INSEE, the French statistical institute, has just released the real estate price index for the last quarter of 2013 (existing home index). With a decrease of -1.4% it is just a little below last year level. That’s what the first chart below shows. After a strong uptrend profile until 2006, the index dropped during the crisis. The question is to know if the price now is cheap or still expensive. I have looked at two simple measures to gauge the real estate price. We need comparison for that: a price by itself is meaningless.
Real Estate, CAC 40 (French Stock market index), Disposable Income and the Consumption Price Index
The chart below compares profile of the real estate price, the CAC 40 index, households’ disposable income and the consumption price index (CPI). The starting point is the first quarter of 1996 and the last is the fourth quarter of 2013 (except for the disposable income because the fourth quarter is not available yet).
This is the update of a post I did almost a year ago (you can find it here).
The main characteristics of my last year comments remain.
The real estate price is almost stable and does not present the volatility that can be observed on the stock market index. In other words, if the stock market price changes with economic conditions, this is not the case for the real estate price. Even with the strong increase seen in 2013 for the CAC 40, the housing price is still 23% above it at the end of 2013.(ratio of real estate price to stock index) (I had a remark last year as I didn’t integrate dividends. But I didn’t integrate rents on the housing price)
The nominal disposable income has a smooth profile with a change in trend at the beginning of the crisis (2008). It has not increase as rapidly as the real estate price. At the end of 2013 (third quarter) it is 49% below it. (ratio of real estate price to disposable income). This is very important. Income has grown less rapidly than housing price and for a buyer, specifically a first time buyer, real estate is very expensive. What we have to keep in mind here, is that this disposable income profile reflects the average profile. We know that there are huge differences depending on the age and on the household composition (this study from INSEE for 2003 gives some interesting figures on this heterogeneity here).
The consumption price index is just 29.7% above its 1996 level. The real estate price is 92% above the CPI. Over the period, real estate investment has had a very good real return
This advantage for the real estate investment and this lack of volatility come notably from the French government behavior in 2008. There was a real crisis on real estate in France (inventories at the end of 2008 were equivalent of 21 months of sales, more than what has been seen in the USA). The government has created some fiscal shelters for housing. Their consequences were to pool the price. Investors had an incentive to buy at any price. This latter was “erased” by the fiscal advantage. In other words, price was no longer a signal of dearness. The fiscal shelters are progressively reduced but there is no shock that can push the price down.
Comparison with the USA
One way to compare real estate prices at the international level is to calculate the ratio of housing price to disposable income. I did that for France and the USA. I have used the data I’ve shown for France. For the USA I have used the Case-Shiller index for 10 cities because the series is longer than the 20 cities index. Their behavior is not too different for the current purpose (see here a former post on US real estate price)
Before 2007 the two profiles follow the same trend. But after the beginning of the crisis, US prices dropped dramatically while French prices remained hooked at their high level. As I mentioned earlier, this index level cannot create incentives for French households to buy a house or an apartment. For American households, clearly there is an incentive. Real estate is cheap, back to the 2000 level, before the bubble. This is and will be a catalyst for the economic recovery. The Fed, by keeping interest rates as low as possible, has this in mind.
A rapid conclusion
Yes, real estate is expensive in France. The strong market before the 2007/2008 has not led to price adjustment when the crisis has started as it has been seen in the US but also in the United Kingdom, in Ireland, in Spain and other countries which have had a bubble.
The way real estate investment was funded, has changed. Loans’ maturities are longer now and interest rates are low. But this is just a way to accommodate for high price.
There is another issue that can explain high prices. Housing starts are low. The chart below shows housing starts since 1995. Except when real estate prices were increasing rapidly, housing starts are between 300 and 350 000 per year. This is clearly not sufficient while French population is increasing rapidly. Moreover, employment distribution is not homogeneous. Everyone wants to live where the labor market can have a strong momentum. This is the case for large towns like Paris, Lyon, Toulouse and few else. But in these towns, real estate price is already expensive with an important density of construction.
Real estate issues in France reflect the heterogeneity of regions’ development. But this goes far beyond the economy.