Home Prices in France Over the Long Run - CGEDD

 
Home Prices
                    in France
                Over the Long Run

Jacques Friggit, CGEDD, French Ministry in charge of Housing. Presentation, June, 2012.
The analyses and points of view expressed are the author’s, and, in particular, not necessarily CGEDD’s or the
government’s.
http://www.cgedd.developpement-durable.gouv.fr/rubrique.php3?id_rubrique=137                                     1
Preliminary
•    « CGEDD » = “Conseil général de l’environnement et du
     développement durable” = internal audit and prospective
     department common to the ministries in charge of the
     environment, sustainable development, energy,
     transportation, etc. and housing
•    Accent on long term perspective
•    Various papers, presentations, data series, sources, monthly
     updates may be downloaded on
http://www.cgedd.developpement-durable.gouv.fr/rubrique.php3?id_rubrique=137

                                                                               2
PLAN
1. Home prices in France, a Historical
   perspective
2. Comparison with Other Assets
3. Several Important Properties of Home Prices
4. How can we Explain the 2000-2010 Rise?
5. Home Price Prospective

                                                 3
Home price indices in Paris since 1200
  10
                                                                                                                  WW I and II
                Home price indices in Paris since 1200                                                           Rent controls
                                                                                                                   Inflation
                         Constant currency
                            Basis 2000=1
   1

   1200             1300             1400             1500             1600             1700   1800           1900           2000

                             1348
                          Great Plague
                                                                                                               Division
  0,1                                                                                                           by 15
                                                      Slope +0,6% per year
                                                    on average over 800 years
                                  100 year war         Little significance

 0,01               Division
                     by 4

                                                         Centre of Paris 1200-1790
                                                         Centre of Paris 1790-1850 before adjustment for obsolescence
                                                         Paris 1840-2009 before adjustment for obsolescence
                                                         Paris 1840-2009 after adjustment for obsolescence
0,001
Source: CGEDD after d’Avenel, Duon, INSEE, indices Notaires-INSEE and notaries’ databases                                           4
1840-2011: the 1914-1965 depression
     10
                                        Home price indices, France and Paris
                                          Constant currency, basis 2000=1
                                               France                                          Rent controls
                                                                                                                           Exit from
                                                                                                                             rent
                                               Paris                                            + inflation
                                                                                                                           controls

       1                                                1870                          1914
                                                                                                     1930-35
                                                                                                    « refuge » 1948                1965
                                                       defeat
       1800                               1850                              1900                      out of      1950                         2000
                                                                                                      stocks 1940-44
                                                                                                              « refuge »
                                                                                                                against
                                                                                                               inflation

    0,1

                                                        1840-1914                                 1914-1965                               1965-2011
  0,01                                                                                                                                                5
Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Duon, Toutain and Villa (CEPII).
What are we talking about?
                                           Beware quality/structural effects!
               Disposable income per household       (average value, stock)
               Existing-home price index, France      (index, flow)
               Housing expense per household (from National accounts)(average value, stock)          3.12
               Rent index, France (index, stock)
    3          Construction cost index (index, flow)                                                 3.08

        Constant currency, basis 1965=1

    2

                                                                                                     1.68

                                                                                                     1.44

    1                                                                                                1.04

    0
    1960         1965         1970         1975     1980   1985   1990   1995   2000   2005   2010      2015
Source: CGEDD after INSEE and notaries’ databases                                                              6
Example of quality effect: surface
                                                                                                                    Nb de
                                                                                                                    Nbr of personnes
                                                                                                                           persons
Surface                      Surfaceper
                            Surface  pardwelling,
                                         logement,  nombreofde
                                                   number       personnes
                                                              persons per par logement
                                                                          dwelling                                    par logement
                                                                                                                    per dwelling
100                                            et surface par personne
                            and surface per person                                                                                5,0
                                                                                                                   92
                                                                                                      90
                                                                                         89
                                                                                87
 90                                                                85                                                             4,5
                                                          83
                                             79
 80                                                                                                                               4,0
                                73
                                                          Surface
                                                          Surfacepar
                                                                  perlogement
                                                                       dwelling (m²)
                                                                                 (m²)
                      70
 70                                                       Surface
                                                          Surfacepar
                                                                  perpersonne   (m²)
                                                                       person (m²)                                                3,5
                      3,1                                 Numberde
                                                          Nombre  of personnes
                                                                     persons per  pardwelling
                                                                                      logement(right scale)
                                                                                                 (échelle de droite)
                               2,9
 60                                          2,8                                                                                  3,0
                                                          2,7      2,6
                                                                                2,5     2,5
                                                                                                     2,4
 50                                                                                                                2,3            2,5

 40                                                                                                                               2,0
                                                                                                                   40
                                                                                                      38
                                                                                         36
 30                                                                33
                                                                                34                                                1,5
                                                          31
                                             28
                                25
 20                   23                                                                                                          1,0

 10                                                                                                                               0,5

   0                                                                                                                              0,0
   1965             1970              1975         1980    1985          1990         1995    2000            2005             2010
                                                                                                  Year of the housing survey
Source: CGEDD after housing surveys                                                                                                 7
Stability from 1965 to 2000 then take off of
       the home price index relative to income per
                         household
   2

 1,9
                         Home price index
 1,8      relative to disposable income per household
                              France, basis 1965=1
 1,7

                      Home price index relative to disposable income per
 1,6
                      household, basis 1965=1
                      Auxtunnel 0
 1,5

 1,4

 1,3

 1,2

 1,1

                         Tunnel
   1

 0,9

 0,8

 1/1 1965        1/1 1970       1/1 1975       1/1 1980       1/1 1985    1/1 1990   1/1 1995   1/1 2000   1/1 2005   1/1 2010   1/1 2015   1/1 2020
Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE indices.                                                                                8
Local differentiation
2,6
                                                                                                                                     2.54 (Paris, Q1 12)
2,5

2,4                                                                                             France
                                    Home price index
                                                                                                Paris
2,3                                                                                             Region of Paris
         relative to disposable income per household                                            Province
2,2

2,1
       Differentiation Paris / Region of Paris / Province                                                                            2.14 (Paris Region, Q1 12)
                                              Base 1965=1
  2

1,9

1,8                                                                                                                                   1.83 (France, Q1 12)
       NB: the divider of all four ratios is the disposable
1,7    income per household over all of France                                                                                       1.69 (Province, Q1 12)

1,6                                                                                   Exception = « crisis »

1,5

1,4

1,3

1,2

1,1
                                 Tunnel
  1

0,9

0,8

0,7
1/1 1965        1/1 1970          1/1 1975          1/1 1980   1/1 1985   1/1 1990   1/1 1995   1/1 2000       1/1 2005   1/1 2010    1/1 2015         1/1 2020

Source: CGEDD after INSEE, notaires’databases, Notaires-INSEE indices.                                                                                            9
2000-2010: heterogeneity of home price
        growth in the various « departments »
The extremes (growth from 2000 to 2010 in the existing-home price indices):
•The 3 smallest increases: Territoire de Belfort: +59%; Haut-Rhin (deptt of
Colmar): +64%, Moselle +70%
•The 3 biggest increases: Bouches-du-Rhône (=departt of Marseilles), Paris,
Alpes-Maritimes (departt of Nice): (in a draw) +138%
•(France: + 107%)
(Source: Notaires-INSEE indices and Perval)

 Higher 2000-2010 growth if:
 -More secondary residences
 -More private rented principal residences
 -Fewer owner-occupied principal residences
 -Lower construction rate (elasticity ~ -1 or -2)                                                                     2010 home price index
 -Higher population growth (elasticity ~ 1 or 2)                                                                      Variation
                                                                                                                      Basis 2000=1totale
                                                                                                                         1,056 à 1,381 (30)
 -Higher income growth (elasticity ~ 1)                                                                                  0,906 à 1,056 (32)
 -Lower unemployment growth                                                                                              0,587 à 0,906 (32)

 -Results not robust with respect to the period studied
 Details in the paper:
 http://www.cgedd.developpement-durable.gouv.fr/IMG/pdf/difference-variation-prix-immobilier-par-departement_cle76a2da.pdf
                                                                                                                                              10
2000-2010: inversion of apartments /
          indiv. houses differentiation
Relative to indiv. houses,                                                   1,3

                                                                                        Apartment price index
apartments have:                                                           1,25              relative to
                                                                                     detached house price index
                                                                                          Basis Q4 2000=1
•appreciated from 1950 to                                                    1,2
                                                                                           Region of Paris minus Paris

1965 (exit from rent controls, which                                       1,15
                                                                                           Province

• had impacted apartments more than individual houses         )
•depreciated from 1965 to                                                    1,1

2000 (while occupants were                                                 1,05
getting poorer)
•appreciated from 2001                                                           1
(while occupants went on getting
poorer)                                                                    0,95
                                                                             1/1 1995    1/1 2000       1/1 2005         1/1 2010   1/1 2015

                                 Source: CGEDD d’après indices Notaires-INSEE.                                                             11
International comparison (1)
                                  France, USA and UK:
                        similar long run trends over 1965-2000
         2

                   International comparison:
                  home price index relative to                                               France
                                                                                             USA (FHFA)
               disposable income per household                                               USA (S&P/C-S)
                                                                                             UK (DCLG)
                         Basis 2000=1                                                        UK (Halifax)
                                                                                             Aux 0,9
       1,5

        1,1

         1

        0,9

       0,5
        1/1 1965      1/1 1970      1/1 1975      1/1 1980      1/1 1985      1/1 1990      1/1 1995      1/1 2000      1/1 2005     1/1 2010      1/1 2015   1/1 2020
Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Freddie Mac, FHFA, R.Shiller, US Bureau of Economic Analysis, Census Bureau,
UK DCLG, UK National Statistics, Halifax                                                                                                                                 12
International comparison (2)
                                       Diversity since 1995
                            Home price indices
             relative to disposable income per household
                        International comparaison
                              Basis 2000=1
 1,5                                                                                                      France
                                                                                                          USA
                                                                                                          UK
                                                                                                          Germany
                                                                                                          Spain
                                                                                                          Netherlands

    1

 0,5
     1965             1970             1975             1980             1985             1990            1995             2000             2005          2010   2015
Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Freddie Mac, FHFA, R.Shiller, US Bureau of Economic Analysis, Census Bureau,
UK DCLG, UK National Statistics, Destatis, Gewos, Central Bureau voor de Statistiek, Instituto Nacional de Estadística, R. Vergès.                                  13
International comparaison (3)
                                        France-Germany:
Relative to income per household, from 2000 to 2010,
• home price indices diverge
• but rent indices remain flat in both countries
      (impact of German households’ very high long term debt in 2000)
                                 Home sale price                                                                                   Rents
                                      (existing-home price index)                                          ( « rent » component of the consumer price index)
      1,8                                                                                     1,8
                     Home price index
      1,7   relative to income per household                                                  1,7
                                                                                                                   Rent indices
              Comparison France-Germany                                                                relative to income per household
      1,6              Basis 2000=1                                                           1,6        Comparison France-Germany
                                                                                                                  Basis 2000=1
      1,5                                                                                     1,5
                            France
      1,4                                                                                     1,4              France
                            Germany
      1,3                                                                                     1,3              Germany
      1,2                                                                                     1,2

      1,1                                                                                     1,1

        1                                                                                      1

      0,9                                                                                     0,9

      0,8                                                                                     0,8
        1990              1995             2000             2005              2010              1990        1995            2000             2005              2010

Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Destatis, Gewos.                                                                           14
2000-2010: rental return (=rent / price)
 1,8
                   collapses
                                Home price index and rent index
 1,7                     relative to disposable income per household
                                      France, basis 2000=1
 1,6

                                              Home price index relative to disposable
 1,5
                                              income per household, basis 2000=1                          NB1: the rent index and the price
                                              Rent index relative to disposable
                                                                                                          index have different perimeters =>
                                              income per household, basis 2000=1
                                              Auxtunnel 0                                                 bias => dividing the former by the
 1,4                                                                                                      latter does not provide an index of
                                                                                                          gross rental income.
                                                                                                          NB2: the «income per household»
 1,3                                                                                                      used as divider relates is that of all
                                                                                                          households, whether tenants or
                                                                                                          owner-occupier.      Tenants’ income
 1,2
                                                                                                          grows slower than owner-occupiers’
                                                                                                          (by ~1% per year).
 1,1
                                                                                                          NB3: depends on location
                                                                                                          NB4: many structure effects

   1

 0,9

 0,8
 1/1 1965     1/1 1970     1/1 1975     1/1 1980     1/1 1985     1/1 1990   1/1 1995   1/1 2000   1/1 2005   1/1 2010   1/1 2015   1/1 2020

Source: CGEDD after INSEE, Notaires-INSEE indices and notaries’ databases                                                                          15
Resilience of the 6% gross rental return
• In 1900-1910:
   –   inflation +0,3%/year,
   –   income per household +1,6%/year,
   –   Paris home price indexs +1,1%/year,
   –   Gov’t debt interest rate 3,1%/year
• The gross rent of the (residential) properties purchased by
  La Fourmi Immobilière (a property company) (from 1899 to
  1913) was worth 6 to 7% of their price (quoted by F. Simmonet,
  « La Fourmi Immobilière »).
• « The average gross rental return in Paris would be 6,36%
  (from 5,13% in the 16th arrondissement to 7,76% in the 20th
  arrondissement) », of which 33% expenses must be
  substracted (P. Leroy-Beaulieu, « L’art de placer et gérer sa
  fortune », 1906).
• 6% gross rental return        « a residential building is worth
  200 monthly rents »                                               16
•Which rates (nominal, or net of past
    Interest rates are at a
                                                                                        inflation, or net of expected inflation)?
        historical low
   …but their decrease had                                                              •Low with respect to which reference?
 begun much earlier than 2000                                                                                   Average 1965-
                                                                                                                    2000
                                                                                                                                       2000   2008     Fin 2010

    20%
                                                                                          Interest rate              9,2%          5,5%       4,3%      2,8%

                                                                                             Inflation               5,6%          1,7%       2,8%      1,6%

                                                                                          Interest rate              3,6%          3,8%       1,5%      1,2%
                                                                                         minus inflation
    15%

                                                                                         Long Term Interest Rate and Inflation

                                                                                                               Interest rate
    10%                                                                                                        Inflation
                                                                                                               Interest rate minus inflation

      5%

      0%
         1/1 1965         1/1 1970          1/1 1975   1/1 1980   1/1 1985   1/1 1990   1/1 1995    1/1 2000     1/1 2005   1/1 2010     1/1 2015    1/1 2020

     -5%                                                                                                                                                          17
Source: CGEDD after Ixis, Banque de France and INSEE
2000-2010: increase of mortgage initial length
     25
                                                          Mortgage initial length
                                            Purchase of a principal home by an owner-occupier
                                                                  (years)
     20

     15

     10                                                           Ancien

                                                                  Neuf
       5

       0
       1965                  1970                1975      1980      1985   1990   1995   2000   2005   2010   2015
Source: CGEDD after housing surveys before 2005 then OFL                                                              18
« Affordability », « property purchasing power », etc.
            indices: what are we talking about?
•       Which period? (ex: 2000-2010 or 1990-2010 or 1965-2010)
•       Which area? (ex: Paris or France)
•       Which price? (« constant quality » index or average price? new or existing?)
•       Which income? (buyers’? borrowers’? all households’? « disposable » or net
        taxable or gross taxable income?)
•       Which financing conditions?
    –      Which interest rate? (several series, more or less consistent and continuous
           and reliable; what with adjustable rates, capped adjustable rates?)
    –      From 1973 to 1985, how do we factor in inflation, progressive monthly
           payments?
    –      How do we take into account changes in mortgage length?
    –      How do we take into account changes in downpayment?
•       Other variables: transaction costs, interaction with the gov’t (subsidies
        and taxes)
•       Other points of view: purchasing power in rent years??
                                                                                          19
Example: impact on « affordability » of nominal /
 ‘real’(=net of inflation) interest rate, and of mortgage length
      1,6
                                                                                Affordability index: comparison
                                                                         constant (15 years) and actual mortgage length
                                                                           nominal or 'real' (=net of inflation) interest rate
      1,5
                                                                                      France, basis 2000=1
                                                                                            Affordability at nominal interest rate, constant (15 years) mortgage length
      1,4                                                  Constant mortgage length
                                                                                            Affordability at 'real' interest rate, constant (15 years) mortgage length

                                                            Actual mortgage length (=       Affordability at nominal interest rate, actual mortgage length
      1,3
                                                           "forgetting" households will
                                                           have to pay for more years)      Affordability at 'real' interest rate, actual mortgage length

      1,2

      1,1

       1

      0,9

      0,8

                                     High inflation
      0,7
        1965           1970          1975           1980             1985            1990         1995              2000             2005             2010           2015
Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Banque de France, Ixis, housing surveys, OFL.                                                    20
2000-2010: decrease in the
                              affordability index
                     at nominal and ‘real’ interest rate
         1,5

         1,4                                                                                      Affordability index
                                                                                                          Basis 1965=1

         1,3

         1,2

         1,1

           1

         0,9

         0,8
                       Affordability index at nominal interest rate
                       Affordability index at 'real' interest rate
         0,7           Auxtunnel 1

         0,6
          1/1 1965      1/1 1970     1/1 1975      1/1 1980      1/1 1985      1/1 1990        1/1 1995    1/1 2000      1/1 2005   1/1 2010   1/1 2015   1/1 2020

Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Banque de France.                                                                         21
2000-2010: increase in the mortgage
     length necessary to purchase the same
       dwelling everything else being equal
             Mortgage length to purchase the same existing dwelling with the same deposit to
45 years            income and initial payment to income ratios, basis 1965=15 years

40 years

35 years                                                                                                                                   34,9, Q1 2012

30 years

25 years

20 years

15 years

10 years                                                                            Mortgage length 'at nominal interest rate'

                                                                                    Mortgage length 'at real interest rate'
 5 years

 0 years
       1/1 1965       1/1 1970      1/1 1975       1/1 1980       1/1 1985      1/1 1990       1/1 1995   1/1 2000   1/1 2005   1/1 2010     1/1 2015      1/1 2020

Source: CGEDD after INSEE, notaries’ databases, Notaires-INSEE SA indices, Banque de France.                                                                      22
2000-2010: New versus existing-home price

•The average price has grown faster for existing homes
than for new homes
•We have no price index (i.e. at constant quality) for new
homes for now (maybe it’s going to change: INSEE is working on it) so
we don’t know whether a new-home index would grow
faster or slower than the existing-home price index

                                                                        23
2000-2010: the number of existing-home sales has
                           remained quite constant
          Cumul.                                                                                                                                                          Cumul.
      last 12 months                                                                                                                                                   last 3 months
    1 200 000                                                                                                                                            1 178 000           300 000
                                                                                                                                                          (Apr. 12)
                                   Number of property sales
                            taxed at the regular transaction tax rate
    1 000 000                               France                                                                                                           All types of    250 000
                                                                                                                                                             property

                                                                                                                                                         818 000
      800 000                                                                                                                                            (Mar. 12)           200 000

                                                                                                                                                          Of which
      600 000                                                                                                                                             existing-homes     150 000

                                                                                       Number of property sales taxed at the
      400 000                                                                          regular transaction tax rate, all types of                                            100 000
                                                                                       property: existing-homes, existing              Of which existing-homes
                                                                                       commercial property and VAT-exempt land

                                                          (Left scale)                       Cumul. last 12 months                   Cumul last 12 months
      200 000                                                                                                                                                                50 000
                                                          (Right scale)                      Cumul. last 3 months (deseasonalized)   Cumul. last 3 months (deseasonalized)

               0                                                                                                                                                             0
             12/ 1990                             12/ 1995                              12/ 2000                    12/ 2005               12/ 2010                     12/ 2015

Source: CGEDD after CGDD/SOeS(Existan), DGFiP (MEDOC and Fidji), notaries’ databases                                                                                                   24
2000-2010: construction of new dwellings:
                              no excesses
                                                               Construction of dwellings
500 000                                                 and change in the number of households

400 000
                                                                                                              Apr. 2012
                                                                                                               376 731

300 000
                                                                                                              Series change
                                                                                                              in January 2011

200 000

                                          Number of ordinary dwellings started, cumulated on last 12 months
100 000
                                          12 month change in the number of households

                                                                                                     Metropolitan France
         0
       1/1 1950                1/1 1960      1/1 1970      1/1 1980      1/1 1990       1/1 2000   1/1 2010             1/1 2020

Source: CGEDD after CGDD/SOeS and INSEE                                                                                            25
Sales of new dwellings by developers                                              (NB: only 1/3 of new dwellings)

              Quarterly # of
                                        Quarterly number of dwellings sold by developers
               dwellings

        40 000

                      Put on sale
                      Sold
        30 000

        20 000

        10 000

              0
            déc-80          déc-85     déc-90   déc-95   déc-00    déc-05    déc-10        déc-15
Source: CGEDD after CGDD/SOeS (ECLN)                                                                                 26
Developers’ inventory: reasonable but picking up
                                                Developers' inventory in months of sales
    25 # of months of sales

                     Total inventory
                     Of which under construction or completed
    20               Of which completed

    15

    10

      5

      0
      déc-80          déc-85           déc-90   déc-95    déc-00    déc-05    déc-10       déc-15
Source: CGEDD after CGDD/SOeS (ECLN)                                                                27
2000-2010: increase in the amount of
                  property sales relative to GDP
                                                                                                                                                                 Apr. 2012: 14.2%
  14%                                                                         Total amount
                                                                            of property sales
  12%
                                                                    as a % of gross domestic product
                                                                                  sales of any type of property
                                                                     (residential and commercial, old and new, incl. land)
                                 1844
                                                                     subject to transaction tax, cumulated on 12 months
                                                                                                                                                 1990
                                                                                                                                                                 Apr. 2012: 10.2%
  10%                                                        1881
                                                                      Total
                                               1853                   Of w hich taxed at the current regular rate and antecedent rates
                                                                      Of w hich existing homes
                                                                      Auxabscisse
                                                                                                                                                                 Apr. 2012: 8.1%
   8%                    1831

                                                                                                                                   1980

   6%                                   1848
                                                                                                                                                        1995

                                                      1871                                                                                1984

   4%

   2%

                                                                                                            1948

   0%                                                                              1915
         1/1                         1/1                               1/1                                  1/1                                            1/1                       1/1
        1800                        1850                              1900                                 1950                                           2000                      2050

Source: CGEDD after DGFiP, INSEE and Toutain                                                                                                                                               28
2000-2010: households’ outstanding mortgage
       debt doubles with respect to their income
      mortgages

                                                                            Mortgage debt
                                                                             outstanding
                            Households' new mortgages
        New

                          and mortgage debt outstanding
                  as a % of households' gross disposable income
     14%                                                                  70%
                                                                Apr. 12
                                                                 64%
     12%                                                                  60%

     10%                                                                  50%

      8%                                                                  40%

      6%                                                                  30%

      4%                                                                  20%

      2%                                                                  10%
                            New mortgages (12-month cum.)
                            Mortgage debt outstanding (right scale)
      0%                                                                  0%
               1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1
              1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: CGEDD after Banque de France and INSEE                                              29
2000-2010: households’ outstanding
     mortgage debt – international comparison
     140%                                      Households' outstanding mortgage debt
                                               as a % of households'disposable income
     120%

                                           France
     100%                                  USA
                                           UK
                                           Germany
       80%

       60%

       40%

       20%

         0%
            1970             1975            1980             1985        1990   1995   2000   2005   2010   2015
Source: CGEDD after natioanl institutes of statistics and central banks                                             30
Consequences of the increase of
      home prices 2000-2010 (1)
•Increase in incomes indexed on home prices (realtors, notaries,
etc.) and in departments’ receipts in transactions taxes
•Wealth creation for owners (but almost no « equity withdrawals » in France)
•Compared to 2000, cash transfer
    •From net buyers to net sellers
    •From (not too) poor to rich
    •From younger than 56 years to older than 56 years

                                                                               31
Net buyers and net sellers:
                               the 56 year threshold
                   Number of dwellings bought or built, or sold,                                         Dwellings bought or built
                                                                                                         Dwellings sold
                      as a % of the number of households                                                 Balance bought or built minus sold600 000
   15%
                     as a function of age of the householder                                             Number of households (right-hand scale)
                                    Year 2006
          %                                                                                                                                        500 000
                                                                                       Effect of the
   of the number                                                                       baby-boom                                                Number
   of households                                                                                                                             of households

   10%                                                                                                                                             400 000

                                                                                                                                                   300 000

                                                                      56 years
     5%                                                                                                                                            200 000

                                                                                                                                                   100 000

     0%                                                                                                                                            0
                                                                                                                              Age of the householder
          20               30              40               50                   60             70            80              90               100

                                                                                                                                                   -100 000
                       Average age of age brackets which are                          Average age of age brackets which are
                                net buyers: 34 years                                           net sellers: 74 years

    -5%                                                                                                                                            -200 000
Source: CGEDD after DGFiP, SOeS, notaries’ databases, EPTB, Filocom                                                                                           32
Consequences of the increase of
      home prices 2000-2010 (2)
•Injection of the cash provided by increased mortgages
(cumulated over 2000-2010: 15 to 20% of GDP) into
   •(a little) construction
   •(a little) financial savings
   •(mostly) consumption => GDP growth, households’ income, increase in tax
   receipts, increase in trade deficit – no gain in competitivity
•Future increase in cash disbursements by borrowers (because of
increased mortgage length)
•Buyers increased their debt to purchase an asset
   •which does not provide any additional income (non productive asset)
   •the price of which is higher today but will (as we argue thereafter) revert to its past
   trend level with respect to income per household
                                                                                          33
PLAN
1. Home prices in France, a Historical
   perspective
2. Comparison with Other Assets
3. Several Important Properties of Home Prices
4. How can we Explain the 2000-2010 Rise?
5. Home Price Prospective

                                                 34
Price of gold net of inflation:
 100
                               constant in the long run
                                                  Gold price index, constant currency
                                                              basis 2000=1

                                       in constant French currency

                                       In constant $

                                       In constant £
   10

     1

    1800                              1850                              1900        1950   2000

  0,1
Source: CGEDD after INSEE, Banque de France, World Gold Council, (Officer, 2002).                 35
Fixed income:
      long term interest rate = inflation + 3% + wide fluctuations
       30%
                                           Long term interest rates net of inflation
       20%

       10%

         0%

            1800                              1850                             1900                              1950                        2000
      -10%

      -20%                                                                                                                                 France
                                                                                                                                           USA
      -30%                                                                                                                                 UK

      -40%

      -50%

      -60%

Source: CGEDD after Vaslin, Loutchitch, Ixis, Chabert, Lévy-Leboyer, Homer & Sylla, national institutes of statistics and central banks.            36
Stocks have been providing a 6.6% trend total return
    above inflation over two centuries (except catastrophic wars)
         10

                           Value of an investment in
          1
                         US, French and British stocks,
                            constant local currency,
                      dividends reinvested, basis 2000=1
         0,1

       0,01

            Tunnel
       Slope =+6,6% /an
      0,001

                                        y = 9E-58e 0,0654x
                                          R2 = 0,9944                                               US stocks
     0,0001
                                                                                                    French stocks
                                                                                                    British stocks
    0,00001
                                                                                                    Trend of US stocks, constant $

                                                  Tunnel                          (« Siegel’s tunnel »)
   0,000001                                  Slope =+6,6% /an                      (« Siegel’s constant »)
          1800                                1850                            1900                             1950                              2000
Source: CGEDD after (Arbulu 1998), SGF, Euronext, (Chabert, 1949), (Lévy-Leboyer & Bourguignon, 1985), INSEE, (Schwert 1990), (Shiller 2000), S&P, STAT-USA,
US Bureau of Labor, (Dimson, Marsh & Staunton, 2001), UK Office of National Statistics                                                                         37
Value of an investment in stocks (dividends reinvested)
          relative to long term trend
         1000                          Value of investments in
                                    US, French and British stocks                                                               US stocks
                                relative to US stocks long term trend
                                                                                                                                French stocks
          100
Tunnel                                                                                                                          British stocks

             10

         2

Tunnel         1

         0,5
                                                     Distribution:
                                                     -bimodal (?)
                                                     -Standar deviation slightly (and less and less) growing
(« mean reversion »)                                 - platikurtic

           0,1

             1800                           1850                                     1900                      1950                            2000
 Source: CGEDD after (Arbulu 1998), SGF, Euronext, (Chabert, 1949), (Lévy-Leboyer & Bourguignon, 1985), INSEE, (Schwert 1990), (Shiller 2000), S&P, STAT-USA, US
 Bureau of Labor, (Dimson, Marsh & Staunton, 2001), UK Office of National Statistics                                                                               38
Value of an investment (total return: dividends reinvested),
   French
   1000
           stocks relative to US stocks (both in constant local currencies)
                    Value of an investment in French stocks, div. reinv'd, constant French currency
                       _____________________________________________________________
                         Value of an investment in US stocks, dividends reinvested, constant $

    100

                                                                                                                                Basis: average 1965-2005=1

     10

      1
        01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/  01/
       3800 3810 3820 3830 3840 3850 3860 3870 3880 3890 3900 3910 3920 3930 3940 3950 3960 3970 3980 3990 4000 4010 4020

                                                                                                                                            Date + 2000 years

    0,1
Source: CGEDD after (Arbulu 1998), SGF, Euronext, (Chabert, 1949), (Lévy-Leboyer & Bourguignon, 1985), INSEE, (Schwert 1990), (Shiller 2000), S&P, STAT-USA,
US Bureau of Labor                                                                                                                                              39
Other yardsticks for stocks

• Price/earnings ratios [which earnings: past (over
  which duration)? future (over which duration)?]
• Price / dividends ratio [which dividends? past (over
  which duration)? future (over which duration)?]
• If the ratio departs from its long terme average, will
  it revert to it by the numerator, the denominator or
  both?

                                                           40
Which yardstick: « Siegel’s tunnel » or PER (earnings smoothed
        over 10 years)? They have been diverging since the 1990’s
3
                 Comparison                                      (1) Total return index / Siegel's long term trend
                                                                 (2) Shiller's 10 year adjusted PER / 15
             Total return LT trend                               (2) / (1)
                    versus                                       0,5
                                                                                               Sep.                                    Dec.
                adjusted PER                                                                   1929                                    1999
2                   End-of-month values, USA
                                                                 Jun.
      Nov.                    Jun.                               1881
      1802                    1835
                                             Dec.
                                             1852                                                     Feb.
                                                                                                      1937

                                                                                   Nov.                                         Aug.
                                                                                   1916                                         1987

1

0,9

0,8

0,7
                                                               Jun.
0,6          Dec.                                              1877
             1814                    Mar.
                                     1842
                                                                                                                    Jun.
0,5                                                                                                                 1949
                                                                                                             Apr.
                                                   Oct. 1857                                                                                  Feb. 2009
                                                                                                             1942
                                                                                   Dec. 1920                               Aug. 1982
0,4                                                                                              Jun.
                                                                                                 1932

  1/1                                        1/1                           1/1                                       1/1                1/1
 1800                                       1850                          1900                                      1950               2000

Source: CGEDD after (Schwert 1990), (Shiller 2000), S&P, STAT-USA, US Bureau of Labor                                                                     41
Value of various investments                                                                                              (yearly returns reinvested)

  1E+02                     Value of various investments, French constant currency,
                                                  basis 2000=1
  1E+01

  1E+00
       1800                               1850                               1900                               1950                               2000

  1E-01

  1E-02

  1E-03                                                                                            1914-1965
                                                                                             Gold
  1E-04                                                                                      Money market
                                                                                             Bonds
  1E-05                                                                                      French stocks
                                                                                             US stocks
  1E-06                                                                                      Rented residential property in Paris
Source: Source: CGEDD after Arbulu, Euronext, Vaslin, Loutchitch, Ixis, Banque de France, ECB, notaries’ databases, Notaires-INSEE indices, Duon, INSEE, Schwert,
Shiller, S&P, World Gold Council, Officer.                                                                                                                          42
Trend total return of an investment in
          housing on the basis of 1965- 2000
                                               Somewhat too high?
•(a) Capital gain:
GDP growth                                       inflation + 2,5%
Households’ disposable income growth       idem: inflation + 2,5%
Minus growth in the number of households                    - 1,2%
Equals: growth in income per household           inflation + 1,3%
Capital gain                       idem: inflation + 1,3%
•(b) Net rental income:
Gross rental income                                      6,0%
Minus expenses 37% (incl. heavy repairs)                - 2,2%
Minus purchase expenses (11%) depreciated over 20 years - 0,5%
Equals: net rental income                                   3,3%

•Total return = (a)+(b)                    inflation + 4,6%
                                                                    43
100%
                 Return X volatility: 1840-1914
             5 year return                                                                                                  1840-1914
               volatility
  80%

  60%
                 Inflation

  40%

                                                         US stocks

                                                 French stocks (ASIS)
  20%
               French bonds                    Housing Paris
                                        Fr. stocks (LB, dep. 1854)

                                    French money market                                                                          Yearly return
    0%         Gold

          0%                            5%                            10%                           15%                            20%                           25%
Source: CGEDD after Arbulu, Le Bris & Hautcoeur, Euronext, Vaslin, Loutchitch, Ixis, Banque de France, ECB, notaries’ databases, Notaires-INSEE indices, Duon,
INSEE, Schwert, Shiller, S&P, World Gold Council, Officer. NB : ASIS = Arbulu-SGF-INSEE-SBF250 series. LB = Le Bris series                                         44
100%
                 Return X volatility: 1914-1965
             5 year return                                                         Gold
                                                                                                                           1914-1965
               volatility
  80%

                                                                                                                                              US stocks

  60%
                  French stocks (LB)                                                            French stocks (ASIS)

  40%                                                                                                       Housing Paris

  20%                                                                               Inflation
                                             French bonds

                                   French money market                                                                           Yearly return
    0%
          0%                            5%                           10%                              15%                         20%                           25%
Source: CGEDD after Arbulu, Le Bris & Hautcoeur, Euronext, Vaslin, Loutchitch, Ixis, Banque de France, ECB, notaries’ databases, Notaires-INSEE indices, Duon, INSEE,
Schwert, Shiller, S&P, World Gold Council, Officer. NB : ASIS = Arbulu-SGF-INSEE-SBF250 series. LB = Le Bris series                                                     45
100%
                 Return X volatility: 1965-2011
             5 year return                                                                                                 1965-2011
               volatility
  80%

  60%
                                                              Gold

                                                                        US stocks

                              French stocks (LB)                        French stocks (ASIS)
  40%

                                                                                 Housing Paris

  20%                                                             French bonds
                                           Inflation

                                                        French money market

                                                                                                                                 Yearly return
    0%
          0%                            5%                           10%                            15%                           20%                           25%
Source: CGEDD after Arbulu, Le Bris & Hautcoeur, Euronext, Vaslin, Loutchitch, Ixis, Banque de France, ECB, notaries’ databases, Notaires-INSEE indices, Duon, INSEE,
Schwert, Shiller, S&P, World Gold Council, Officer. NB : ASIS = Arbulu-SGF-INSEE-SBF250 series. LB = Le Bris series                                                     46
Trend return X volatility
100%

          5 year return                                                                                              Trend
            volatility
80%                                                                                       (assumption: inflation 2%)

                                                                                               (return , volatility)
60%
                                                                  US stocks (Inflation+6,6% , 50%)
                        Gold?? (Inflatn+0,0%, ?)
                        Inflation

40%                                                               French stocks (Inflation+6,6% , 42%)

                                                     Housing Paris          (Inflation+4,6% , 28%) (NB: without leverage)

20%                                        French Bonds (Inflation+3,0% , 20%) (NB: not protected against unexpected inflation

                                      French money market (Inflation+2,0% , 8%)
                                                                                                                               Yearly return
  0%
       0%                             5%                           10%                            15%                            20%                           25%
Source: CGEDD after Arbulu, Euronext, Vaslin, Loutchitch, Ixis, Banque de France, ECB, notaries’ databases, Notaires-INSEE indices, Duon, INSEE, Schwert, Shiller,
S&P, World Gold Council, Officer.                                                                                                                                    47
Other aspects of investing
•Leverage
•Management costs and transaction costs
•Taxes
•Risks other than price volatility
(valued differently depending on the investor)

•Diversifying power

                                                 48
Now
Relative to their respective long term
trend,
- stock prices are low(*)
- gold, bonds(**) and housing prices are
high

(*) although a decrease is possible in the short term
(**) except sustained very low inflation
                                                        49
PLAN
1. Home prices in France, a Historical
   perspective
2. Comparison with Other Assets
3. Several Important Properties of Home Prices
4. How can we Explain the 2000-2010 Price Rise?
5. Home Price Prospective

                                                  50
Several properties of house prices (1)

•Series are short => limits the significance of
results (incl. problem of lack of robustness of results)
•High autocorrelation of 1 year price changes
=>strong cyclicity (in the sense of high autocorrelation)
Deciders’ « myopia » (= expectations based on the recent past = « short
memory »), self-reinforcing phenomenon
Conversely, no short term autocorrelation for stocks ( ~ random walk)

•No periodicity other than seasonality
                                                                          51
Seasonality
      3%                     Seasonal variation coefficients
                                for existing-home prices

      2%

      1%

                                                                                      Quarter of the sale
      0%

                      Q1                      Q3                Q3                    Q4

     -1%                                           France - apartments

                                                   Paris - apartments

                                                   Paris region except Paris - apartments

     -2%                                           France minus Paris region - apartments

                                                   France - individual houses

                                                   Paris region - individual houses

     -3%                                           France minus Paris region - individual houses

Source: CGEDD after Notaires-INSEE indices.                                                                 52
Several properties of house prices (2)

•Link with households’ income :
    •in time: intuitive in appearence, empiric in
    reality
    •and in space

                                                    53
Link home price X income per household:
                       by city in the Paris region
     800 000

     Home price (€)

     700 000

                Average home price (apartments and individual houses)                                                         y = 6,63x - 38958,29
                                                                                                                                      2
                 as a function of gross taxable income per household                                                                R = 0,81
     600 000
                               2006, 1000 biggest cities in Paris region
                                      (averages exclude the 10% extreme values)

     500 000

     400 000

     300 000

     200 000
                                                                                                    The surface of the circle is proportional
                                                                                                    to the number of households in the city
     100 000

                                                                                                        Gross taxable income per household (€)
            0
                0        10 000       20 000           30 000          40 000     50 000   60 000        70 000         80 000        90 000         100 000

Source: CGEDD after notaries’ databases and Filocom (DGFiP)                                                                                                    54
Idem by urban area                                                                                                 (impact of secondary homes)
350 000
                                                                                                    Antibes                                                 y = 8,24x - 97272
  Hom e price (€)                                                                                                                                               R2 = 0,55

                                                                                                                                                                                Chantilly
300 000                                                                          Menton

                                                                                    Fréjus      La Teste
                                                               Bayonne                                                         Paris
                                                                                          La Ciotat
                                                                        Nice
250 000                                                                                       Annemasse
                                                       Cavaillon                                                                                     Rambouillet
                                                                             Dinard                      Annecy
                                                                  Saint-Nazaire                        Thonon
                                              Carpentras
                                                           Toulon              Draguignan
                                                                      Istres                                                Fontainebleau
                                                                           Saint-Malo
                                                   Avignon
200 000                                    Miramas                La Rochelle
                                                      Martigues
                                        Alès      Arles
                                               Lunel                                                          Saint-Louis
                                                                                                    Cluses
                                                                                          Orléans
150 000                                                                                                                     The surface of the circle is proportional
                                                                                 Dijon Haguenau
                                                                         Colmar Nancy                                       to the number of households in the urban area
                Longw y                                                  Mulhouse
                          Lens                                             Rodez

                                                                   Saint-Avold   Average home price (apartments and individual houses)
100 000
                    Maubeuge
                                                            Epinal
                                                                                  as a function of gross taxable income per household
                                 Vierzon Montceau-les-Mines
                                                                                                by urban area, year 2006
                                                                                                                                                 Gross taxable incom e per household (€)
 50 000
      20 000                   25 000                     30 000                    35 000                        40 000                    45 000                 50 000               55 000
Source: CGEDD after notaries( databases and Filocom (DGFiP)                                                                                                                                      55
Interpretation of the link price X income
Households’ asset (1)
-100% of users are households (housing expense = 1/5 of their income)
•29 million households, 34 millions dwellings of which 1/10 secondary homes (differences = vacancy)

-95% of buyers are households (a household’ biggest purchase during
its existence)

-8 dwellings out of 10 are owned by households
•difference =8/10 « social housing » (« HLM ») + 2/10 owned by other non-individuals

- ¾ of households own a dwelling at least once in their
existence, 63% of households own at least one dwelling,
59% of households own their principal residence

Source: estimates by CGEDD after Housing surveys and Filocom, SOeS and various sources                56
Households’ asset (2)
-Out of 10 households:
        -4 own no dwelling
        -4 own at least 1 dwelling
        -2 own more than 1 dwelling (on average 2.8 dwellings, incl. their principal residence)
By comparison only 2 households out of 10 own stocks (and only 5% own a significant amount
of stocks)
-Out of 10 households:
        -4 are tenants (of which 2 get a housing benefit)
        -2 are owner-occupier and reimburse a mortgage (« accédants à la propriété »)
        -4 are owner-occupier and don’t reimburse a mortgage (« propriétaires non
        accédants »)
-Out of 3 dwellings purchased
        –1 is the first principal residence of the buyer
        –1 is a principal residence of rank >1 (the 2nd one, the 3rd one, etc.) of the buyer
        –1 is a rental investment or a secondary home (of which: 2/3 rental investments
        and et 1/3 secondary residence)
-A household purchases on average 2,5 dwellings during its existence
Source: estimates by CGEDD after Housing surveys, Filocom, SOeS and various sources               57
Households’ asset (3): number of dwellings
getting into or out of an individual’s
ownership during his lifetime
                                                During the lifetime of an individual as part    Number of
                                                                                                 dwellings
                                                  of a household
                                                Dwellings purchased or built                       2,5
                                                (of which purchased existing)                     (1,8)
                                       With                                                       (0,7)
                                               (of which purchased new or built)
                                       payment
Entry into                                                                                         1,8
or exit from
                                               Dwellings sold
ownership                                       Difference purchased or built minus sold           0,7
                                                Net balance of dwellings given or received as      0,0
                                     Without      donations
                                     payment
                                                Dwellings inherited                                0,4
                                                Dwellings owned at death                           1,1

Source: CGEDD estimates after various sources                                                                58
Several properties of house prices (3)
•Low univariate correlation of house price changes
and interest rate changes
    •counter-intuitive but is the basis of the diversifying power of housing investment with
    respect to bonds (maybe different for whole buildings owned by large investors?)
    •=> one has to factor out many other phenomena to see the sensitivity of home prices with
    respect to interest rates
    •Link by the return to the hierarchy of trend return-risk couples but this return is not
    immediate

• No univariate correlation of house price changes
with stock investment [nevertheless stock krachs have often (1929, 1987,
2000, 2008) but not always (1882) been followed by an increase in house prices (particularly
rented house prices)]
•Time-series analyses (with autoregression) methods don’t yield better results
•Multivariate analyses (incl. changes in offer and supply, income) impaired by
the series brevity (at most 46 years)]

=> Diversifying power                  of housing investment with respect to financial investments   59
Several properties of house prices (4)

A fundamental property: the elasticity of
housing price with respect to housing
supply seems in the -1 or -2 range, maybe
(?) slightly more (-3?) in the Paris region

Details in the paper:
http://www.cgedd.developpement-durable.gouv.fr/IMG/pdf/elasticite-prix-immobilier-nombre_cle093f5d.pdf

                                                                                                         60
Elasticity of housing price with respect
    to housing supply (complement 1)
• Quite few works
• Complicated because
  – Many variables must be taken into account
  – Reverse effects
  – Time lags
  – Time series are short => results not robust with respect to the
    period studied
  – Analyses in space may compensate the lack of memory… but few
    local data
• Many more works on a reverse problem: sensitivity of
  construction to housing price changes

                                                                      61
Elasticity of housing price with respect
    to housing supply (complement 2)
• Barker report + Oxford team: e=-2 in the UK
• Murphy, Duca & al. (Oxford + Fed Reserve):e=-1 in the
  USA
• Other references: widely dispersed results (by a factor 8 for
  the USA!)
• Often, economists’ assumptions may be seriously
  debatable (incl.: arbitrage is not instantaneous)
• Result robustness is rarely mentioned
• Economists may be wrong: cf. (McQuinn, 2004) about Ireland,
  (OECD: Girouard, Kennedy & al., 2006) about the USA
• But results form a cloud centered around an order of size
  of -1or -2
                                                              62
Elasticity of housing price with respect to
             housing supply (complement 3)
                                                                 References
                                                                                                                Ref erence
Country, period                                        Elasticity
                                                       -0,007 (ancien), -2,0 (neuf)                             (OCDE, 2006)
Ireland, 1977-2004
                                                                                                                (M cQuinn, 2004)
Ireland, 1980-2002                                     -0,5
                                                                                                                (OCDE, 2004)
Netherlands, 1970-2002                                 -0,5
                                                                                                                (Duca, M uellbauer & M urphy, 2009)
USA, 1979-2007                                         -1
                                                                                                                (Verbruggen & al., 2006)
Netherlands, 1980-2003                                 -1,4
                                                                                                                (Jacobsen & Naug, 2005)
Norway, 1990-2004                                      -1,7
                                                                                                                (M een, 2002)
UK, 1969-1996                                          -1,9
                                                                                                                (Cameron, M uellbauer & M urphy, 2006)
UK, 1972-2003                                          -2
                                                                                                                (Barker, 2004)
Idem                                                   Idem
                                                                                                                (Wagner, 2005)
Danmark, 1984-2005                                     -2,9
                                                                                                                (M cCarthy & Peach, 2004)
USA, 1981-2003                                         -3,2
                                                                                                                (Bessone, Heitz & Boissinot, 2005)
Paris, 1986-2004                                       -3,6
                                                                                                                (Abelson & al., 2005)
Australia, 1975-2003                                   -3,6
                                                                                                                (OCDE, 2005)
Spain, 1989-2003                                       -6,9 à -8,1
                                                                                                                (M een, 2002)
USA, 1981-1998                                         -7,9
Source: CGEDD after table 3 of (OCDE: Girouard, Kennedy et al., 2006), as well as (Duca, Muellbauer & Murphy, 2009) , (Cameron, Muellbauer & Murphy, 2006).   63
Elasticity of housing price with respect
    to housing supply (complement 4)
• Our contribution
  – Comparison France / UK over 1970-2005: elasticity =
    minus a few units

  – Comparison of the various French departments (1994-
    2010) ( multiple regression of housing price change with respect to change in
    income, population, number of dwellings, etc.)
     • Confirms an order of -1 or -2 ,
     • maybe (?) slightly more (-3?) in the Paris region
     • Results are sensitive to the subperiod studied (problem of
       robustness)

                                                                                64
PLAN
1. Home prices in France, a Historical
   perspective
2. Comparison with Other Assets
3. Several Important Properties of Home Prices
4. How Can We Explain the 2000-2010 Price Rise?
5. Home Price Prospective

                                                 65
How can we explain the 2000-2010
          price rise?
•Supply-demand of housing service?
•Inflationary impact of housing subsidies?
•Other explanations except financial
environment ?
•Financial environnement?
  •for the investor
  •for the buyer of his own principal residence

                                                  66
How can we explain the 2000-2010 price rise?

•Supply-demand of housing service?
No because:
    •Elasticity price/supply too low (-1 or -2)
    •No rent rise beyond historical trend
    •Qualitative effects?
         •Decrease in household size?
         •Ageing?
         •Foreigners?
      no or not at the scale of the problem

                                                  67
How can we explain the 2000-2010 price rise?

     •Decrease in household size: is not new
     and goes on at the previous pace
                            3,3
                                             Number
                                            Nombre     of persons
                                                   de personnes        per
                                                                par ménage
                                                 France métropolitaine
                            3,2             household
                            3,1

                            3,0

                            2,9

                            2,8

                            2,7

                            2,6

                            2,5

                            2,4

                            2,3
                              1960   1970       1980         1990            2000   2010
Source: CGEDD after INSEE                                                                  68
How can we explain the 2000-2010 price rise?

 •Ageing: impact >0 or rather
How can we explain the 2000-2010 price rise?
      • (Net) purchases by foreigners? Too few bar exceptions
      Purchases of existing dwellings net of sales
      by foreigners as a % of the number of sales
                Moy 94-99 2000 2002 2004 2006 2008 Evol.
All foreigners   2,3% 2,6% 3,2% 3,2% 2,4% 2,1%
Britons                                     0,5% 1,3% 1,7% 0,9% 0,4%
Other                                       2,1% 1,9% 1,4% 1,5% 1,8%
Of which(mostly
          MATT  resident)
                                            0,6% 0,7% 0,5% 0,5% 0,6%
Of which Portuguese                         0,3% 0,2% 0,2% 0,2% 0,3%
                    (mostly resident)

Of which Germans                            0,1% 0,0% 0,0% -0,1% -0,1%
Of which others                             1,1% 1,0% 0,8% 0,9% 1,0%
  Source: CGEDD after notaries’ databases                                70
How can we explain the 2000-2010 price rise?
 •Inflationary impact of subsidies?
 Not at the scale of the 70% to be explained
 -Households’ housing expense = 15% of GDP
 -Amount of dwellings purchased or built by households = 250
 Billion € = 13% of GDP in 2007 (at its highest)
 -Amount of property inflation generated in 2007 by the 70%
 increase in home prices relative to income: ~100 Billion €
 To be compared to
 - Transfers organized by gov’t in favor of housing = 1 to 2% of
 GDP (depends on how one counts)
 - Leeway on these transfers = ten times smaller
 - « PTZ »: around 2,5 Billion € equivalent-subsidy(at its maximum)

                                                                      71
How can we explain the 2000-2010 price rise?
• Other explanations except financial environmt? (1)
-    Resale financed the price rise?
     By nature resale feeds rises (and falls: reversible effect) but
     a) Resale financed the same % (21%) of purchases (of principal residences by owner-
         occupiers) in housing surveys 2002 and 2006
     b) The number of existing-home sales remained constant (800 000/year) from
         2000 to 2007 => the « rotation speed » of the housing stock did not increase
         (rather it decreased)
     c) Departments where home price rised most were those where there were the
         fewest owner-occupied principal residences as a % of all dwellings
-    Inheritance and donations finance (and will finance) the price rise?
     Not that much and not more than previously
     - One inherits from parents around 55
     - Donations financed a low (3%) and constant % of purchases (of principal
         residences by owner-occupiers) in housing surveys 2002 and 2006
     - Lagged and reversible effect

                                                                                           72
How can we explain the 2000-2010 price rise?
• Others explanations except financial envirnt? (2)
-    The price rise since 2000 results from land price rise and
     scarcity? No
     Land price
     -   The market price of constructible land is determined by the price of existing
         dwellings in its neighborhood => the rise in home prices caused the rise in
         land prices, not the reverse.
     -   The average price of land used for building individual houses did not grow
         faster than the average price of existing homes, whereas the construction
         cost index grew much slower.
     Land « scarcity »
     -   The elasticity of housing price with respect to housing supply being around -
         1 or -2, an increase in the supply of constructible land parcels (by regulatory
         changes or by sellers’decision to sell) decreases housing prices only slightly.
     -   When, from 2004, construction grew from 300 000 to more than 400 000 per
         year, finding land was not a problem.
                                                                                           73
How can we explain the 2000-2010 price rise?
• Other explanations except financial environmt? (3)
-    The price rise is just a continuation of the increase in the
     weight of housing expense as in households’ budgets
     experienced since 1965? No since the increase in housing expenses from
     1965 to 2000 took place while the house price index was constant relative to
     households’ income: it resulted from an increase in the quality of housing, without
     any equivalent in the 2000-2010 period.

                                                                                           74
How can we explain the 2000-2010 price rise?
• Financial environment?
A. Housing as an investment: arbitrage against
other assets (risk X expected return)
   •« Rational » investors value housing as a rent-indexed perpetual bond (Rnet
   initial~r-i+k-a
               where r= interest rate, i = expected inflation, k= risk premium, a= expected growth rate of rent, net of
   expenses and inflation)
   •In 2010 interest rates were low (relative to their trend level) => could justify
   housing prices in spite of low rental returns…: housing investment was
   competitive with respect to bonds, which probided low expected returns too
   (but isn’t it risky to finance an indexed perpetual bond by a 25 year bond?)
   •…but stocks were low (relative to their trend level) and their expected return was
   high in the long term
         •Certainly many households don’t arbitrage housing against stocks in any way
         • but only « myopia » (after the 2000 stock krach) can explain that the others didn’t move to stocks.
         •Parallel with 1930-1935
=> The 2000 - 2010 home price rise can be explained by arbitrage
only if one assumes deciders’ «myopia »

                                                                                                                          75
How can we explain the 2000-2010 price rise?
• Financial environment?
B. Housing as principal residence (=majority) :
what can one buy for a given monthly payment?
  •Lower interest rates impact owner-occupiers less than investors (15-20
  year mortgage less sensitive than perpetual bond to interest rate)
  •Longer mortgage length
     •In the short term: to be relativised (increased the amount purchased by
     12% to 15% everything else being equal),
     •In the long term: repayment takes longer (=> from which budget will
     households take the cash?)
  •Downpayment as a % of price has decreased from 2000 to 2006 (consequence
  of increase in indebtness allowed by longer mortgages and lower interest rates)
  •Other conditions have fluctuated as they have since 1965 – may have contributed moderately
  to the price rise
  •Conclusion: for owner-occupyers, lower (net) interest rates relative to the
  1965-2000 reference (3.6%) have not compensated the price increase, even
  taking into account longer mortgages
                                                                                                76
How can we explain the 2000-2010 price rise?
To summarize:
• Mortgage conditions (rate + length) favored some price
increase,
• + deciders’ « myopia » (mainly investors)
These factors impact rental investment more than purchases by owner occupiers
 => explains that since 2000, prices have been growing faster
•for apartments (3/4 rented) than for individual houses (3/4 owner-occupied)
•In departments with lower % of owner-occupied principal residences
The same factors seem to have caused the rebound in home prices in 2009-2010:
- Additional fall in ‘real’ interest rates (not sustainable)
-Deciders’ « myopia », even more so after the 2nd stock crash (2008 after 2000) (reversible)
-Higher rebound in larger urban areas (where more rented dwellings)
-Difference 2008-2010 France – UK - USA:
    -Few housing investors + « subprimes » and repossessions in the USA
    -Fewer investors + (adjustable!) interest rates fell by more in the UK,

                                                                                               77
PLAN
1. Home prices in France, a Historical
   perspective
2. Comparison with Other Assets
3. Several Important Properties of Home Prices
4. How can we Explain the 2000-2010 Price Rise?
5. Home Price Prospective

                                                  78
Home Price Prospective
                                                                                                            F    Divergence

                                                                                                            E
  2
                                                                                                            D    Level change

                                                                                                            C
1,1
 1                                         tunnel                                                                 Return to
0,9                                                                                              A      B         the tunnel
0,8
0,7
0,6
 0,5                                               Indice du
                                                   Home      prix des
                                                           price      logements
                                                                    index       rapporté
                                                                          relative  to au
 0,4
                                                        revenu disponible
                                                   disposable      incomepar  ménage
                                                                            per  household
                                                             France, base 1965=1
0,3
                                                   France, basis 1965=1

 0,2

             Not useful to anticipate the future
                 (impact of rent controls)

0,1
   1/1         1/1          1/1           1/1         1/1       1/1          1/1    1/1    1/1    1/1    1/1     1/1
  1930        1940         1950          1960        1970      1980         1990   2000   2010   2020   2030    2040            79
Source : CGEDD after notaries’databases, Notaires-INSEE indices and INSEE
Scenario F (divergence) looks unlikely
• Rental returns can’t decrease indefinitely
• => after a certain while, rents would be disproportionate
  relative to households’ incomes
• => Scénario F is unlikely
• => the home price index will probably resume a progression
  parallel to income per household

                                                               80
Will the « tunnel » change level?
                       (= scenarios C, D et E)

Does the 2000-2010 price rise signal permanent « level
 change » resulting from irreversible phenomena?
• Will the causes of the 2000-2010 price rise have a
  permanent impact?
  – Explanations by « supply / demand »: have been rejected
  – Explanations by inflationary impact of subsidies: have been rejected
  – Other explanations other than financial environment: have been rejected
    (or are reversible)
  – Remains: financial environment and deciders’ « myopia »
• New phenomenon: level of public debt

                                                                              81
Financial environment:
                   A. Housing as an investment
•   Interest rates will revert to the trend level = 3% plus inflation
•   Risk - return couples will revert to their trend levels for other investments
•   Arbitrage => idem for housing investment: total return will revert to its trend
•   « Level » => housing investment’s capital gains will be at its trend level
=> Rental return L/P (total return minus capital gains) will revert to its trend level (net ~ 3,5%)
Rents L should not grow faster than income per household:
         •   Have grown at the same pace up to now
         •   Low elasticity / supply and demand
         •   Tenants can not pay much more than they do as a % of their income
         •   Tenants’ income grows slower than average households’ income
=> Housing price P should revert to its past trend level relative to
  income per household
• In addition deciders’ « myopia » (the impact of which is temporary and reversible by nature)
  with respect to stocks will end and invert its impact at some point
• => « Return to the tunnel »                                                                         82
Financial environment
            B. Housing as principal residence
• Interest rates will revert to the trend level = 3% plus inflation
• Mortgage length
    – In the long term,
        • Reverse effect of additional monthly payments on the amount of further
          purchases [where will people find the cash? Lower housing purchases?
          Lower other housing expenses? Lower other expenses (cars, vacations,
          etc.)?]
        • Part of the increase in average price will be an increase in quality (cf.
          mortgage lengthening of 1965-1975) => further reduces the impact on the
          house price index
        • In the USA, mortgage lengthening in the (21 years in 1963, 27 years in
          1980) has not coincided with a « level change » (rather the opposite)

• Other: no reason not to assume past constants will change + reversibility
   in some cases
=> No cause for a significant level change in the long run.

                                                                                      83
Government deleveraging
Will impact in some way households’ housing purchases
              Households' mortgage debt
            and Maastricht government debt
100%
         Households'mortgage debt as a % of
 90%     households'disposable income
                                                    Dec. 11
         Maastricht general government debt as       86%
 80%     a % of gross domestic product

 70%
                                                     Apr.12
                                                      64%
 60%

 50%

 40%

 30%

 20%

 10%

 0%                                                              Source : CGEDD after
    1/1  1/1  1/1  1/1  1/1  1/1  1/1  1/1  1/1  1/1  1/1  1/1   Banque de France
   1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020   and INSEE           84
As a conclusion: a « level change » looks unlikely

•   Rejection of explanations by « supply-demand »
•   Rejection of explanations by subsidies and misc.
•   Reversion to « trend » interest rates (3% plus inflation)
•   For the investor: stability of the risk/return hierarchy of the various
    investments (return to rental returns of years prior to 2000) and end of « myopia »
• For the owner-occupier: reverse impact of mortgage lengthening
• Government deleveraging
⇒ a« level change », if any, should be small: we reject
  scenarios C, D and E
⇒ Remain: scenarios A and B: « return to the tunnel »

                                                                                          85
How fast shall we revert to the tunnel?
                                                                                                            A (fast) =
  2
                                                                                                            nominal prices
                                                                                                            fall by 35 to
1,1
                                                                                                            40% in 5 to 8
 1
0,9
                                     tunnel
                                                                                           A      B
                                                                                                            years
0,8
0,7
0,6                                                                                                         B (slow)=
 0,5                                      Home
                                          Indice duprice   index
                                                    prix des       relative
                                                             logements        toau
                                                                       rapporté
                                                                                                            nominal prices
 0,4                                      disposable      income
                                               revenu disponible  parper  household
                                                                     ménage
                                                    France, base 1965=1
                                          France, basis 1965=1                                              constant for
0,3
                                                                                                            15 to 20 ans
 0,2                                                                                                        (« Japanese
                                                                                                            scenario »)
0,1
   1/1        1/1        1/1        1/1        1/1         1/1        1/1     1/1    1/1    1/1    1/1    1/1
  1930       1940       1950       1960       1970        1980       1990    2000   2010   2020   2030   2040

 Source : CGEDD after notaries’databases, Notaires-INSEE indices and INSEE                                              86
How fast shall we revert to the tunnel?

•Based on years 1965-2000, scenario A (fast) est likelier
than scenario B (slow) which may not be excluded
nevertheless
•Low interest rates lessen the likelihood of scenario A
until deciders’ « myopia » reverses its effect
•Local scenarios may differ (depending on the 2000-2010 change in
home price and on the past and prospective change in income, unemployment,
population, number of dwellings, % of secondary residences, etc.)

                                                                             87
Prospective:households’ mortgage debt
           projected to 2030
                                                                                                      Macroeconomic consequences
           Households' mortgage debt                                                                  of an increase in households’
   100% as a % of their disposable income                                                             mortgage debt?

     80%

     60%

     40%

                                                                           USA, observed
     20%                                                                   France, observed
                                                                           France, projected, scenario D
                                                                           France, projected, scenario A
                                                                           France, projected, scenario B
      0%
          1970               1980              1990               2000              2010               2020             2030
Source: CGEDD after (up to 2011) Banque de France, INSEE, Federal Reserve, Bureau of Economic Analysis
Paper: http://www.cgedd.developpement-durable.gouv.fr/IMG/pdf/dette-immobiliere-2030-friggit_cle7496ca.pdf                            88
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