Real estate bubble

A real estate bubble is a Speculative bubble which even appears with the local scales of an area on the whole of the territory of a Real estate market. It is characterized by a fast rise of the value of the real Biens.

Very closely related to speculative and psychological aspects , the raising of prices evolves/moves without relationship with many the fundamental economic ones like the Salaire S or the rental output. The market will return inevitably, on the Long run, to its value of balance. The deflation of the bubble can be slow (case of the real estate markets in general, because of weak the liquidity in goods), or rapid: the correction of the prices then takes the form of a real Krach, leaving many owners in negative equity (the amount of the contracted banking loan is higher than the value of the real estate). As for the various types of speculative bubbles, the existence of a real estate bubble is known in an unquestionable way only a posteriori , after its bursting.

When the rise of the prices relates to a particular zone (a city, a district, a real estate project), one speaks about Real estate speculation .

Reasons of the formation of a real estate bubble

the inflation and anticipations of inflation
current and anticipated interest rates
the carryforward of investments in the case of a stock exchange crash
the behavioral Imitation - to see “Imitation and investment”

There is also the speculation which is made in specific cases

a change of zoning for
a factory which comes to be established in the surroundings.

The cause of disequilibriums of the market are varied

; Causes structural

Concentration of the populations on certain gravitational zones professionally, climatically, culturally, etc
Rural migration (in the countries in the process of development).

; Causes of the economic situation

the bubbles and Krach S real estate are conversely correlated with the Interest rate. Very low rates lower the monthly payments and push to be involved in debt and buy at full price.
Investment badly directed real estate passed, big number of empty offices.

; Lawful causes

Bad condition of housing stock because of the taxation and the absence of protection of the small holders.
Political restrictive of permit building; but when well even this one would be granted in a very free way, one cannot build on the streets , and it is necessary well in sparing.
Bad management of the land and real inheritance of the state and not release of the land and real park become less useful.

; Budgetary causes

Political of Urban renewal not very active.
Destruction of unsanitary housings without construction of new housing.

; Sociological causes

end of the traditional reference marks (family, Welfare state) which make the individuals receptive to the stress.
the preceding myths (the golden delicious-servant boy of the years 1980, new economy of the years 1990) made failure and must leave room to a new myth, that of the rich person landowner.
rumors of shortages of housing, maintained by secondary myths:

the myth of massive purchases from abroad.
the myth of the mini baby-boom of the years 2000-2001.
the myth of the rise of the number of students.
the myth of the local market disconnected from fundamental from the market.
the myth of the bad maintenance of housing stock whereas France profits from the best park of Europe.

Examples of real estate bubble

American real estate bubble of the years 2000

The American Real estate market knew a very strong growth of the prices during the Années 2000, after the deflation of the Bulle Internet. A too great quantity of liquidities on the market, and the “exceptional” credit terms (see Subprime), would be at the origin of this bubble.

The fast deflation of the American Real estate bubble in 2007 generated a monetary and financial Crise world, undergone under the name of Crise of the subprimes.

And in the rest of the world?

According to the magazine The Economist in an article of June 16th, 2005, there would exist in 2005 a real estate bubble in the following worldwide: the United States, England, Australia, New Zealand, Ireland, Spain, (see on this subject the article Spanish Real estate bubble), South Africa, India, China and France.

Real estate bubbles in France

History of the French real estate market

The French real estate market was deeply déstructuré by the Second world war. The Law of 1948, by fixing by decree the price of the rents of the old residences, had an important influence on this market, in particular by supporting construction in the cities. The prices then rebounded quickly towards their historical standards. Since 1965, the prices (in constant euros) of the French real estate market showed a relative stability. Jacques Friggit, IPC operations manager with the General advice of the Highways Departments, observed that the prices of the residences were connected to the growth of the incomes of households and that they oscillated with a margin of 10% around a long tendency (tunnel of Friggit).

The prices in France were confined in the tunnel during more than 37 years until 2002. An exception relates to the prices of the residences in the Paris region since those indeed very largely left this tunnel in 1988 to reach a maximum (more than 50% above the historical tendency) in 1991. The Real estate speculation maintained by the realtors is often held like person in charge of this peak. To this boom a known violent correction as the real crash of 1991 will follow where the prices strongly dropped (by 30% to 40% in certain sectors) until 1997.

During the period 1998-2001, the market evolved/moved within the low limit of the tunnel of Friggit. Finally, an explosive growth of the prices occurred as from 2002, this time on the whole of the French territory. Already in October 2004, Jacques Friggit estimated that the recent trend of the price of the residences appears historically abnormal . At the end of the first quarter 2007, the index for the whole of the territory is higher of 72% than with its historical tendency (80% in Île-de-France and 68% on the remainder of the territory).

The bubble of the years 2000

Indicators of the state of the French real estate market

Various criteria make it possible to describe the Real estate market French.

; Trend of the prices in annual slide: The evolution of this index of 1997 to 2006 is represented on the following figure. The histogram emphasizes the growth and the fast exit of the tunnel of Friggit. The period 2002-2005 when annual rises higher than 10% were observed is particularly development. Since 2005, the rise of the prices slows down clearly. According to the forecasts of the BIPE, the annual slide will be of 6% in 2006. Another investigation, published in December 2006 by the Xerfi institute, predicted even a fall of 25% by 2010

; Index of solvency of firstly-reaching: The graph brings back the evolution of the capacity of purchase and the solvency margin according to the indicator Crédit Foncier/ESSEC. The average capacity of purchase is calculated like the capacity of purchase in m ² with a rate of average effort of 28% and one average duration of refunding (19 years). The maximum capacity of purchase is calculated for a rate of effort of 35% and one 25 years maximum duration. The solvency margin is the difference between these two capacities. In the first half of 2006, the average capacity of an eligible household firstly-reaching is of 48 m ² in Metropolitan France in fall of 17% compared to that estimated at the first quarter of the year 2000. The solvency margin is not any more that of 14 m ² in 2006 and is in strong reduction (48% compared to the year 2000). The growth of the prices thus had an significant impact on the solvency of the firstly-reaching households.

Various mechanisms made it possible to partially deaden its impact during this period. But neither the lengthening of the duration of debt, neither the fall of interest rates of approximately 2,72 points between the two extremums (5,61% the 1/19/2000 with 3,07% the 9/23/2005) and nor the launching of the new loan atrate zero in 2005 were enough to compensate for this rise of the prices.

; Other indices of solvency Other indices of solvency are calculated and published by other financial institutions. They have as a common point all to raise a degradation of the solvency of the households close to those observed at the time of the real crash of 1991:

Crédit Agricole " In 2007, zero growth of the prices of the ancien" ,
BNP Paribas " Which end of cycle for the French real estate? " ,
Jacques Frigitt of association ADEF " Data statistiques" .

Principal data in 2006 and 2007

It is always difficult to envisage the future prices. On the other hand, the historical and recent tendencies of the prices can give invaluable indications on the state of the real estate market. Thus, the prices dropped by 40% in constant euros in all the districts of Paris between 1991 and 1996. Between 1997 and 2007, the prices of the houses and apartments increased by 142%.

The first signs of a reversal of the market are perceptible since the summer 2007:

Fall of the number of sales of new housings between the first and the second quarters 2007 (- 12% according to the federation of the promoters)
Fall of the prices of 1,5% in July and 1,4% in August according to the FNAIM
Brutal increase of stocks of unsold residences at the second quarters 2007

Zones where real imbalances pose the most problems in France

Corsica Paris region
Littoral

Situation in Paris

The prices dropped by 40% in Paris between 1991 and 1998 in constant euros, before taking again a very strong rise (more than 100% between 1998 and 2007).

Myths and psychology

Contrary to certain consumables current, the prices of the real estate are very difficult to determine. In fact, the " just prix" is established taking into consideration preceding transaction. That raises two problems:

on the one hand, difficulty in knowing the prices of the transactions carried out,
on the other hand, each apartment or house being single, difficulty in defining average costs for different goods.

Thus, psychology plays a fundamental role in the price determination of the real estate. The rise as the fall of the prices is then a car-fed phenomenon, according to whether the media influence - voluntarily or not - the households in their real purchases. Certain myths remain - for example: " the real estate makes only monter" , which is absolutely false if one looks at the history of the real prices over the hundred last years, which rather shows the existence of cycles in the prices of the real estate.

Notes and references of the article

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