fundamental value and market value
A study conducted by Wuest Partner France focuses on the evolution of property prices in France. Based on data covering nearly 30 years of evolution, the consulting firm has developed a new analysis model. Indeed, it compares for the first time the fundamental value of homes with their market value. Thus, the results for the year 2023 predict stable prices despite inflation and rising interest rates.
What is the fundamental value of real estate?
Wüest Partner sheds light on the evolution of real estate prices in France with a new analysis model. This model makes it possible to distinguish the fundamental value of the property from its market value. Indeed, the fundamental value is determined on the basis of economic criteria. While the market value depends rather on transient speculative effects.
To determine the fundamental value of real estate, 5 economic variables are taken into account:
- population,
- household income,
- the mortgage rate,
- inflation,
- THE vacant dwellings.
Indeed, population growth influences the demand for real estate and prices. And, that, like the inflation which pushes up the rents and the prices of the real estate in France. Furthermore, the level of household income partly influences the level of demand. Similarly, interest rates on home loans have a direct effect on the cost of buying a home, and therefore on demand. Finally, the availability of vacant homes also has an impact on prices.
Market value or acquisition price
The market price of a property is the acquisition price obtained during an exchange between a buyer and a potential seller. This price depends both on economic factors, but also on other more speculative criteria such as local conditions or crises. Note that the Wüest Partner model uses the Notaires-INSEE index to measure the evolution of net seller prices, differentiated for houses and apartments.
A look back at 26 years of property price trends in France
Comparison of market value and fundamental value
Wüest Partner’s study demonstrates how fundamental value can be used to gauge whether prices are undervalued or overvalued. In addition, this value makes it possible to analyze the impact of economic factors on the evolution of real estate prices.
To do this, the study relies on quarterly data spanning a 26-year period, from 1996 to 2022. They include significant price fluctuations such as the increases of the 2000s, the financial crisis of 2008- 2010 and the health crisis of 2020-2021.
When these two values are close (fundamental and market), it means that prices are rational and anchored in the country’s economy. On the other hand, significant differences may reflect speculation or irrational expectations of market participants.
Indeed, the fundamental value explains about 75% of the variations in market values. However, an overvaluation of real estate prices in France was observed between 2005 and 2007 as well as between 2010 and 2012, followed by value corrections.
Note that in 2022, the difference between the market value and the fundamental value was less than 1%. However, this is seen as a positive signal for the French real estate markets. In fact, they remain strongly anchored in the country’s economy despite the change in the interest rate context in 2022.
“While interest rates are rising sharply, it is important to have an “objective” look at the potential evolution of property prices thanks to a model based on economic fundamentals.” – Bérengère Oster, Managing Director of Wüest Partner France.
Towards a stabilization of real estate prices in France in 2023?
Towards a stabilization of real estate prices in France in 2023?
By analyzing the data presented above, it is possible to predict the evolution of real estate prices in different scenarios. But, also, to analyze the impact of the context of low interest rates in recent years on future price growth.
Analysis of 5 scenarios
Thus, according to Wüest Partner, the fundamental value should decrease by 0.5% for apartments while it would increase by 1.9% for houses. These current economic conditions should not lead to major disruptions in the real estate markets, and prices could therefore remain stable. However, a larger price drop for apartments is expected in Paris, with a decrease of 2.1%.
Indeed, this model makes it possible to project the evolution of real estate prices in France over five years, from 5 different scenarios:
- Recession: an economic recession, with a 1% drop in disposable income each year.
- Stagflation: high inflation without economic growth, with an increase in interest rates to limit inflation.
- Stable prices: house and apartment prices remain stable with little variation.
- Forecasts : forecasts for economic development in France from 2023 to 2027.
- Growth : sustained economic growth, inflation and mortgage rates at levels below those of 2022.
Thus, it can be extended to consider disparities between rural areas and large cities. For now, it only covers the national level. On the other hand, it is innovative and the notion of fundamental value that it uses is enlightening for real estate professionals.
