effort to save each month it would spend if he owned.
3. The market is down since the crisis. But without transactions, the prices can not fall.
The decline in the number of transactions still several months before the price drop. Volumes were down 18% in 2012, 5% in 2013 and 8% for 2014, while the price index fell very slowly. In the long term, the volume has always proven to be a leading indicator of the level of real estate prices: the bursting of the housing bubble in 1991 in France was preceded by four years by lower volumes. In the US, the first fruits had appeared six years earlier.
Since the summer, the decline appears to be accelerating with a yoy decline of 4% in Paris. We anticipate a decline of around 5% for the full year with an acceleration of the decline in 2014 due to the herd effect. The drop draws down and vice versa.
4. Rates are lowest and prices have dropped a little over a year, this is the time to buy.
Mortgage rates have reached in spring 2012 their lowest historical level (due to the zero interest rate policy of the central banks). They could go up very gradually in 2015, especially with the more restrictive policy of the US central bank next year. Credits twenty years could reach 3.5% end of 2015. The loan conditions are very favorable and have a good chance to deteriorate in the near future. The recovery rate of early mechanical cause a downward adjustment in property prices. This is not the minimal decrease in property prices for more than a year will offset the anticipated longer-term adjustment of these. Lower prices will be higher than the current benefit derived historically low borrowing rates.
5. The housing prices, adjusted for both the evolution of income and credit conditions, is now at the lowest since 1968.
Without being the lowest, the index of housing prices, adjusted for borrowing capacity, does not show, it is true, obvious signs of overheating. However, this assumes that the current credit conditions are normal, yet they are extremely favorable and may not be sustainable. If the duration of loans fell by five years and interest rates rise by 100 basis points (1%), one immediately surpasses the last two peaks borrowing capacity. The risk then is to give exposure to a sharp correction like the one we have known after 1988 peak year in price / borrowing capacity.