Is France the US of the Eurozone — at least when it comes to housing?
I have –on occasion — pushed against the standard economic narrative on the US and Europe, one that contrasts the "flexible" US with "rigid" Europe. It has a grain of truth, but only a grain.
The emphasis on US flexibility and European rigidity misses, for example, the fact that employment growth has been more impressive in Europe than the US over the past few years, something recently highlighted by Floyd Norris.
A narrative that emphasizes differences also misses at least two key similarities the US and Europe: Europe (at least the Eurozone) now runs a current account deficit financed by the emerging world and most of Europe is enjoying a housing boom. While Europe’s current account deficit isn’t really comparable with the US deficit, its housing boom is. See this paper by Gilles Moec of the Banque de France.
Germany and Netherlands don't fit the housing boom story. But then again, neither does Detroit or Central Kansas. Spain, by contrast, looks a bit like Nevada and Florida (before the housing slump). And France looks a lot like the US.
Charles Gottlieb of the Center for European Policy Studies — who looked at the overall European housing data in his last guest post — focuses on the French housing market this time around. He highlights the similar evolution of US and French housing prices. The tendency of the French market to follow the US market up (with a lag) — and down (with a lag) — seems ominous. Maybe not for 2007. But certainly for 2008 .
However, Gottlieb also notes the ways France does seem to differ from the US. Residential investment hasn't been as strong in France as in the US (or Spain). And France hasn't been as efficient at converting rising home values into stronger domestic demand growth as the US. Enjoy his guest post.
The French housing market: housing crisis or housing-based prosperity?
Of all the European markets experiencing strong home price appreciation, the French housing market seems the hardest to grasp. On one hand, the housing sector is booming, with vibrant construction, on the other politicians’ talk of a housing crisis, with a shortage of affordable housing. This emphasizes the current conundrum in the French housing market.
In Spain and Ireland, strong economic growth, financial deepening and the fall in yields associated with joining the Eurozone suggest that the surge in housing stems from the dynamics of convergence.
France hasn’t benefited in the same way from European integration. The explanation for its surge in home prices must lie elsewhere. Indeed, the OECD data (see Chart 1) shows a remarkable similarity between the recent surge in French and US housing prices, and even a similar cycle in housing prices.
Chart 1: French and US housing price trends compared
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French housing prices have actually increased more than US prices. In France, though, this increase in housing prices has not prompted a surge in residential investment comparable to the surge in the US. This is well illustrated by the below Chart 2
Chart 2: Residential investment and house prices: the supply side
The strong supply response in the US suggests increased concern, given that an overhang of inventory potentially could trigger a bigger price correction in a downturn. (The same could be said of Spain and Ireland, as securitisation data is on a steep slope in those countries). Indeed, as Chart 2 of my first contribution showed, the increase in US domestic demand and residential investment associated with home price appreciation was far stronger than in other countries experiencing strong price pressures. The obvious risk is that both may also respond strongly to a price downturn.
The relatively weak expansion of housing supply in France parallels the relatively weak expansion of supply in the UK. The most credible explanation seems to be the restrictive zoning that limits new residential investment (supply adjustment) in those places with the most demand for housing.
However, this may be changing. In June, the INSEE (the French national statistics institute) published data on new home construction that showed that 2005 was a vibrant year for French housing. 410.000 new dwellings mushroomed … a figure which was only topped back in 1980. In fact, the 13% increase in home construction puts France at the top of any Euro Area league table – at least in terms of housing growth. With annual house price growth that still flirts with a 8-9% rise (YoY), new home construction is likely to remain robust in 2006 as well.
A recent announcement by the governor of the Banque de France mentioned signs of slowing house price growth on a monthly basis (-0,54 % for apartments and -0,73 % for houses - MoM). But such assertion seems a “langue de bois” – central banker talk – there is no observable evidence that suggests the durability of this trend, but more a governor willing to reassure investors and house-owners.
A deeper look into the regulatory aspects of the French housing market seems to well explain the sluggishness of adjustment in supply to the surge in demand. The Robien-Borloo scheme has increased the incentives for house purchases (as it provides tax advantages for home buyers who rent). Moreover, the current tax structure for landowners does not penalize land retention. Both measures pushed prices upwards, and hindered supply side adjustments.
Stiff “urbanism” rules, strong environmental and agricultural protection have kept many areas off limits for housing development, and slowed issuance of construction permits. Moreover an academic paper emphasizes that the rent and construction subsidies offered by the French state during the 1990s fuelled housing price growth.
One other factor may be important. The above mentioned housing policies have mainly created incentives to address supply at the top end of the housing market. A more effective policy would have focused on removing potential bottlenecks to the supply of social housing. 60% of the French active population have annual incomes inferior to 18.000€, making about ¾ of French households eligible to social housing.
Politicians are currently addressing the home affordability issue by granting zero percent loans, by offering a standardized house for the price of 100.000€ (which turn out to cost 125.000€) and by setting out plans to build 500.000 social housing units by 2009. The issue should have been addressed the other way around - that more social housing should have been built earlier. In fact, already back in 1996, statistics highlighted the fact that the bottom decile of the population was already paying a higher square meter rents than the top decile.
As is often the case, a key question is whether further regulation and state led intervention on this market will prove to be counterproductive… why not deregulate instead of regulating against previous regulations?
Consequently, despite similar price dynamics, the French housing market remains very different from the American housing market, particularly if we look on the finance and regulatory sides of the story.
Nonetheless, Chart 1 shows that French housing prices tend to follow US housing prices with a time-lag of two years (Chart 1). The past is not necessarily a good guide to the future, but if this pattern holds, the French housing market should begin to slow in 2007 or 2008.
Fortunately, as emphasized in my previous contribution, French domestic demand seems to be less sensitive to home price movements than US domestic demand (in part because French credit market as not as well developed). Thus French households are not as strongly exposed to potential drop in house prices as US households are, even if a mix of low interest rates, tight supply (at least in some areas) and speculation has propelled housing market in both countries to the sky.
Off topic, but important: China drafting new labor laws to shut down sweat shops and stop dangerous increase in income disparity.
http://www.nytimes.com/2006/10/13/business/worldbusiness/13sweat.html?pagewanted=2&ei=5094&en=a6f855fccccf9c59&hp&ex=1160798400&adxnnl=1&partner=homepage&adxnnlx=1160712830-P+GEWJQ424u4NmyrRbwDfg
Everything is in the details, of course. As expected, the American Chamber of Commerce is dead set against the new law and fair labor practices, representing as it does, purely business interests.
The only way China will ever become a consuming nation instead of an export platform for mnc’s is for labor to have rights.
The entire article is worth reading, touching on what few economists dare to mention: the rights of labor to bargain collectively.
Too bad the WTO is just an instrument of big capital.
interesting, but definately off topic — let’s keep this discussion focused on Europe. There will be plenty of chances to discuss China soon (guaranteed).
Brad–The Chart you provided is amazing; why French housing prices follow US housing prices so closely with two-year lag? Unless and until I am given a plausible explanation of possible causality, I would not buy the prophesy that the French housing market should begin to slow in 2007 or 2008.
Actually I thought the best lag would be with the UK, but no statistics on that. As I remember the fall in French house prices in the beginning of the 90s followed the UK, and the increase in French prices at the end of the 90s also followed the UK. Anyway, that’s why I bought my house in Paris in 98 - because I saw that UK prices were starting again on an upswing.
Most new regulations on the French housing market now come from European level (. Also the way that France finance social housing (not enough I agree) is also under attack … from the European Commission (see “Livret A” stories).
Another point, with France being the country with the most of tourists coming to visit each year, it might not be completely uncorrelated with housing / environmental regulations including countryside protection and a curb on urban sprawl.
I agree that tax incentives are really bad in housing, but these incentives are just part of a huge list of tax niches which I agree is plagging the country.
Nice to see someone noticing the household financial structure difference between France and the USA, as well as the more reasonable growth of the construction sector. My bet is still that exit of the bubble will be vastly different in France (read: better) than in the rest of the world where creative finance and excess construction capacity will bite much harder.
http://guerby.org/blog/
one question about the employment-comparison:
The point the paper makes is that employment rates in Europe are as high as in the United States by now. But still there is a remarkable difference regarding the unemployment figures. How can we interpret this?
Is there a higher percentage of the EU population that wants to work?
David — I would put the last point differently. A large fraction of the US population is not actively seeking work, and thus not formally unemployed.
I would be interested in Charles Gottlieb’s thoughts on why French housing prices have been correlated wiht US housing prices … though I would note that correlation in this case clearly isn’t causation.
Asset prices are usually highly correlated to the business cycle (house price lag cycle peaks by a couple of quarters, see OECD paper). Hence as the EU/France business cycle lags the US’s by a year or so, French housing assets lag the US by a similar lag. Therefore both housing cycles have via the comovement of their business cycle, a strong correlation.
Looking in the crystal ball… US growth slows (Q3-Q4 2006), Housing should follow soon… EU growth will have some momentum for a couple of more quarters (see French growth peaking at 2.3% during the last quarter), before housing prices in Europe slow down mid/end 2007.
re: “France looks a lot like the US”
but you just make the point that ‘the US’ is Nevada, Florida, Detroit and Central Kansas - each of which move in accordance with - increasingly differentiated fundamentals?
Might it be feasible and helpful to break out ’sub-indexes’ for French residential real estate and compare?
Guest — if you want to investigate French regional sub indexes, be my guest. I think the basic answer is pretty obvious. Paris and the Parisian basin are a bit different from Correze/ Le Midi — and probably provence/ SW Atlantic coast are another basin with relatively strong price increases. Charles can probably confirm. But rather than demand more, shouldn’t we thank Charles for his detailed analysis of the various national European housing markets?
Absolutely Brad - was expressing interest. Sorry if the post may have been read as a demand.
David, unemployement is an extremely weak measure, especially for international comparison. This lies in the difference between “unemployed” and “inactive”. Some states are better at using tricks to push unemployed into the inactive category. In the past few years the UK for example has created more than 500 000 handicaped persons, which are of course “inactive”.
Employment / total population per age tranche (beware of some employment / population ratios where some random categories are excluded from “population) gives a much better picture. If you want a quick check take 25-54 male category, the picture is then very very different from the “unemployment” one.
So, what is the relationship between the dollar and the oil trade and how crucial is it to America’s continued control over the global economic system?
The supremacy of the dollar depends almost entirely on the oil trade. Oil is the largest commodity in the world and its trade is almost exclusively denominated in dollars through the New York Mercantile Exchange (NYMEX) or London’s International Petroleum Exchange (IPE). Foreign countries must maintain large stockpiles of US Dollars in order to meet their energy needs. In fact, Arab News recently noted that nearly $4 trillion in USD are currently held in foreign banks. Needless to say, if Bush is unable to maintain this de-facto monopoly on the oil trade, we can expect a massive sell off of greenbacks that will result in hyper-inflation and, perhaps, depression at home.
By 2030 60% of the world’s oil will come from the Middle East. The only way that western elites and banking giants can maintain their superpower role is by asserting direct control over the resources of the entire Caspian Basin. This will ensure that the dollar remains the as the de-facto international currency regardless of America’s profligate spending and prodigious debt. Foreign nations will have no choice but to continue to purchase oil in US dollars.
Oil is critical to the maintenance of the system, but the dollar is the system. It is the means of extorting valuable resources and manufactured goods through the issuance of worthless, green paper backed by nothing but $8.3 trillion of debt.
America is now engaged in a transition that has never before been attempted. It has hollowed out its manufacturing sector (more than three million manufacturing jobs have been lost since Bush took office) looted its treasury, and plunged the country into irreversible debt. Its major corporations and banks have disconnected from the mainland and operate as sovereign islands protected by the US military and international trade law. They have no allegiance to America and are unaccountable to anyone except their own shareholders.
Dollar-hegemony is critical to their ongoing success as it keeps the basic unit of exchange; paper money, in the control of fellow elites at Federal Reserve. Absent that power, American plutocrats would be unable to perpetuate the system of trading debt for goods and resources.
http://www.pej.org/html/modules.php?op=modload&name=News&file=article&sid=5609&mode=thread&order=0&thold=0
Guest — I do lots of posts on oil, reserves, US external debt and the dollar. This isn’t one them. This post was on europe; I appreciate on topic comments more than way off topic ones — and I suspect Charles does as well.
Declining population didn’t support Massachusetts’ home price rises either. Mania and rationalizing did. “Well if that guy’s house in Miami is worth X, then my house in Boston (France, Milwaukee, Shanghai, etc) has to be worth Y”.
Housing is a mania hitting many parts of the world.
Dear Setser.
Another excellent analysis in you account. Let me take the focus to the case of Spain. It may be that the slope of the correlation between constr. and prices is not as big as in the US but your figure shows that the TOTAL movement in both construction and prices has no parallel among the examples cited. I KNOW that the bust in Spain will be the worst. Did you know that building permits arised to 800.000 in 2005 and probably 850.000 in 2006? Amazing for 40 million inhabitants! As you note, securitizations have been slowing in Spain this summer. Anecdotal evidence suggests a steep slowdown in home sales. The slump will be terrible!. Because banks finance both purchases and construction they are concerned about how to get rid of the gigantic inventories of unsold homes.
It is scary.
IM — good point on Spain — i think that also comes out of Charles Gottlieb’s previous post. But do give credit for this post/ analysis to Mr. Gottlieb, not to me!
uuuups!
Sorry,
Thank you Mr. Gottlieb!
I learnt a lot with the post and the graphs.
Charles,
What is meant by residential investment? If it is the market value of transactions in an environment of rising prices then its correlation with rising prices appears meaningless.
Some interesting stuff on the direct rent subsidy distortion of the rental market such that rents to the lowest decile over the period 1973 - 2002 rose above all other deciles by 1996.
Your referenced academic paper seems to indicate that the rental yield (or opportunity cost) of housing has increased less than 10% between 1996 and 2001 while “prices” have increased at a far higher rate. All other things being equal (obviously they are/were not) and assuming yield(or opportunity cost) a relevant factor in a rational house price assessment there should be a closer match.
Back to the issue though since there are myriad tax, subsidy, supply and other conditions that differ between the US and French property markets what explains the apparent correlation between price trajectories?
Does the index reflect housing price trends across France or is it weighted in time and, location, to the American (or maybe Rosbif areas) where properties have been transacted? If so will it become more French as/if prices decline? Perhaps these then will be exposed to a drop in prices?
What is the definition of a developed credit market? One that socialises the private costs, of bad credit through higher fees, of credit crunches through subsdised restructuring a la Resolution Trust Corp., higher taxes, more expensive insurance, lower pension, general inflation, slower future growth, etc etc. or one that seeks to avoid the moral hazard of such risk transference?
http://www.oecd.org/dataoecd/4/60/31920338.pdf
And I recommend http://www.bis.org for the overall asset price policy debate.
thanks to Brad and Laurent for answering on the unemployment topic.
special thanks to Charles for highlighting european stuff in this blog.
Hi All,
you may find more information on the french market in this document:
http://www.foncier.org/statistiques/graphactu.doc
Some comparison between France/UK/US markets is available on page 3
BR,
Stéphane
Stephane — thanks. Hadn’t realized that France’s price surge now tops that of the UK. Guest — if you read even a bit of French and can follow a graph with French lables (easy), this has some comparisons between Paris/ its vicinity and the rest of the country that would be of interest.
Guest - residential investment is meant to mimic the supply side of the housing market. (see http://www.ecb.int/pub/pdf/other/pp55-70_mb200602en.pdf). It is not the market value of all transaction but rather the value of investments done in order to maintain, expand the housing park of an economy.
Regarding the index it is the price of “old dwellings” (logement ancien). the indicator covers france, thus I believe that it is weighted in location.
By developed credit market, I speak about market completeness. In france, access to mortgage financing is rare and not easy, thus the credit market is far less complete than in the UK for instance.
Charles
The OECD doc. referenced has some top down statistical analyses that compare mortgage markets for “completeness” where France can be compared to other European and ex-european markets.
http://www.oecd.org/dataoecd/4/60/31920338.pdf
France is low on mortgage equity withdrawal and (thus?) in marginal propensity to consume out of housing wealth and thus housing the report suggests is a less efficient transmission mechanism for monetary policy.
Key differences shown for France are the length to enforce mortgages, higher transaction costs (for medium sized homes)
but we would guess these would be obstacles to sharp price increases. France’s housing supply in the longer term appears reasonably elastic but of course a banker can extend credit faster than a house can be built.
All these are of course aggregate figures and cannot may fail at the individual and marginal level to explain.
The graphs from Stephane are interesting in that they show the strong correlation of all the identified French property types in this cycle as opposed to those prior.
What are the details of France’s tax incentives and any changes and of the Robien scheme? What do you thin the impact of overseas demand has been?
Guest- I agree on the fact that france has mortgage on equity withdrawal and consequently a weaker housing wealth effect than Uk or US. This is precisely the point I had underlined in my first post. However the wealth effect is still present, as rational houseowners tend to reduce saving anticipate future income flows as their housing wealth rose by 15%. This usually triggers consumption and growth.
Indeed the price level were also strengthened by foreigners’demand, and by fiscal incentives to purchase housing (borloo scheme). For the details of the incentives http://www.de-robien.fr/dispositif.htm (french).
Charles,
Just trying to clarify the impact of the various factors in your analysis.
Re: the differences in “wealth effect” France’s relatively low home ownership may reduce the size of the wealth effect relative to other markets. In addition I think it would be relevant to compare the housing debt to equity ratio to give an idea of the relative size and volatility of the “marked to market” and perceived amount of “wealth” that can be spent.
Or do you mean that the French are using house prices as an indicator of future income growth?
On the negative side of a consumption stimulus account might not higher house prices stimulate saving on the part of prospective house buyers and those seeing higher house prices as an idicator and perhaps real factor behind rental increases? And of course have the reverse effect?
If foreign buyers are driving the market would there be any differences in wealth and consumption effects of price increases and falls?
Some more evidence by french professor that intervention boosted prices in France.
http://www.liberation.fr/opinions/rebonds/210771.FR.php
Guest - thanks for your efforts. Well to be more precise, “the mortgage debt to equity ratio” would in fact be interesting to evaluate on the french market. However the whole difficulty with the french market is that data is a lot scarcer than in the US, so it is not easy to replicate the Economist’s nice graph published in this week’s edition (http://www.economist.com/finance/displaystory.cfm?story_id=8028512).
I am have always emphasized that the wealth effect over the mortgage link in France is smaller than in the US/UK. However wealth effect doesn’t necessarily go through the mortgage link, it can also go through an anticipation link: as u say it “French are using house prices as an indicator of future income growth”, and reduce current saving knowing that they just saved (their housevalue rose considerably see Chart 1).
I don’t agree on your point on the negative side of consumption stimulus. As with the current Robien scheme, buying a house in France without taking up the most debt possible would make little sense given the fiscal incentives confered by this scheme.
Charles,
Other possible additions to the negative side consumpton account:
The rise in price also means a property owner has been underestimating the depreciation of the property and so the repairs to, potential replacement cost of, and possibly taxes on, the asset leading to a need for increased saving.
For a new buyer the assumption of additional debt (rather than or in addition to the saving for downpayment) than would otherwise have been required (had prices remained lower) still has effect of reducing present and future income not devoted to property thus reducing income that could be devoted to demand for other types of goods. They will also be subject to the property owner effects described above.