Journal of Financial Economics

REF 115 The housing markets and their financing

Housing is the consumption first largest expense of households and has been increasing for almost 20 years, along with an improvement in comfort. Housing also represents 28.9% of the total national investment. New constructions which are the most business cycle dependent represent half of the total investment. Housing, basically financed by regular credits, is an essential part in the accumulation of French households wealth, of which it represents almost 2/3 – with substantial inequalities. Finally housing aid increased significantly in the last decade to reach a peak of EUR 44.9bn in 2011, i.e. 2.3% of GDP. However, a drop was recorded in 2012 and 2013. More than half of these aids is provided by the state, in different ways, the highest being personal aid. Bricks and mortar aid is a small minority whereas multiple fiscal aids are the most dynamic with a significant inertia of aids in rental investment.

Let’s hope that these figures will clarify the debates concerning the efficiency of housing policies.

Real estate plays a major role in business cycles through three main channels. The first one is housing investment, the second one is a financial accelerator by which the increase of real estate prices leads to an increase in households debt for which its serves as a collateral. Finally, the third channel is a wealth effect. This articles explores these three channels in the main OECD countries relying on national accounts, wealth accounts and detailed consumption data. We show that the first channel differs among the various countries, the accelerator is found in all. The wealth effect is real in periods of rational bubbles.

Since the seventies, most countries have implemented policies fostering homeownership. The global financial crisis addresses the relevance of such policies. Indeed, they reduce the size of the private rental sector and, in progressively refocusing the social housing sector, limit the latter towards those who cannot afford a dwelling in the market. Households particularly suffered from the crisis in countries combining the following factors: a high rate of home owners, a high and fast increasing level of mortgages, a credit supply process that shelters lenders vis-à-vis the risk of credit defaults, and a weak consumer’s and borrower’s protection. The crisis is a result of the excesses of finance, rather than a matter of tenure. However, policies too exclusively based on home ownership speed up the rise of housing prices, deepen wealth inequalities and cannot fit the needs in high-cost markets, namely those of metropolitan areas, and in certain populations especially the poor, the young and the people relocating frequently.

The desire to own one’s home and to accumulate housing wealth is largely widespread in Europe. The fall in interest rates during the 2000s and the increased competition between banks have promoted the distribution of credit before the financial crisis. Despite public measures to support the housing sector, house prices and credit have collapsed in many European countries, after a decade of real estate boom. These evolutions result from the strengthening of bank balance sheets and from the slowdown in household income growth. Germany is an exception. After ten years of decline, prices have stabilized in the mid-2000s and even increased since 2010. In this context, we will first focus on the trend in household mobility and then analyse how the macroeconomic environment has impacted the profile of households who have recently purchased their home. Our logit regressions show that younger and/or lower income households have been the first victims of tighter credit conditions. Indeed, in all the countries studied (Germany, Spain, France, Italy and the United Kingdom), low-income households have seen their probability of purchase greatly reduced. This is the case even in Germany, where the probability of purchase for other households has tended to stagnate or to grow. The purchase likelihood of households under 30 years has strongly decreased in Spain. On the contrary, the probability of young households to buy their home in France has remained constant, due to quite favourable credit conditions, the “zero interest loan” reform and increased donations.

Nobody is arguing against the fact that more housing should be built. Consensus on housing needs stands at over 400,000 units per year. However, it is not only a quantity matter. The location is crucial too. Indeed, no part of the territory should be ignored due to the renewal needs, but the emphasis should be put on the most strained areas, where achievements have clearly declined since 2000. If the land shortage is denounced as the major cause of this structural housing deficit and, thereby, has a consequence on property price, it must be underlined that it does not constitute an obstacle to the construction of non-residential buildings. Obviously, elected officers prefer non-residential construction at the cost of housing for purely political reasons. This is where attitudes have to change in order to really tackle the housing crisis, which has only been an act of speech until now.

The second-hand market is now the major part of the housing market. It developed only recently, in the wake of home ownership. It was long neglected by governments and economists, until the Notaries established the databases that allow to calculate the “Notaires-INSEE” house price indexes and to provide information on the nature of traded dwellings and on stakeholders in the transactions.

The cycle that started in 1998 can be described in detail using the Notaries databases. Unlike the previous one, it is characterised by soaring prices throughout the country, albeit not uniformly, at least until 2008. Only after the crisis a strong differentiation emerged between large metropolitan areas, starting with the Paris region, and the rest of the territory. A large share of the price increase can be explained by easy and cheap credit. The proportion of quick resales grew during 2005-07, leaving suspicion of speculative behaviours. The role of foreign buyers should not be overestimated : among natural person buyers, fewer than one in forty on average is a non-resident alien.

This paper examines how rent regulation has affected the role of private renting across a range of European countries and how regulatory frameworks are currently developing. It clarifies the three types of regulation that have been experienced since the war and their different impact on landlord and tenant incentives. It shows that traditional forms of regulation that hold rents below market levels into the longer term lead to dysfunctional rental sectors. However, ‘third generation’ rent control systems, where initial rents are set by the market but with long term tenancies and predictable rent increases, can help reduce market failures. It also shows that the extent of regulation is not closely related to changes in the size of the sector, mainly because of the impact of other policies.

The paper examines the systems that operate in a number of European countries – notably Germany, the Netherlands and France. It also discusses how, in many countries, governments are responding to current market pressures by introducing stronger controls and the possible impacts of such controls.

Social housing organisations’ activity and strategy are tightly linked to their stock of dwellings. A proper knowledge of these assets is therefore a necessary prerequisite to understand the sector’s challenges.

As a consequence of a strong construction pace in the thirty-year post-war boom period, today’s average age of social dwellings is high, at 36 years. But beyond the average figures, social housing stock is not evenly distributed throughout the French territory, and its characteristics (such as age, type of dwelling, etc.) vary according to its location. Indeed, the construction of social dwellings has occurred in successive waves, each of which has concentrated in certain regions, following the demographic and economic evolutions in French society. Today’s social housing stock therefore reflects the location and the main characteristics of each period’s buildings.

The current and future dynamics of social housing, both in terms of construction and rehabilitation works, are thus partly determined by the state of the housing stock in each territory, and its adequacy to societal changes.

Often accused of having failed to meet all the needs of the sector, housing policies in France are highly complex, under the combined effect of the diversity of the objectives they pursue (economic, social and urban) and of the large number of players responsible for their design and implementation. This accumulation of national and local legitimacies creates both numerous inconsistencies and a poor legibility of the results obtained.

Nevertheless, it is possible to identify at least four topics of national debates on housing policies, that we can highlight by some perspectives on the situations and policies of EU countries. Can we, for instance, discuss the relevance of the repeatedly stated objective of building 500,000 new dwellings each year in France? What is expected of a France of homeowners and is it really an absolute priority in our country? Why and how to regulate private rented markets? Should social housing be reserved for the poorest?

This paper analyzes the main changes in the housing financing in France during the period 2003-2013. Relying mostly on the data made available at the Banque de France, it recalls the main features of housing financing in France: dynamic credit flows, historically low interest rates, geographic heterogeneity and diversity of banking resources. Thereafter, the paper examines the synchronization between the cycle of housing loans and the business cycle: the results suggest that in the long term, home loans precede the changes in economic growth, but that this link is slightly distended during the recent period. Finally, the analysis of recent developments based on indicators of borrowers’ profile does not indicate a risk to financial stability in France.

Facing a long lasting housing crisis, France has set itself ambitious goals : build 500,000 new dwellings per year, including 150,000 social housing ; speed up energetic renovation of housing stock and extend urban renewal program. The difficult record of national public finances, the complexity of housing market where mid-term rationalization collide with short term effects, and the unfortunate choice that has been made in our country for “land rent” make their realization difficult.

HLM providers are major operators of the rental market and take their due part in the national goals. The economic model of social housing in France is based on a system that is both classic (debt leverage, subsidies) and specific (tax free savings scheme, housing allowances). This system has produced a housing stock of more than 4 million dwellings giving both safety to renters and financial security to moneylenders and public authorities.

Recently, real estate and notably housing markets have been found as the preferred area for testing the potentials of macroprudential policies. After an analysis of international experiences, the article assesses their benefits, but also highlights, with very limited hindsight, various limitations. The new European regime with the 2013 capital requirement directive and regulation, and the new powers granted to the European Central Bank as well as to the French High Committee for Financial Stability, could offer some responses to these questions.

Advanced countries now benefit from a macroprudential institutional framework. This article presents available monitoring tools for the analysis of the housing market as well as the housing loans market, clearly intertwined. Key indicators are regularly controlled but can be late due to inertia inherent to the housing markets. Complementary capitalization methods are also late indicators since ignoring the short-term supply reaction. Early warning systems are agnostic, but may ignore unexpected adjustment of the fundamentals. Modeling behaviors is theoretically more satisfactory but challenging from an operational perspective. We finally propose a simplified model of the housing and housing loans market for France.

According to the World Bank, bank exclusion affects 2.5 billion inhabitants. Economic literature on the subject deals essentially with the characteristics of those excluded from banking services (age, gender, education…) but gives few details about the specifics of the banking system that might be the source of exclusion. In this article, we propose to study bank exclusion in France, 30 years after the introduction of the entitlement to basic banking services, by analysing the business models of the main banks. We show that these models are still selective and conducive to the exclusion of persons who have little self-sufficiency and/or limited financial resources, i.e. almost 10% of French households.

At the onset of the financial crisis in 2007, “fair value” accounting came under fire for its pro-cyclical effects. Seven years on, fair value remains the sole method of accounting valuation of banks’ trading books. One concern, which is relevant to regulations aimed at preventing systemic risk, is based on the observation that accounting valuation of trading portfolios at “market price” is in fact minimal compared to “model price” valuation. In this paper, we assess the distribution of the valuation of trading portfolios, between “mark-to-market” and “mark-to-model”, at the international level. Then, we calculate a measure of return on equity (ROE) on trading activities by comparing the gross income to the amount of regulatory capital based on “value at risk” (VaR) and find that this ROE is not only abnormally high, but has also generally remained stable since the onset of the crisis. In addition, we establish that returns on banks’ trading activities are positively and significantly correlated to the share of assets subject to mark-to-model in the total portfolio, and particularly the share of “Level 3” assets.