French Economy Slump on Hollande’s Rent Cap and Housing Sales Regulations

The interventionists’ short term nostrums fails once again.

Here is what I wrote last June on rent controls (bold original):

since rent controls preclude property owners from adjusting prices based on market realities (which essentially violates property rights of property owners), the economic outcome will be one of shortages in housing supply for these housing categories as depressed prices reduce the incentive to provide additional supplies.

Applied to France, this excerpt from Bloomberg:

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years.

Housing starts fell 19 percent in the second quarter from a year earlier, and permits -- a gauge of future construction -- dropped 13 percent, the French Housing Ministry said yesterday.

The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods.

So rent caps reduced the incentives for developers to build.

But there’s more. Well more than the rent cap, President Hollande also imposed new regulations on home sales…

To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.

“Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.”

Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7 percent, down from 6.3 percent in the first three months of 2007, he estimates.

So both interventions signifies a double whammy which took a severe toll on the French economy. Likewise both interventions has only aggravated the lingering bust cycle being endured by the French 

The bottom line is that there will hardly be any meaningful or real recovery when politics gets into the way of the markets.