The continuous surge in the French residential market, a glorious era or a bubble risk?

Sabrine Rekik and Myriam Ben Saad

ERES from European Real Estate Society (ERES)

Abstract: A recent study by the European Central Bank (2021) shows that unlike previous financial and economic downturns, the covid-19 crisis did not impact the increasing tendency in house prices in Europe. Unexpectedly, both prices and loans rose respectively by 4.3% and 2.6% during the pandemic (ECB, 2021). While financial markets have plunged several times during the sanitary crisis, the real estate market continue to grow steadily. In this context, experts point out the existence of an increasing housing bubble and wonder if it will burst soon.Like most of the European countries, France has experienced a fearful increase of the value of real estate assets since the late 1980’s. The peak does not seem to be reached even during the hectic period of the pandemic. The question about the existence of a bubble becomes even more relevant especially with the very recent rise that is expected to deflate the value of real estate assets and accelerate the burst of the bubble.To the best of our knowledge, this paper is the first to study the French property market and examine the existence of a plausible bubble. Unlike previous studies, we use quarterly data of the residential property price index from Q1 1970 to Q3 2021. We contribute to the existing literature by using a longer span of time-series. We expect more relevant findings as our sample includes 206 observations per country. The first part of the paper is dedicated to a global analysis of the residential prices in a set of European countries (Belgium, France, Germany, Italy, Spain and the United Kingdom). We, then, focus on the French context in order to study the existence of a gap between the fundamental and market values of houses. We also suggest some explanatory variables to figure out the determinants of house prices in France and implement a cointegration test.A large strand of literature suggests different econometric techniques to detect the existence of financial and real estate bubbles. Most of them are based on unit root tests, variance tests, Johansen-Ledoit-Sornette model and durations and regime tests (Mahalik and Mallick, 2011; Ren et al., 2012; Escobari et Jafarinejad, 2016; Vogiazas and Alexiou, 2017; Hu and Oxley, 2018a; Harsha and Ismail 2019. Dufitinema, 2020; Rafiq et al., 2021).We implement an Augmented Dickey-Fuller (ADF) test, the Generalized Sup Augmented (GSADF) test and Phillips-Perron unit root test. Our results prove the existence of a bubble in the residential French market and confirm a long-term cointegration between price indices and our set of macroeconomic variables.

Keywords: Cointegration and unit root tests; France; Housing Bubble; Residential property price (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2022-01-01
New Economics Papers: this item is included in nep-his and nep-ure
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