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Are French House Prices About to Start Falling

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French Property

Two French economists recently told the world that house prices in France are due to start falling – and will continue a gentle decline for the next decade.

Economists Jean-Luc Buchalet and Christophe Prat claim that the era of rising French house prices has come to an end, basing their claim on the idea that the most important single variable that affects house prices is household income. Until the 1990s, there was a strong link between French household income and house prices – about what you’d expect for a prosperous nation with a strong and tightly regulated housing market. But between 1998 and 2011, we saw something very different.

During that period, prices rose by an average of 161% across France – and by 278% in Paris. French household income rose by about 31% over the same period, meaning that the historic link between house prices and incomes was well and truly broken.

So how has this disparity come about? Essentially, through competition between French people who are spending money on credit. Where the London and new York markets are replete with foreign money, the French market is filled with borrowed money. Add in favourable conditions on loans, mortgages and other financial products and low interest rates, and you have the conditions for people to get while the getting was good. Interest rates have been low, banks have increased the duration of loans and the deposit required for a mortgage loan has fallen.

The authors break it down like this: 42% of the house price rise is down to increased mortgage capacity arising from low interest rates; 45% is down to increased mortgage terms; 35% is down to growth in household incomes, adding up to 122% and leaving 39% to be accounted for by fiscal incentives offered by successive governments to stimulate the housing market and encourage home ownership, and to some speculation amongst owners.

However, if this sounds like a house of cards, Messrs Buchalet and Prat say that’s because it is. They say the future holds tougher credit conditions, lower household income growth, changes ion France’s demographic profile, and a reduction in fiscal incentives.

Mortgage rates are expected to remain historically low for the foreseeable future – in many cases under 3%. However, the era of easy credit is thought by the authors to be at an end, pointing up banking reforms sweeping Europe and giving a nod to the signs that rates will increase towards the end of 2014 and into 2015. Banks have already begin to demand stricter evidence of employment, higher deposits and raised other barriers to cheap, easy credit, bolstering the economists’ case.

Lower household income growth is forecast based on high unemployment rates – about 10% for the foreseeable future and higher among the young – and falling or stagnating living standards.

Meanwhile, in common with much of the West, France is seeing a demographic shift, as older people over 60 come to predominate. As net sellers of property, this age group tends to depress prices. Household size is also expected to increase.

The final nail in the coffin of the French housing boom is the demise of government programs of fiscal incentives that, since the 1960s, have kept the French housing market on the up. These include incentives for construction; these incentives have ben slashed in recent years and are unlikely to be reinstated.

In fact, what is likely to happen is a correction, as French house prices fall to match french incomes. If you’re thinking of buying a French house, it might be best to wait.

Les Calvert is the owner and CEO of many internet property and travel related websites including this overseaspropertymall.comand he regularly writes news and articles for his websites, trade magazines and newspapers.