Updated: 25th June 2007
Just prior to the French Presidential elections, the French property market's support to household investment and consumption – notably on household goods – looked likely to wane this year, according to a report by BNP Paribas.
Sales slowed considerably in 2006: +3.6% for new homes (after +8.3% in 2006); stability for existing homes. Inventories have risen fast, reaching nearly 80,000 for new homes in Q4 2006, compared with less than 40,000 a year earlier. This equates to more than seven months of sales. Sale prices have therefore started to slow markedly, with the lag related to the inertia of expectations that characterises the property market. Year-on-year, price growth thus slipped from 9.8% at the end of 2005 to 6.6% at the end of 2006 for existing homes, and from 12.5% to 7.1% over the same period for new properties.
These symptoms of a slowing property market naturally follow a tightening of household solvency constraints, mainly through income rising less quickly than house prices. Buying capacity has been steadily eroding since 2000, and borrowing capacity turned down in 2005 when long-term interest rates bottomed out. This upturn in rates was yet modest relative to the scope of monetary tightening since then, and was offset by a significant compression of banks' margins on mortgage loans, which are often used to attract customers.
It seems likely that the property market peaked in 2006, following its cyclical path. Household solvency constraints with which the property market is faced are therefore likely to bring a marked slowdown in demand for homes, despite sound demographic and sociological fundamentals. This is even truer of the new home segment, insofar as the Robien law, which provided major incentives to invest in the new-build rental market in 2004 and 2005, has seen its benefits fade as price rises erode rental returns.
It will probably be a while before prices adapt to household solvency constraints. Even looking ahead two quarters, BNP Paribas said the stocks-to-sales ratio for new homes still does not hint at a stabilisation in year-on-year price increases.
Now above its 10-year average (6.9 months of sales), new home inventories is nevertheless set to continue rising given the growing lag between homes put on sale and homes sold (with a ratio of 80%). A stabilisation of new home prices on a year-on-year basis is therefore likely on a 2008 horizon.
