This post proposes a measure of property purchasing power by calculating the floor area in m² that an individual with an average income could buy with a housing loan (excluding deposits) in some of the largest euro area countries. After declining sharply in the 2000s due to rising house prices (with the notable exception of Germany), affordable floor area has increased since the 2008 crisis, mainly thanks to lower interest rates.
Note: Affordable floor area in France increased from 37m² in Q1 2010 to 47m² in Q4 2018 (for an individual with an average disposable income, assuming a debt-service-to-income (DSTI) ratio of one-third of disposable income and a loan maturity of 20 years).
Usually, the price-to-income (PTI) ratio is the preferred indicator of property purchasing power. It can be used to assess tensions in the housing market: if the PTI ratio rises, house prices then change more rapidly than household income and drive down purchasing power. However, Dujardin, Kelber and Lalliard (2015) highlighted this indicator’s limitations.
It is possible to build up a property purchasing power indicator that can address these shortcomings by using price series expressed in euro/m² and by incorporating the interest rate associated with the housing loans granted to households (Lalliard, 2017; Bricongne, Turrini and Pontuch, 2019). This indicator represents the floor area affordable on credit (excluding deposits from buyers’ own funds) for an individual with a disposable income (i.e. after deductions and transfers) equal to the national per capita average, assuming an average loan maturity of 20 years and a debt-service-to-income (DSTI) ratio (the proportion of income spent on the main residence) at origination of one-third of disposable income.
This indicator is thus a stylised and average measure of property purchasing power, excluding deposits from buyers’ own funds. Its evolution in each country depends on changes in average per capita disposable income, average house prices and housing loan interest rates. However, this indicator notably does not take into account the dispersion of loan maturities (and the fact that they have changed over time) nor house price heterogeneity across regions and cities within the same country. It is a legible indicator, that complements PTI, but which is still simplified. In reality, borrowing practices vary across the euro area: interest rate types (fixed or floating), loan maturities and the legal regime for the collateral securing loans differ from one country to the next.
This indicator should not be interpreted as a reflection of the property purchasing power of the average household: on the one hand, it does not take into account deposits from buyers’ own funds; and on the other, the disposable income of the average household is greater than the average per capita disposable income.
Since the end of the 1990s, the property purchasing power indicator has followed a similar trend in some of the largest euro area countries, with the notable exception of Germany (see Chart 1):
Average affordable floor area in Spain and Italy has exceeded that of France since 2010. In Italy, property purchasing power increased significantly, peaking at 63m² in Q4 2018. Higher per capita income, lower borrowing costs and above all the absence of a house price rebound have bolstered property purchasing power. In Spain, the dynamic trend in average affordable floor area has lost momentum since the end of 2016, falling back to the level of France in Q4 2018. In France and Belgium, current purchasing power levels are slightly below the high of the late 1990s but are close to those of 1996-97, with affordable floor areas of 48m² and 55m², respectively, in Q4 2018.
The exception is Germany, where property purchasing power has increased almost continuously since 1995. While 31m² could be purchased with an average per capita income in 1995, less than in France or Belgium, affordable floor area rose to more than 69m² in 2015. Since then, affordable floor area in Germany has dropped back slightly, down 8m² over the 2015-18 period.
However, these comparisons do not take into account the effect of countries’ demographic structure: a younger population would have a lower average income and therefore weaker property purchasing power.
In France, house prices grew strongly from 2000 to 2007, but the trend was more uneven in the 2010s. The majority of their negative cumulative contribution of almost 40m² since 2007 (see Chart 2) was therefore felt in the initial period. It was partly offset by the increase in disposable income and then, particularly from 2008 onwards, by the fall in lending rates, whose cumulative contribution went from 1m² at the start of 2009 to 13m² at the end of 2018. Again, it should be noted that the effect of extending loan maturities is not taken into account as they are assumed to be fixed.
In Germany, the stability of house prices in the 2000s combined with increased disposable income bolstered household property purchasing power. Growth in house prices regained momentum from 2010 onwards, initially offset by the fall in lending rates, which continued to maintain the affordable floor area, with a cumulative contribution that amounted to 20m² in 2015. Since that date, the positive contribution of lending rates has no longer been able to offset the increase in house prices, leading to a slight erosion in property purchasing power since 2015.
Thus, the floor area that an individual could afford in Germany benefited from the later rise in house prices than in France. Disposable income grew steadily during the period under review. Lastly, the fall in lending rates since 2008 provided substantial support to property purchasing power during the past decade.
Note: This chart shows the cumulative variation in property purchasing power since 1998 and its breakdown according to the relative cumulative effects of changes in disposable income, the lending rate and house prices. The affordable floor area in France was 20m² lower at end-2004 than at end-1998, with a negative cumulative contribution of 32m² from house prices and positive contributions of 10m² and 2m² from disposable income and lending rates, respectively.