Lack of liquidity driving up French mortgage rates but transaction numbers still increasing on confidence upswing

Mortgage

After an extremely quiet September, traffic and enquiries are up by more than 40% in October, with many international buyers signing agreements to purchase in France for the ski season despite the continuing Euroland saga. Wednesday’s announcement of a solid plan to alleviate the Eurozone sovereign debt crisis should boost confidence in the markets by making clear that the political will is there to support the Euro – as predicted by George Soros. Overall confidence has been buoyed, with many seeing the French property market as a safe haven for investment funds

French mortgage product rates were stable during October although two banks are now set to increase rates and margins by 0.35%, attributed to an increase in the ‘cost of funds’ on the markets with others keeping rates stable for now.

This increase in the ‘cost of funds’ is an amount which is added to the index or rate at which French banks are borrowing and is a kind of risk and liquidity cost margin. This increase does not appear in any of the indices such as the 3 month Euribor, against which the majority of variable and capped rate mortgages are pegged. The reasons for the increased costs are the new banking rules on increasing the capital base for lenders. These rules have reduced the ability of banks to lend and the uncertainty of bank debts which may have to be written off due to the situations in Greece and the wider economy. This increased cost associated with liquidity has prevented long term interest rates from falling to extremely low levels again, as they did in September last year. We recently saw the TEC 10 index, which gives an indication of 10 year government bond yields and long term fixed rate mortgages, fall to its lowest ever level of 2.45% on 12 September, the previous low taking place 12 months earlier.

We may be set for a decrease in the ECB rate before the end of the year. The question is whether this will be passed on in the form of lower rates or simply absorbed into the ‘cost funds’. If the liquidity problems persist, those who manage to obtain a mortgage facility will be pleased they have one, if the cost of liquidity continues to increase.