The French Property Market, February 2009

If you keep up with the financial news you would have heard that the UK is now in a “Deep Recession” according to Governor of the Bank of England, Mervyn King. Other prominent economic figures claim that the UK will experience its worst economic conditions for 100 years- even worse than the Great Depression of the 1930’s. Unemployment in the UK is now at 1.97m and it is expected to reach 3m by the end of 2009. Many high street brands such as Woolworths have gone into administration and many more are expected to follow- certainly gloomy times for the UK economy.

Across Europe the ramifications of the global economic crisis are also being widely felt, especially in Germany and Spain but also in the newer EU member states. France on the other hand will be the last developed EU economy to head into recession which it is expected to do by the end of the 1st quarter 2009. It is also expected to have a reduction in growth for 2009 but comparatively fare better than its EU neighbours.

The stock markets across the world have crashed quite unanimously, however the property markets in many of the EU countries have not shown such a joint reaction. In fact the property markets of France and Germany have fared comparatively well in comparison to the UK and Spain. In the UK and Spain it is not uncommon to pick up a property for less than 50% of what it was worth in August 2007, while in France and Germany the average reduction is around 5-10%. This is mainly down to their differing money lending policies: in France and Germany banks are much more conservative with a maximum 33% debt ratio, while in the UK and Spain Self-certification schemes were rife and indeed encouraged. The result of this is that the UK and Spanish markets became excessively over-heated through speculation that stretched beyond affordability while the French and German markets although hit were no-where near as exposed and as such have not succumbed to the same fate.

Having said that there are some excellent deals to had in the French property market where the developers have sold 80%+ of their development and they are near completion or have already completed. As the developer has already made his profit on the 80% he can then afford to sell those remaining at a reduced price (of say 10-20%) in order not to sit on empty stock. This is, however, a short term position for the developers and a unique opportunity for investors. The reason it is short term is because the cost of construction and land costs have hardly changed at all so if a developer starts a project today he must sell at almost the same price as a year ago as without a profit margin it would not be worthwhile. When you build in France you cannot start without a bank guarantee in place and the terms for this guarantee are usually that about 40% of the units must be reserved. If sales do not reach this percentage then the development will simply not go ahead. It is not economical for the developer to try and build it at a lower price- it will simply be cancelled and deposit monies returned to investors. This is why these opportunities for 10% to 20% off are very limited.

For resale properties on the other hand it is quite a different story and we see a much wider pattern of activity. In some rural parts of France we are seeing sellers drop their prices by 30% in order to secure a quick deal. Individual sellers are ruled by unique circumstances and if desperate to sell will do so. We are however also seeing the opposite happen in some markets where sellers are simply not prepared to sell in this market and instead we are left with few properties for sale. This is especially true in the more affluent areas of the Cote d’Azur and Paris and if there are discounts to be had they are rarely more than 5%- even in this slow market.

A contributing factor to this slow market in France has been the comparatively high interest rates over the past few months. Rates have been on the increase since late 2007 and the ECB rate reached 4.25% in August 2008. This coupled with the interbank lending rate (Euribor) increasing meant it was hard to get a mortgage for less than 5.8%. In the last 2 months or so though this has all changed, with the ECB concluding that with the worry of inflation now largely over, the prime concern is for growth of the European economy. As such ECB rates have been slashed with the result that you can now get a mortgage for less than 4%. The lending criteria for French banks have remained largely unchanged so for those that can afford it 100% mortgages are still available. This is in stark contrast to the UK where banks typically require a 30% deposit now and the best rates are only available to those with deposits of at least 50%.

All of this activity means that investors now have a double incentive to invest and homeowners will have a better opportunity to get on the property ladder. Some experts believe that the property market in France will fall by 10% on average over 2009, however where this may happen, reductions have already been priced in so it is unlikely that we will see vendor offer prices reduce much further.

Further evidence of this is that prices for apartments increased by 1.3% in January and remained at 0% for houses (source FNAIM). If taken over the last 12 months we see that this reduction in prices is also quite small with apartments dropping just 2.2% and houses by 6.2% (source FNAIM).

The effect of the severe downturn in the UK economy has been quite noticeable on the English speaking French property buyer. The market was typically made up people looking to buy a holiday home for cash or with a small mortgage for an average price of about 210,000 Euros. However many of these people have now deferred their purchase “till things improve” citing the poor exchange rate as a prime reason or lack of confidence. As such the market is now dominated by investors taking out 90% or 100% mortgages (and thereby largely unaffected by the exchange rate) or by the very wealthy looking to purchase expensive villas for 1m Euros+ who are buying in cash. Both sets of buyers are getting some great deals at the moment, however, by the time confidence is back in the UK economy and the exchange rate improves these deals are likely to be long gone.