Friday, May 4, 2012

French House prices could drop as much as 40 percent

housing price slump graph

From the daily telegraph

"It is a gigantic bubble, all the more dangerous as it is spread across France," said Pierre Sabatier, from the consultancy PrimeView.

"It reached a paroxysm in the summer of 2011. There is a mix of incredulity and denial as it starts to burst but there can be little doubt that all levers propelling the market are disappearing."

Prime View said prices across France have jumped 160pc since 1998, though household incomes are up just 35pc. Paris has overtaken New York to become the world's third costliest city at €18,000 (£14,600) per square metre.

The boom seemed to defy global gravity last year as southern Europe and the US battled property slumps. The mood has since darkened. "A number of clients tell me they think the market has topped and want to get out," said one French hedge fund manager.

Standard & Poor's has told investors to brace for a 15pc correction. Credit Agricole says prices may fall 12pc by the end of next year, expecting a "gradual slide" that could last until 2016.

PrimeView thinks it will be much worse. The price-income ratio was stable from the 1960s to the late 1990s, before exploding over the past 12 years as a perfect storm of demographics, state sweetners and cheap credit led to a 12-year blow-off.

housing price slump graph

There are parallels with Spain and America but Mr Sabatier said the French twist is a replay of the early 1930s when investors fled stocks after 1929 and rotated into "safe" property. Hence the paradox of rising prices during the Depression. The strange boom did not end until premier Pierre Laval cut rent ceilings in 1935, triggering a long slide.

"Laval's policy change was the catalyst. The same could happen now as austerity forces brutal measures," he said. An array of market props are eroding, including tax relief on some mortages and certain capital gains.

The shift comes at a delicate moment. Banks are limiting credit as they scramble to meet Basel III lending rules.

PrimeView said de leveraging - which pushes up mortgage spreads - comes just as France's ageing crunch arrives. Those younger than 58 are net buyers of property, those older are net sellers. The buyers will stay constant at 33m, while the sellers rise by 1.2m every five years for a quarter century.

"Starting this year, the demographic structure will have a profound deflationary impact on property, reversing the last 40 years. We could see a vicious circle of falling prices," said Mr Sabatier.

"Ageing means the end of property's golden age. It may be less rapid than in the US because French households have less solvency problems, but we think a 40pc fall may be inevitable over five or 10 years."

A housing slump would hammer the economy just as long-delayed austerity begins in earnest. Property makes up 65pc of French household wealth, compared with 57pc in Germany, 39pc in Japan and 27pc in the US.

The risk is a "negative feedback loop" as all key levers of the economy turn contractionary. Any slippage in growth below the rosy forecasts of both candidates in Sunday's presidential elections, Francois Hollande and Nicolas Sarkozy, would play havoc with debt dynamics, pushing France above the danger line of 90pc of GDP.

"Whoever wins will receive a poisoned chalice. What France faces is like Japan: not a cardiac arrest, but slow growth for years," said Mr Sabatier.