Has the French property market reached an event horizon?

french private finance

When gravitational pull becomes so great it is unavoidable you get what is called an event horizon. For British buyers looking at French property right now the market is strongly demonstrating this characteristic.

Even without a degree in astrophysics many will be quick to point out that such an occurrence is a sign of a black hole and unless you are either Matthew McConaughey or Anne Hathaway black holes are normally bad news. Yet where French property is concerned things couldn’t be more different.

The economic planets of low interest rates, currency and asset price inflation outlook caused by quantitative easing have aligned to produce a French property buying ‘event’ which may not been seen again for several cycles.

The evidence that this is happening now is all around us. French mortgage rates have dropped to new all-time lows. A 20 year fixed rate mortgage now stands at 2.35% for an average applicant and even despite the negative effect the general election has had on the pound it still buys you the same amount of euros as it did back in December 2007.

This means that for today’s French property buyer there are three main things that are being savoured; a cheaper deposit, lower monthly payments and less interest over the full term. Whilst some of these facets can be linked to one another, when you look at the real-term savings the numbers are very interesting.

In just one year French mortgage rates have reduced by more than 32% which has in turn reduced monthly payments by 10%. If you factor in the prevailing exchange rates from today and a year ago British buyers are today more than 21% better off per month, effectively paying £105 less per month on every €100,000 borrowed.

As you’d expect, the total interest payable on a 20-year fixed rate mortgage has also reduced, but this is where the savings really stack up. The total interest payable has dropped by 35% (€33,204) across the full term of the loan.

fpf-infograph-150514

It is tricky to say how much the situation might improve for non-resident buyers. The euro could weaken further and interest rates could drop but it is hard to see either moving in British buyers’ favour by more than 10% (maximum of £1 up to €1.55 or a 20 year fix down to 2.10%) from here. This means that we are effectively within 10% of the peak situation, which is certainly a good time to buy.

Beware of the competition

The only problem with such a value driven market is that there are a lot more buyers to compete against. Farmhouses in Dordogne haven’t seen a huge amount of buyer activity, largely because it is rural areas that have been hit the hardest when it comes to price drops. Therefore buyers of such properties have a little more time to breath. However, in areas that have a high tourism demand like the French Alps, Paris and certain areas of the south, there is real competition and buyers using finance are having to move quickly to secure their property before someone else buys it.

On more than one occasion so far this year one of our biggest sales partners, Athena Advisors, has seen the return of the property waiting list, something that hasn’t been around in French property since 2006. This evidence suggests that buyers have been circling their favourite resorts, cities and towns for sometime waiting for the time to strike. In the first six weeks of this year Athena sold more French ski properties to British buyers than it did in the entire of 2011.

Is quantitative easing important for French Buyers?

Looking further ahead, some clients still have concerns over property prices in France. Values are still dropping, but declines are mainly restricted to resale properties. The biggest decreases are still being seen in more rural locations and new-build properties in popular areas command a premium as they have a better chance of performing effectively on the rental market. Yet with the European Central Bank’s quantitative easing programme price increases are at least on the cards.

The theory behind quantitative easing is fairly simple. A central bank creates money to buy bonds from other financial institutions, thus flushing money more into system often resulting in things like lower interest rates. With money more readily available to people and businesses, everyone spends more which eventually boosts the economy, fuels growth in property prices..

Both the UK and US started considerable quantitative easing programmes after the recession and whilst there are lots of arguments as to how this printed money was eventually used the fact remains that their property markets stabilised and prices ultimately increased. The ECB’s planned injection of more than one trillion euros into the European economy, France, who’s real estate market wasn’t affected as badly as its neighbours’, is well positioned for asset price inflation such as real estate.