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Contents:

•   Factors conducive to long-term increase in rents and prices
•   Rents: moderate growth
•   The purchase price: an atypical evolution
•   Prospective elements: impact of increased construction and assumption of bubble

For fifteen years, house prices in France are changing seemingly disconnected from that of rents:

•   rents, surface quality and constant overall pattern as the average disposable income. The housing costs increased, however, given the rise in the average size and quality of housing. This movement is not homogeneous in the territory and between different income groups;
•   However, the purchase price has doubled and this increase seems to be widespread only marginally explained by the increased cost of construction or a general lack of construction.

Relatively moderate rents invalidates the hypothesis of a general shortage of housing. However, the scarcity of land in areas most in demand likely contributes quite strongly to price increases. This increase was also helped by improving the borrowing capacity of households, coupled with favorable taxation, fueling demand.

If the first phase of increase might seem consistent with the decline in interest rates, it now seems likely that it has skewed the expectations upward, creating a bubble in the French property market. It is not impossible that this overvaluation is reinforced by households already own that are somehow "immune" against the increase, while new entrants face more difficulty.

In the event that such a bubble would deflate with, its adverse effects could still be put into perspective, firstly because household debt remains limited and partly because the construction is not hypertrophied in France, unlike the situation in Ireland or in Spain before 2008.

The mechanisms identified in this note tempers in any case the potential benefits of a comprehensive strengthening of demand and plead for controlled structural reforms to boost the supply or reduce barriers to residential mobility for a more efficient allocation of housing stock.

•   Authors: Mahdi Ben Jelloul, Catherine Collombet, Pierre-Yves Cusset, Clément Schaff , Economics departments - Finance and Social Issues.

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