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The leading French bank “Credit Agricole” has just released its latest analysis on the property market.
The French market experienced a moderate slowdown in 2013, with both sales volume and prices decrease by respectively 2% and 2.5%. The market adjustment since early 2012 remains modest. In 2014 the negative environment should continue as a “soft landing”, unless the interest rates increase sharply, albeit not very likely according to Credit Agricole.
As the economic environment remains difficult for French householders (e.g.: high unemployment rate…), Credit Agricole forecasts a 4% price decrease in 2014, following a 5% downward trend between 2011 and 2013.
The bank considers that short-term interest rate should remain very low in 2014 (around 0.30% for the 3 months Euribor). However, long-term interest rates like “OAT” 10 years (French government bonds) should increase from 2.30% at the end of 2013 to 3% at end of 2014. This moderate hike would come from the long-term interest rates increase in the US and the tailing away of Euro crisis due to the reduction of budget deficits in the Southern Eurozone. Therefore, the “flight to quality” which helped to lower German & French long-term rates to historically low-level, is less prevalent. Consequently, mortgage rate in France should (linked to the 10 years OAT) continue to increase moderately. But they should remain at a historically low-level, inducing a “soft landing” of the property market.
Credit Agricole in-depth survey analyses the strengths and weaknesses of the French property market:
“Cyclical” market weaknesses:
- Flat growth rate and increasing unemployment :
- GDP growth rate was stagnant in 2012 at 0% and again in 2013 (+0.2%),
- Increase of unemployment rate (9.8% in 2012 and probably 10.5 at the end of 2013)
- Harsher tax environment for the property market:
- There was a sharp increase of capital gains tax (CGT) on second home early in 2012,
- The zero interest rate mortgage is now restricted to new homes,
- Tax incentive for property investment in new homes (“Duflot”) requires more specific lending conditions (renting rate cap…) than the previous scheme (“Scellier).
- However, Credit Agricole estimates that the CGT reform (in place since the 1/09/2013), should be a positive factor for the market in 2014.
- Property prices could be overvalued by 15% :
- The 155% price increase since 1998 has only been partly offset by interest rate decrease, longer mortgage duration and 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 2004 (maximum was 39% before the 2008 crisis, minimum was 25% in 1999).
- Some 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 prefer investing in property instead of shares, the financial crisis has deepened this long-term fundamental.
- Historically low mortgage rate:
- Mortgage rate decreased in 2012 and in the first half of 2013, while remaining broadly stable in the second half of 2013,
- This has had a positive impact on solvency of property buyers, and compensating the moderate decrease of property price
- The mortgage market is rather cautious:
- 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 of income for mortgage payments.
- 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.
- This is also favourable for the buyers, as it limit the probability of a market price crash, as mortgage payments will not be impacted by interest rate rise as it could happen in the UK
- There is no excess of property on offer: rather the opposite especially around Paris. Property developers have remained cautious and have constantly adjusted their production 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 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 new reform in September 2013).
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, therefore the price decrease should be limited. Credit Agricole forecasts a further 4% decrease in 2014, while sales volume should remain stable. 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.
**Read our article on Capital Gains Tax reform:
Read also our previous analysis on the French and Paris property market that were published in January 2014: