RESEARCH FOR BUSINESS : The reduction in rent-price ratio will affect housing price growth

After a decreasing period in 2008 and 2009 followed by a recovery, new sources of uncertainty affect house prices in France, particularly in the Paris area. In a context marked by a reduction of tax benefits for investors, recent increases in mortgage lending rates, as well as a slowdown of economic activity, the housing market actors (households, banks, developers, government) need leading indicators to improve their ability to anticipate future price movements.

It has already been established on the U.S. real estate market that the rental yield, i.e. the rent-price ratio, can provide relevant information on future price trends. This indicator indeed captures some of the pressures on housing markets at a given date. When rental yields are high, this means that home values ​​are low compared with the expected flow of rents and therefore future prices are expected to increase due to a higher demand for these assets.

The predictive power of rental yields on the Paris property market can be assessed at an extremely small geographic level (i.e. the land register unit) by taking advantage of individual localized bases for rents and sales prices. This represents a substantial change over available studies testing the predictive power of rental yields at the scale of entire metropolitan areas and allows us to highlight the impact of taking into account the heterogeneity of local real estate markets.

First, it appears that the dynamic of rental yields explains over 40% of future trends in prices at a forecast horizon of three years and about 53% at a 6 years horizon. Furthermore, its predictive power culminates in the medium term (3 or 6 years), making it an easily usable tool given the delay in collecting information in real estate. The recent decline in real rental yields (from 5% in the late 1990s to just 2.5% in the mid-2000s) will contribute negatively to future price in Paris. The effect of this indicator could therefore be combined with other factors mentioned above (mortgage lending rate, macroeconomic trends), which may conduct to lower prices in 2012.

Finally, most of the future dynamics of local prices is explained by the rental yields at the finest geographic level (the land register unit) compared to broader levels (the district for example). It seems then fragile to forecast local prices in real estate without having local indicators.

To know more, article in french

Auteurs :
Stéphane Gregoir
Directeur, pôle de recherche en Economie, EDHEC Business School
Directeur de la recherche, EDHEC Business School

Tristan-Pierre Maury
Direction adjoint de recherche, pôle de recherche en Economie,
EDHEC Business School