Prices will fall but there is no market crash in prospect, according to two recent reviews of the French housing market. Both Credit Agricole and HSBC France consider that after ten years of sustained growth the market is moving towards a period of ‘stabilisation’ and ‘adjustment’, with prices falling next year by up to 5%. Credit Agricole, in particular, consider there are four main reasons why there will be a relatively gentle landing:
Whilst prices are historically high, they are not overvalued, in large measure because of a drop in the real cost of credit over the past decade. Since 1996, interest rates have been low, and credit periods have been extended. As a result, whilst the amount borrowed has increased, the actual real cost to the buyer remains manageable, with average debt levels remaining constant, at around 50% of earnings. This is in stark contrast to many other countries, notably the UK, where household debt levels are around 135% of earnings.
Unlike the Anglo-Saxon market, there is no ‘sub-prime’ market in France. Loans are based on the level and security of income of the borrower, not on the value of the property. Most French mortgages are also granted on a fixed rate basis, contrary to the Anglo-Saxon market, where variable rate mortgages are widespread. Credit Agricole consider that banks will continue to hold a tight rein on credit criteria. Mortgage rates may continue to rise, but only marginally. Whilst credit conditions may, therefore, become tougher, the rise in mortgage rates will be dampened by the competition for mortgage business between lenders, an activity that is of central importance to their profit levels. Mortgage rates in France remain well below those in the UK, currently at around 4.8% for a fixed loan of around 20 years.
The speculative investment pressure that drives a large part of the Anglo-Saxon market is not present in France. In the main, the housing market is driven by buyers seeking property for their own use, not a property to buy and re-sell for a quick profit. Most of this pressure is structural, resulting from an increase in the number of households (+350,000 per year). France is one of only three countries in Europe where the population is growing principally because births exceed deaths. Recent tax breaks for mortgages, and a relaxation of the rules on inheritance tax, will also continue to provide support to the market. The Observatoire de la Production de Crédits Immobiliers (OPCI) based at Paris X-Nanterre University, is a body that monitors mortgage supply and demand. In its most recent review of the market, it reported that in the quarter June to September 07, mortgage approvals were nearly 5% higher than the same period in 2006.
Whilst around 400,000 new homes a year have been placed on the market over each of the last two years, there is a large historical backlog, and there continues to be a deficit in the number of houses to meet need and demand. Credit Agricole do not discount the possibility that major tensions in the international financial system might upset their central scenario, by bringing about a sharp rise in rates, but they believe the risk to be a low one. As a result, there is every prospect that in some areas of France (notably Paris and parts of the South East), prices will continue to rise at a moderate rate. Regional variations demonstrate why, in a country as large and varied as France, it is dangerous to generalise too much about the state of the market! You can read more in the most recent review of the property market from the French professional body of estate agents, FNAIM.