Written on 29 May 2018

Tristan-Pierre Maury

Associate Professor, member of the Economics Research Centre at EDHEC Business School

Kevin Beaubrun-Diant

Co-director of the Executive Master in Wealth Management at Paris Dauphine University


France is the European country that has seen the most dramatic increases in real estate prices: up 71.5% since 1990

Interest-free housing loans (known in France by their acronym PTZ, for prêts à taux zéro) are part of a long tradition of French government subsidies designed to ease the burden for first-time property-buyers. First established in 1995, PTZs have undergone numerous iterations and alterations over the years, floating across the real estate landscape and trailing the names of each government official (Scellier, Robien, Borloo and, as of 2015, Pinel) who at one time or another has done his bit to keep the PTZ banner flying.

PTZs are considered to be largely responsible for increasing the level of homeownership in France, from 55.9% in 2001 to 64.37% in 2013. Yet according to an EDHEC research paper, there’s a big downside, starting with significant windfall and inflationary effects. These so-called zero-interest loans have also driven up property prices and have exacerbated the shortage of rental properties. Simply put: a lot of the money the government has set aside to help prospective homebuyers has ended up lining the pockets of sellers and promoters.

The EDHEC study reveals that interest-free housing loans suffer from a windfall effect to the tune of about 85%. That means some 85% of the recipients of these subsidies would have bought anyway, even if they hadn’t received this form of financial aid. This calls into question how well these loans are packaged and whether a (re) focusing on the least well-off of potential buyers might be a more efficient use of public monies.

Inflationary effects are another undesirable impact of interest-free loans. The EDHEC study points out that financial incentives to invest in real estate actually end up contributing to higher property prices. Legislation that took effect in 2009, which doubled the amount of interest-free loans allocated for new housing construction, was responsible for a 7% jump in property prices. How did that work? Well, despite the high demand, few new houses were being built, a situation that tends to encourage property prices to head upwards. Property prices also rise as landowners wait for more favorable (bullish) periods before putting their property on the market. When the government makes money available for their property to be purchased, those hesitant landowners cash in.

France is the European country that has seen the most dramatic increases in real estate prices: up 71.5% since 1990. And unlike in the US and the UK, French property values have not experienced a significant correction since 2008. What’s more, the valuation of homes in France is among the highest in Europe. Rents, on the other hand, have not followed the same trend as housing prices. Low rental yields, estimated to be around 2.5% in Paris between 2004 and 2007, according to the EDHEC study, make the option of investing in buy-to-let property somewhat unattractive. Some units get taken off the market while others go on the market at high rents, leading to vacancies.

Business wisdom tells us there is no such thing as a free lunch, yet in France there is such a thing as an interest-free property loan. The problem is, of the €1 billion the government spends funding such loans every year, more than half of that amount never reaches its intended beneficiaries - the young families hoping to become first-tome homeowners.

Possible solutions

Given these substantial side effects, one solution might be for the government to cut down or cut out interest-free loans. Would the decrease or extinction of PTZs have a comparable deflationary effect? The EDHEC researchers suggest it would not. So instead of either maintaining the PTZ tradition or doing away with it altogether, perhaps the government should consider a third option: limiting zero-interest loans to those households most in need in those areas lacking rental accommodations. Reallocating aid in this way would likely be inconsequential compared to, say, restructuring pubic land policy. Large chunks of undeveloped land might be considered as candidates for public housing construction, but the legal and political context is particularly prickly. The relatively low rate of taxation for undeveloped land and the lack of information about how much land is actually available are among the challenges involved. Land construction permit applications are processed on a local level —another impediment to grappling with a nationwide housing crisis. Only a complete overhaul of the legal framework governing land supply can begin to address France’s housing problem in any systemic way. 

See “What are the effects of interest-free loans on property prices?” An EDHEC Position Paper by Tristan-Pierre Maury, Associate Professor, member of the Economics Research Centre at EDHEC Business School, and Kevin Beaubrun-Diant, co-director of the Executive Master in Wealth Management at Paris Dauphine University.

This article was first published on Otherwise magazine (#3 issue). If you enjoyed reading it, subscribe here and receive the next issue  for free ! 

© Image by Florent Hauchard 

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