The French Exception

Romain/ août 31, 2020/ Finance/ 0 comments

People might say that this blog is pessimistic. And it’s true that many posts are bearish. However, it is not a structural opinion. My tone is cautious because I believe that Western countries are ending a multi-decade’s economic cycle. And of course, it does not support current assets valuation.

First, American and European economies are pressured by deflationary forces due to their ageing population. Second, growth catalysts are now limited as China super-boom is over.  

In this context, central banks and government actions are not solving the problem, but only postponing a crisis that may be triggered by a major market crash. The current situation is very close to 1929, which was also the end of an economic super cycle.

Euphoria and Hysteria

However, it is not true that everyone is chasing tech stocks right now. There is a country where households have better things to do than buying the Nasdaq at all-time high. This country is France.  

In France, people do not want to buy stocks. They want to buy a property.  

Real estate has become a hysterical passion in France, and home ownership has become critical for households. People’s nightmare is to be renters when they retire. So, everyone is willing to buy his/her own house or flat as soon as possible. Whatever the valuation.  

The bull run took off during the 1990’s when baby-boomers started to buy properties. Then, this market has been supported by twenty-five years of positive feedbacks loops. In 2020, the average French person will tell you that the real estate market is “risk-free”. Thus, Millennials are rushing to apply for twenty to thirty years mortgage to buy overpriced flats or houses.  

French households are very conservative, and equities are regarded as very risky assets. Thus, real estate is believed to be the best investment vehicle. In France, when people say “investing”, it actually means “buying a property”.  

In other words, French residential market has been mostly driven by FOMO and TINA. Sounds familiar?

The Great Disconnect

Of course, there is not one single real estate market in France. Geographic location is an important factor, and valuations are not the same whether you consider tier-one cities like Paris or Bordeaux, or tier-two and even tier-three towns. But because of skyrocketing prices in major cities, France has experienced one of the largest housing valuation expansion in the developed world during the past three decades (see chart below). 

Many people fail to understand real estate investment. The Big Short readers may remember that “a home without equity is just a rental with debt”, but most households do not understand that. Besides, everyone believes that units have become affordable thanks to low interest rates. However, affordability has remained at record low levels (see chart below). Indeed, falling rates are not enough to offset price inflation and the absence of significant revenue growth. 

Bulls also argue that prices in cities like Paris are pushed higher by wealthy foreigners. But the statistics provided by the Notaires de France (notaries) have shown that non-resident buyers account for less than 5% of total transactions in Paris.  

The last thing we keep hearing is the fact that the market goes up because demand outpaces supply. It is a circular argument, as it does not explain why so many people want to buy in the first place. Moreover, there is not home shortage in France, contrary to common opinion.

Middle-Class Squeeze

French media often refer to the so-called “housing crisis”. But it is more the result of a price disconnection from economic fundamentals, rather than a demand-supply mismatch.  

From a social perspective, the problem is that working and middle classes are struggling because of that. To solve this problem, almost all French governments have thought that the right thing to do was to help more households to buy. However, such policies have only made things worse. So has the ECB monetary policy. For more information about the middle class squeeze, please check my older post There Ain’t No Such Thing As a Free Lunch – Part 1.

People says the French housing market is “an exception”. But everyone should bear in mind that trees don’t grow to the sky. This real estate mania is not different from Nasdaq, Bitcoin, or China A shares. Soon or latter, it is likely to crash. And the impact on the economy might be severe, as property has become a major source of wealth effect in the French immobile republic.  

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