House prices in France are set to fall gradually for up to the next 10 years, according to two French economists.
In a recently published book that has attracted considerable interest in France, economists Jean-Luc Buchalet and Christophe Prat claim that the era of rising house prices in France is over.
The authors state that, over the long term, the single most important structural factor that determines house prices is the evolution in household incomes.
Until the late 1990s there was a strong correlation between the incomes and house prices in France. However, with the arrival of the new millennium that relationship snapped.
Between 1998 and 2011, house prices in France rose by an average of 161% (278% in Paris), considerably outstripping the growth of 31% in household incomes.
This gap between house prices and household incomes has only been managed by the growing indebtedness of households and favourable credit conditions.
In particular, interest rates have been low, banks have increased the duration of loans, and the level of the deposit required to obtain a mortgage loan has been reduced.
The authors claim that 42% of the growth in house prices can be explained by the increased mortgage capacity arising from low interest rates, that 45% is due to the increased term of mortgages, and 35% to the growth in household incomes, a total of 122%.
The balance of 39% corresponds to fiscal incentives offered by successive governments and by speculation about the rise in prices from existing owners.
These favourable credit conditions have also been assisted by demographic factors, with a growth in the population over the past forty years of 0.6% per year.
This growth has been accompanied by a population whose predominant age profile (20-59 years) has meant that they have had a propensity to be net buyers rather than sellers of property.
Winds of Change
These factors will no longer be present in the future due to:
i. A toughening in credit conditions - Although mortgage interest rates in France remain historically low (the best under 3%) the authors consider the era of easy credit will not continue, due in large measure to banking reforms introduced throughout Europe. There are already signs rates will increase towards the end of 2014 into 2015.
Banks already appear to be applying stricter rules on granting credit, with most now demanding a respectable deposit and evidence of good security of employment.
ii. Lower household income growth - Unemployment levels in France are likely to remain around 10% for the foreseable future, and there has been a stagnation, even reduction, in living standards.
iii. A changing demographic profile - Since 2005, there has been an increase in the percentage of older persons in the population, who, beyond the age of 60 years of age, become net sellers of property. As the number of sellers is greater than the number of buyers, this will lead to a dampening of house price growth.
The authors state that the explosion in the number of small households that also contributed to the demand for housing in the past will no longer be present, with projections showing the average household size increasing from 2.3 persons per household in 2009 to between 2.4 and 2.8 in 2030.
iv. A reduction in fiscal incentives - Since the 1960s the housing market in France has been substantially underpinned by a range of fiscal incentives, notably those relating to new construction. These incentives have been considerably reduced in recent years, and it is unlikely there will be new or improved fiscal relief.
Although the argument is regularly advanced in France that the price growth over the past 15 years has been due to a shortage of new build construction, this is not a viewpoint accepted by the authors.
They argue that between 1960 and 1990 the level of new homes built was in excess of the increase in the number of households and that since this time it has remained almost in line with household growth.
For Buchalet and Prat the problem is not a shortage of homes, but an inability by many households to obtain access to housing; a lack of creditworthiness, not a lack of construction.
Scale of Fall
The authors do not believe that under normal circumstances there will be a housing market crash in France, unlike in Spain or the USA.
One of the most important factors underpinning the relative stability of the market is the comparatively low level of indebtedness of French households, one of the lowest in Europe.
In addition, despite the relaxation in lending criteria, mortgage rules in France remain one of the strictest in Europe.
Accordingly, their forecast is for an 'inevitable' but gradual fall of between 20% to 35% over the next five to ten years, depending on the type of property and geographic area.
That translates to a fall in prices of between 3% to 5% a year, figures that have already started to manifest themselves across the country.
The thesis by Buchalet and Prat is not a new one, for the economist Jacques Friggit, based in the research department at the French Ministry of the Environment has been saying much the same thing for several years. Economists at Credit Agricole and HSBC have also lent their support to such an idea.
Perhaps one of the biggest problems with it is that it relies heavily on the official statistics in the movement of house prices, which, in our view, almost certainly under-estimates the fall in the price of rural properties in France that has taken place over the past five years.
Likewise, in measuring the dissonance between incomes and prices, there is an urban perspective about it all, drawing heavily on the 'average' figures from Paris and other major conurbations.
Within many rural areas of France a somewhat different picture emerges, for the disparities that the authors highlight is less prevalent.
That being the case, it is arguable that in some parts of the country, and for certain types of property, the forecast of the economists may well be a little out of date, for a substantial correction seems to have already taken place.
As we have said many times in these pages, like most other countries, France is a country of micro-markets, where few generalisations apply.