Real estate prices for the first quarter of 2013 have just been published. It’s interesting to compare them on a long time period with other prices or income. That’s what I’ve done in this post. I have taken households’ disposable income, the CAC 40 stock index (ex-dividends) and the consumption price index. I took attention to avoid taking a peak or a through as starting date. That’s why I’ve started in 1990. But the comparison really starts in 1996 as real estate price index published by INSEE begin in 1996.

Real estate price index is on the top of the chart. It has been multiplied by 2.5 times since 1996. What has to be noticed is that crisis on the stock market has implied large drops for the CAC40 index. Price is then a signal. At the end of 2008 the real estate market in France was in crisis, inventories were very large (larger than in the US market in months of sales). Nevertheless we see on the chart that the price adjustment has been mild.
This can be explained by the way the government has managed it. There were a lot of programs that subsidized the purchase of a house if this latter was rented. In that case the price is no longer a signal as it is taken in charge collectively through the subsidy. In other words, the fiscal advantage implied then a lower impact of the price level. As after 2008 most of real estate transactions were for this kind of programs this have drove price upward. It was positive for the seller and for the buyer a part of the price was paid by the fiscal advantage.

This has driven price upward and now the situation is complicated on the real estate market. On one side there were investors who bought for the fiscal advantage and on the other those who wanted to live in their house. But both paid a high price and that’s why the price remains high. No one wants to lose money. The problem is for those who bought a house to live in. The price when they bought was very high due to the program and now they know that if they want to sell there is a risk for them to lose money. That’s why everyone try to wait and postpone the transaction as long as possible. There are now a lower number of transactions than before the crisis and the market lacks of liquidity and does not work well.

Real estate price has increased quicker than nominal disposable income and the real estate price to income ratio is currently still very high almost at an historical high. This is really problematic as it means that it is very expensive to buy a house or an apartment specifically when you are a first buyer as you cannot resale a house in order to buy a new one. The market does not work well. This is a consequence of the fiscal advantage. In all other countries with real estate boom the price dropped and the price to income ratio is now lower than before the crisis. Households have then the possibility to buy a house as it’s no longer too expensive. The dynamic can work again progressively.
This is not the case in France and we cannot expect a strong dynamic in this sector as the adjustment during the crisis has not worked. This is problematic as it is a sector that provides a lot of jobs.

The consumer price index is on a very low trend meaning that the high real estate price implied purchasing power gains.

Real estate price is high. But as long as households can wait there will be no downward trend on average but as income is low compared to this price the price will not be able to increase rapidly. The market is probably on an inefficient equilibrium.