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The state of the Eurozone and how this affects the French property market


The state of the Eurozone, the stimulus package, French politics and their impact on the French property market in 2015 and beyond


The first few weeks of 2015 have been rather eventful for the Eurozone: we have seen the ECB unleash a 1.1 trillion Euro economic stimulus package and Greece have just voted for the anti-austerity left wing party Syriza to take charge of their country in a tense election campaign that has had the eyes of the world watching.

The effect of both of these incidents has pushed the Euro to a low not seen since the early days of the financial crisis in 2008 but while initially it may cause some potential property investors in France to feel a bit jittery and take a sit and wait approach to see how it all unfolds, when the situation is examined it becomes clear it provides much more of an opportunity than anything else particularly if you earn your money in a non-Euro currency. Before we can say this though we need to look at the expected effect of the stimulus package and the Greek election result. First let’s look at the stimulus package:


The Stimulus Package:

The ECB which is mainly influenced by France and Germany (particularly the latter) and since the global financial crisis started have stuck by their guns and said no to QE (Quantitative Easing) and instead proposed that austerity alone is the solution to nursing their economies back to health again considering the large burden of debt the Eurozone was under and how these large debts contributed to the global financial crisis in the first place. On the face of it that seemed reasonable and most developed economies imposed some sort of austerity measures including the UK & USA but the last 7 years have shown that austerity alone is not the solution as European economies have been largely showed fairly unimpressive growth figures over this time. Now, having seen the benefits of a controlled monetary stimulus such as QE on the UK & USA economies the ECB is finally ready to give the Eurozone the stimulus is has badly needed and which has been met with a good response from the markets as inflation remains extremely low. In the short term of course this has the effect of weakening the Euro against other currencies in much the same way that the Dollar and Sterling weakened against the Euro when they announced their stimuli (remember Sterling fell from around 1.5 Euros to the pound in 2007 to almost parity by 2009). This was however of great benefit to the UK as it always is when the currency of an economy is devalued as it makes exports far more competitive which has the effect of boosting GDP. In the London property market in particular it had the effect of causing a huge influx of money into the capital as overseas investors clambered over each other to invest with their newly strengthened currencies into the comparatively cheap London housing market which helped property prices increase by about 30% in a little over a year in 2013 & 2014.

As such a weakening of the Euro in this way, especially when accompanied by QE and incidentally the effect of low oil prices should boost the Eurozone economies and also reduce unemployment in the region. In particular the low oil prices act in effect as a tax cut on the heavy oil consuming economies in Europe and will act as a major stimulus to the economy. This scenario then creates the perfect situation to invest in property in a stable Eurozone country such as Germany or France. These sentiments are echoed by Berenberg economist Christian Shultz who says “A recession looks unlikely in the short-term, and over the medium-term we expect cheap oil, the weak euro and the ECB weighing on funding costs to return Eurozone growth to close to 2% annualised again”. So the upshot is that a recession is unlikely and economic confidence is returning to the Eurozone and a risk of a dramatic collapse in the Euro is extremely unlikely so the recent falls from around 1.24 Euros to the pound to 1.33 Euros to the pound is not likely to slip much further especially considering the Dollar and sterling interest rates are also likely to stay very low for a while so a large rush of money into Dollar and Sterling to the detriment of the Euro is unlikely so the current exchange rates are unlikely to shift a huge amount over the coming years. The very low interest rates stemming from an ECB rate of just 0.05% also adds to the perfect scenario for property investment as these rates even for 25 year mortgages start from as little as 2.5% compared to around 5% for a regular Buy to Let mortgage in the UK.

The Impending Greek Exit From The Euro:

The next thing to look at is whether the new Syriza party in Greece really poses a great economic threat to the Eurozone and its currency. We saw that their election (along with QE) had the effect of weakening the Euro slightly against other major currencies but after the initial days of market jitters the market and the influential political circles seem to have come to terms with the new party in control of Greece at the moment. The reality is that Greece’s GDP contributes to just 1.3% of the Eurozone GDP based on 2014 figures so even if they leave the Euro behind they are not significant enough to have any real impact on the markets or on the stability of the Euro and in fact many people believe that it would actually be a good thing if Greece leaves the Euro since it is struggling so badly compared to its Euro compatriots (it lost 19% of GDP since the crisis started). The possibility of Germany giving in and allowing a huge re-structuring of their debt (which is the only realistic way Greece can stay within the EU) and the ECB providing further funds to Greece now looks unlikely too as we may then see other governments pushing to renegotiate terms of their finance too which could essentially means that the strong countries of the EU are paying the price for debts created in other EU countries which would not sit well with voters in the likes of France and Germany. So it looks more and more like Greece will default on its debts in the coming months especially as the new leftist government has clearly indicated they have no intention of going along with the requirements imposed by the Troika which in turn means the financial taps will be switched off to Greece and they will have to leave the Euro which as I say is no bad thing as they are so out of tune economically with their EU counterparts. The remaining countries in the EU are comparatively far healthier than Greece so it is very unlikely we will see other countries leave and in the words of its president Mario Draghi the ECB is committed to doing “whatever it takes” to preserve the Euro.

So when you look at the expected effects of the recent news the positive aspects of what has happened far outweigh the potential downside. The Eurozone is also still the largest economy in the world generating $17.5 trillion per year beating USA ($16.8 trillion) and China ($9.2 trillion) according to the IMF making it one of the most solid currencies in the world meaning large currency movements are unlikely. If the Euro currency should dip slightly further in the coming months then this simply makes it even more attractive to foreign investors and if you are paying off a Euro mortgage using non-Euro currency then this benefits you even more. Alternatively if it is a rental property in France that you are investing in then you are mainly or completely paying off your mortgage with the rent from the property so any fluctuation in the Euro has little or no effect on you.

The French Economy:


Now let’s look at France’s economic picture a little more closely. It is still the 5th largest economy in the world with $2.8 trillion in GDP ahead of the UK in 6th with $2.5 trillion in 2013 according to the IMF. In the last published figures by OECD showing Q3 2014 GDP they also put France’s growth at 0.3% compared to the UK at 0.7% so although France is not exactly showing fantastic growth it is also by no means in trouble. The unemployment rate on the other hand is fairly high at 9.9% and this will take time to come down however we have to remember that France is still a very socialist country with around 35% of total employment coming from the state sector (compared to 20% in the UK) that has been hard hit by austerity measures without an increase in take up by the private sector. The solution to this is of course to reduce the economic burden of the public sector workers and to encourage businesses to employ more people, especially the younger sector between 20 and 30 years of age however to make a difference this requires a huge reform in employment regulations which will take some time. They also need to offer better tax breaks to entrepreneurs and businesses in general in order to encourage people to take the risks with their time and money in the knowledge that it will be worthwhile rather than the current system which frankly does not encourage entrepreneurs since the tax burden IF you make your business a success is unusually high so doesn’t encourage you to take any risks. It begs the question to the entrepreneur is it really worth it when they could just take a normal job and be protected by the stringent employment laws in France. To make these changes however they need to reduce the power of the unions in France which have had such an huge influence in French politics over the years and this will take time, however, the recession over the past 7 years has shone a spotlight on this issue as never before and hopefully will create the impetus politicians need to make the required changes. They have already made a start by recently announcing 40bn Euros in tax breaks for businesses but they need to do more. The good news is that despite the difficulties businesses can face in France it has still proven itself to be a very successful and powerful country (as mentioned before it has a larger economy than Britain and doesn’t so severely rely on the financial sector as is the case in the UK) so if France can get this right it has an awful lot of potential for growth over the coming years and decades.

Taxes in France:

How about the tax situation? Don’t France’s taxes make it an unattractive place to invest? Again a good question to ask since France is generally known for having some of the highest taxes in Europe but the crucial question is not that, it is instead how exactly the property taxes effect you and shouldn’t be confused with the larger taxation policies that effect French residents like income tax. Income tax and their equivalent of National Insurance contributions collectively are quite high (on average almost 100% of what employees earn is also paid by the employer to the taxman) but actually property taxes, especially for foreigners are quite reasonable. Capital gains tax in France for example is just 19% and reduces to zero over a 30 year period and tax on rental income is just 20% with the ability of offset all costs associated with the running and maintenance of the property and mortgage interest so your actual tax liability is often very small. In addition there are certain tax breaks applicable when renting your property out to tourists in residences where hotel services are provided where for example 90% of the property value can be offset against any income tax due over a 30 year period. When you combine these together you can quickly see that if you invest in the right types of French property you can pay very little if not no tax whatsoever. This is why it is so important to look at the detail and not just read headline grabbing news usually regurgitated by popular media channels to base your decision on whether to invest in French property or not.

Property Market Predictions:


Lastly let’s look at property prices in France. How will they fare? Is it worth waiting to see if French house prices fall before investing? These are all reasonable questions to ask when looking at France as a potential place to put money. To answer this we need to look at the pattern of French property prices and how they have fared throughout the recession and what key factors could make prices go up or down. When we look at French property prices over the past 8 years from just before the recession took hold until today we can see that property prices have remained very stable when compared to most other world property markets. In 2009 for example when property prices in the likes of the UK, USA and Spain fell on average by between 20% and 50% prices in France dipped just 5 to 10%. Since the lows of 2009 on average they regained their highs of 2008 back again by 2011 and since 2011 decreased by 5% or so. Importantly however because this is just an average it hides regional differences which according to notaires shows that property prices in the large cities and in tourist zones such as the popular ski and seaside resorts have actually propped up the prices of many villages and towns outside of these areas. So if you had bought a villa in a popular seaside resort you would still have done reasonably well and probably experienced a price increase from 2008 to 2015 but if you bought an old cottage in the countryside you would have lost money but the overall trend is very stable as mentioned.

The reason for this stability is partly due to the mind-set of the French people in being relatively risk averse and having savings but also is down to the strict mortgage market that has been in place for many years in France. For example the lending criteria in the UK mortgage market pre-crisis was extremely lax with self-certification loans being highly prevalent meaning many people would take out mortgages without ever having to actually prove their income or affordability with tax returns, payslips and bank statements. This meant that many people had taken out mortgages they couldn’t afford so when things took a turn for the worse they were the hardest hit and was a big reason for the high number of repossessions and a significant factor in the sharp decline of the UK property market, including London. In France however ALL mortgages are status only mortgages meaning every applicant has to prove their ability to repay the mortgage and their assessment of borrowing capacity is also more conservative than the UK. There is also no such thing as a Buy to Let mortgage in France which is based almost entirely on the potential income of the property being purchased as French banks want to see that the person paying the mortgage can afford to repay it and not the property being bought. Lastly interest only and 100% mortgages were very rare in France as people in France actually expected to have some savings and expected to repay the mortgage they took out and not just count on the property market doing well in order to pay off the loan and make money. The upshot is that the financial crisis did not actually cause a sharp decline in the French property market like it did elsewhere in the world as the people who owned property and took out mortgages could generally afford them. This kept prices fairly stable and now that we are over the worst of the financial crisis it is highly unlikely that prices will fall by any significant amount even if the economy were to flat line over the next few years and not rebound as is expected as the fundamentals of the market are still very sound and there is still a shortage of 4 million homes in France. Anyone therefore holding out for a French property market decline before they make their purchase is likely to be disappointed as all the signs point to a stable albeit slow property market over the next year.

In fact in 2014 prices fell by on average just 1.5% and most forecasters predict prices to more or less flat line over 2015. Whether property prices start properly rebounding in the latter quarter of 2015 and 2016 remains to be seen but it is certainly not a country where you are going to lose your investment. It is a steady performer and has always been this way and while you are unlikely to make double digit growth year on year you are also not likely to lose money as it doesn’t follow the boom and bust cycle as we have come to expect in the UK & USA. It is therefore a good option for risk adverse investors or those wishing to balance out their property investment portfolio with less risky acquisitions than in some countries. As the market is currently fairly slow it presents an opportunity particularly for investing in new builds as developers have to price their developments very competitively right now if they want to sell with a decent sales rhythm. To give you an example most new developments in France typically cost around 25% more than an existing property partly because they are modern but also because owners know they have no work to do and they come with build guarantees. In the current market however because developers need to maintain their turnover they are heavily squeezing their margins and pricing so are only slightly more expensive than existing properties- on average about 5% higher now so new builds represent by far the best value at the moment and you can get some very good deals. If you wait until the market recovers fully again and sales start getting back to normal figures then these good deals will of course disappear and you can expect to pay significantly more for the same property. When you combine this opportunity with the low interest rates which are the lowest rate since WWII, property investment in France looks rather attractive.