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According to the leading French bank “Credit Agricole”*, short term interest rate should remain very low in 2013-2014 (from 0.25% end of 2013 to 0.40% end of 2014). However, long term interest rates like “OAT” 10 years (“French” gilt edge bonds) should increase from 2.55% at the end of 2013 to 3.10% at end 2014. This moderate hike may come from the recent long term interest rates increase in the US and the tailing away of Euro crisis. Therefore, the conditions for the “flight to quality” which helped to decrease German and French long-term interest rates to historically low level, are no longer prevalent. As the economic environment remains difficult for French householders (e.g.: high unemployment rate…), Credit Agricole forecasts a 4-5% price decrease in 2014, following a 6% downward trend between 2011 and 2013. You may also be interested in reading the previous property market study from “Credit Foncier”: “French second home market in crisis according to a mortgage specialist”.
Credit Agricole in depth survey analyses the strengths and weaknesses of the French property market:
“Cyclical” market weaknesses:
- No economic growth and increasing unemployment : GDP growth rate was stagnant in 2012 at 0% and again in 2013 (+0.1%), increase of unemployment rate (9.8% in 2012 and probably 10.6 at the end of 2013)
- Less favorable tax environment for the property market: sharp increase of capital gains tax (CGT) on second home early in 2012, zero interest rate mortgage restricted to new homes, tax incentive for property investment in new homes (“Duflot”) less favourable than the previous scheme (“Scellier). However, Credit Agricole estimates that the CGT reform (in place since the 1/09/2013), should favor a moderate rise of the number of properties on sale.
- Property prices are overvalued: the 155% property price increased since 1998 has only been partly offset by interest rate decrease, longer maturity mortgage and the wages increase. Credit Agricole assesses the overvaluation at 15%. The average mortgage repayment accounts for 35% of the average household income in 2013, versus 30% in 2003 (maximum 39% before the 2008 crisis, minimum 25% in 1999). Many potential buyers have postponed their acquisitions due to overvalued prices and the belief that prices will decrease.
Underlying market strengths:
- House flats demand supported by strong structural drivers: high desire to access to property ownership (only 63% own their home versus 71% on average in the UE). Other factors are: a positive demography, the structural family changes, property used as a “safe” investment and a way to prepare for retirement. French householders are rather “risk adverse” and favor investing in property instead of shares, the financial crisis has deepened this long term fundamental.
- The mortgage market is rather cautious: and conditions for getting a mortgage are rather strict. Bad mortgage debts remain at low level. Mortgages are granted based on household income, with a cap at 1/3. Mortgage market is mainly fixed rate, thus avoiding the potential inflation risk that may happen in the UK, while maturity remain also lower than in the UK at 19.8 years on average.
- There is no excess of property on offer: rather the opposite especially around Paris. Property developers have remained cautious and constantly adjusted their activity to the market.
Will property price (finally) decrease more significantly?
In 2012 and 2013, both supply and demand have decreased correlatively, resulting in limited price decrease, very close to a quasi market stagnation. Demand has been reduced due to the economic situation, while many owners have decided to hold their property to avoid a price decrease and or a significant CGT (before the September 2013new CGT reform).
However, this fragile balance might be shaken by the interest rates rise. According to the Credit Agricole, the balance between supply and demand is likely to continue, but price might be adjusted downward to offset the interest rate hike, otherwise demand would decrease further. The interest rate increase and therefore the price decrease should be limited, thus the Credit Agricole forecast a 4% decrease in 2013 and a further 4-5% decrease in 2014. The bank considers that the financial situation of many potential buyers has worsened (e.g. first time buyers). A further price decrease would be necessary but is not very likely to happen, while the 25% exceptional rebate on CGT** will help the market, albeit it will not be enough.
*Credit Agricole survey:
**Read our article on Capital Gains Tax reform:
Also our entire section on CGT: