Standard & Poor's Ratings Services estimates French house prices could fall by up to 15% by the end of 2013, according to a report published today titled " Tighter Borrowing Capacity Is About to End The Uncommon Rise in French Housing Prices."
For about five years now, the French residential real estate market has been going its own way--up. Before 2007, as in a number of other markets in Europe,French real estate prices had a long run of rapid growth. But, unlike other markets, the French one experienced only a short correction after the 2007-2008 financial crisis before resuming growth to touch a record high in 2011.
"We have found that borrowing capacity is a good driver of French housing prices. But we expect it--and housing prices in France--to decline through the end of 2013," said Jean-Michel Six, Standard & Poor's chief economist for Europe, the Middle East and Africa.
Standard & Poor's definition of households' borrowing capacity takes into account disposable income, interest rates and average loan duration.
If past trends in borrowing capacity are an indication, the French market is about to experience a correction. Between September 2007 and March 2009,borrowing capacity dropped about 7%, and the associated drop in prices was 10% from March 2008 to June 2009. In the coming 18 months, we project a drop in borrowing capacity of a similar magnitude, although the downside possibility of rising interest rates could result in a bigger drop. What's more, we also expect about a 20% contraction in new housing loans in 2012 versus 2011.
As a result of the weaker borrowing capacity and lower loan production, we anticipate a drop in house prices of up to 15% by the end of 2013. In that case, prices would be back where they were in early 2009. "While the French housing market has gone its own way for a while, it may be just a matter of time before it meets up with its European peers," added Mr.Six.
