Forget London House Prices. Take a Look at Paris

(Bloomberg Opinion) -- Before a sex tape dashed Benjamin Griveaux’s hopes of becoming the next mayor of Paris, the preferred candidate of French President Emmanuel Macron could be found promoting his answer to the capital city’s increasingly dysfunctional housing market. What the average priced-out Parisian needed, according to Griveaux, was a handout of 100,000 euros ($108,380) to use as down-payment in return for a stake in any upside from the property’s resale down the line. “Paris is choking its middle class,” he warned, a year after anti-Macron protesters broke into his office building.Maybe it’s a good thing such a policy won’t get tested. The U.K.’s own “Help To Buy” plan shows how boosting demand may only add fuel to the fire. Between 2010 and 2018, the price of the average London home rocketed 72%, according to government data, while homelessness rose 209%.But it also shows just how desperate some politicians are when it comes to dealing with the effects of a property boom that bears some of the hallmarks of an excessive bubble.

UBS recently ranked Paris the most unaffordable major city in the world, bar Hong Kong, estimating a skilled worker needed 15 years’ worth of wages to afford a 60-square-meter (646-square-foot) centrally-located flat. To be clear, one square foot of prime Parisian property is cheaper in U.S. dollar terms than San Francisco, London or New York. But the gap is narrowing. Even in the face of protests and strikes, the French capital’s prime residential market rose 6.4% last year and may rise 5.9% this year, outperforming other big global cities, according to Savills. Paris property prices have more than doubled in 15 years, and the average price per square meter is up 19% since 2016, according to Century 21.

Paris isn’t alone. The broader euro region is home to some of the raciest property markets in the world, in terms of price growth. A mix of record low interest rates, stable economic performance and the impact of Brexit on London investment has pushed buyers and money to continental cities. Amsterdam, Berlin, and Dublin are up 39%, 38% and 22% respectively since June 2016, according to Knight Frank. Given euro-area wage growth is in the low single digits, such increases look frothy. Voters are rightly frustrated with the thin gruel of ideas on offer from policy makers, who seem reluctant to end the party too abruptly. Promises to boost housing supply have failed to keep pace with the reality of demand, and have lined the pockets of developers in sometimes egregious ways. That’s given way to blunter measures, like proposals for a freeze on rents, as seen in Ireland and Germany. Judging by Paris’s experience with rent controls, these may not have the desired effect when it comes to reducing property prices.Central bankers might have better luck at pinching the market where it matters: Mortgages. While the European Central Bank mulls whether to re-tool its data to better include housing costs, national central banks are telling lenders to keep a close eye on consumer debt levels. Bank of France Governor Francois Villeroy de Galhau told French banks last month to respect loan affordability ratios or face extra capital surcharges. Sweden, which doesn’t use the euro but has used negative rates, has had some success cooling house prices via a loan-to-value cap and strict repayment rules.Still, if cheap credit were the only issue, we’d be seeing housing bubbles and rising debt ratios across the euro zone’s 19 countries, and we’re not. The current boom is highly linked to “superstar cities,” which attract both financial capital and knowledge-intensive human industries like a magnet. Brexit has accelerated this, with several euro-zone cities competing with London for staff and corporate headquarters, but its origins go back further. The growth of technology and financial services since the 1990s has benefited cities, where job density keeps rising. The fact that many European cities are also museum pieces brings in added bottlenecks of overtourism, Airbnb rentals, vacant properties, and NIMBYism.Popping the bubble of unaffordable housing is easier said than done. Increasing supply by building more homes and decreasing demand through credit constraints, regulation and tax policy means hurting the housing market “insiders” to improve the lot of outsiders. That can be a costly political challenge. It’s perhaps understandable that budding mayors would offer Band-Aids like handouts for homebuyers instead. But that’s not the pin this market needs.

--With assistance from Elaine He.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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