Paris New Real Estate Risks Index

Constructing a New Real Estate Risks Index for the Paris Residential Market

Abstract

In this paper we investigate the driving factors associated with the Paris apartment market. We explore a database of more than 220 000 transactions for residential properties in the Paris area over the 1973 – 2001 period. We develop a factorial model that may capture the systematic link between residential prices and a set of predefined economic variables or a linear combination of these economic variables. We assume that capital growth rates in real estate are related to the variables we chose. We measure this link which underlines the ‘true path’ of the real estate market in the sense that systematic factors can represent it. The methodology we develop to construct an index, based on a multifactor approach to apartment price movements in the long run, has two main advantages over traditional indices. Firstly, we are able to identify the main driving factors for the Paris residential market. And secondly, the factors thus derived can be used to generate a “factor model” useful in comparison to existing capital growth indices and that may provide valuable intuition for forecasting residential prices.