The Eurozone Crisis:

The Eurozone Crisis is clearly not "business as usual" but neither is it unexpected nor is its conclusion difficult to foresee. What is difficult is forecasting how and over how long the final phase of the debt deflation will play out before "normal service" is resumed.

Because our Market Trends page is intended to be a long term not a short term view I'm going to continue to focus on this page on what we expect to see in the long term, 5-10 years out. For a snapshot of how we see the Eurozone Crisis playing out over the coming months you'll need to take a look at our blog here.

Overall picture:

• Historically low Euro € interest rates, but they will rise back to normal levels over the medium term.
• The recovery does not have much of a "feel good" factor yet, but this upturn may be the start of the 6th Kondratieff wave and run for 40+ years.
• Impossibility of getting a sensible real return on savings deposit accounts.
• Increasing French mortgage affordability as the Euro falls into Q4 2011 and beyond.
• French housing market now past the bottom, with house prices again rising.
• Basle III begriming to bite through a tightening of bank capital adequacy requirements.
• Euro zone financial plan will finally stabilise, perhaps with the issuance of ECB Euro Bonds and market confidence in the Eure will return.
• 85% + probability that we will see significant inflation after 2011.
• Normal French mortgage lending has returned allowing buyers to chase property - read more

A return to inflation post 2011 as the central banks quantitative easing washes through the global economy will drive property prices rapidly higher in money terms.

Basle III has changed the bank lending horizon for the next 30 years. All French banks have responded with product and rate changes during Q1 20011 but it will be months before the fallout has worked its way through the financial system.

Our monthly French market trends report is reviewed and updated after each month's ECB (European Central Bank), BoE (Bank of England) and US Fed (Federal Reserve Bank) rate review meetings, which are usually held mid-month.

Because many of the trends reported on should be expected to run for longer term than a month our analysis and commentary will not necessarily change each month.

For day by day news and comment go to the Best French Mortgage Blog

DJR, 10th November 2011

The news from the meetings of the European Central Bank and the Bank of England continue to confirm our analysis and our forecasting models, but doesn't bring us any closer to agreeing with their overall view as to where the economy is now. The uncertainty we have centres around the long term effect of Basle III which is likely to decrease world GDP by between 0.05% to 0.15% per year for the foreseeable future.

Here's why.

We see a global economy that is pulling out of recession faster than the commentators are predicting and which is in danger of being over-stimulated to such an extent that we will be impelled into a future round of high inflation, especially property price inflation, and higher nominal interest rates. Certainly the recovery will be very lumpy and markets will oscillate wildly but nonetheless we should begin to slowly see the economy lurch fitfully towards recovery.

Here's our some of evidence:

• In 2007-08 the Central banks were slow to recognise the onset of recession and initially intervened too little and too late. At the time they were criticized for "driving in the rear view mirror" and we think they still are. They are more focused on Q4 2008 than on Q4 2012. Throughout 2011 inflation has been higher than expected despite the recession so expect UK inflation to continue pushing upwards in 2012 unless the coalition precipitates an economic meltdown through ideologically driven cuts.
  
  
• QE (quantitative easing) is claimed to be a new policy tool and the commentators are speculating that it may not work. We know from the "monetarism" experiment of Milton Friedman and the Chicago school in the 1980's that suddenly and significantly reducing the money supply can bring an economy to a screeching halt in months, as happened in the UK and US. So if the technique works when it's called monetarism and the money supply is reduced, it's perverse to believe it won't work when it's called QE and the money supply is increased. The only imponderables are how long the policy will take to have an effect and how big the overshoot will be.

• The corporate banking sector has recovered rapidly, an early indicator that the corporate sector is recovering. There are still areas of weakness but with banks typically paying between 0.0% to 0.5% on deposits and charging around 26% for overdrafts their financial position is improving by the day. The sovereign debt crisis of 2011 is the second leg of the debt deflation cycle, of which the banking crisis of 2009 was the first leg, and we will not be back into "normal" territory until it has finally worked its way through the global economy.

• Global stock markets are already pricing in a recovery on good days and discounting economic Armageddon on bad days - extreme volatility is always a sign that the markets are at a major trend turning point..

• Purchasing managers indices around the world are starting to indicate that the de-stocking cycle has ended and output volumes are rising above 50, the level which indicates positive growth. The smart money is now betting against a double dip recession, but betting on a protracted period of "stagflation".
  
  
• Smart professional analysts are hurriedly re-reading their textbooks on the Kondratieff wave theory and the commentators are re-discovering Bob Beckman, "a man whose predictions were 25 years ahead of their time" and his seminal book "The Downwave: Surviving the Second Great Depression" (now selling on Amazon at £77.95 plus delivery!) whose predictions are at last coming true. Both point the way to a long period of recovery and growth, the 6th Kondratieff wave.

There will undoubtedly be setbacks in the coming months but overall we stand by our present long term view.

Since Q1 2009 we have been cautiously optimistic, based on our long term view of economic cycles. Our positive view has been unfashionable with most commentators who have taken a pessimistic if not downright negative view of future prospects.

We have consistently argued that the French property market is not the place to be if you hope to make a short term speculative killing, but that if you are making a long term commitment to a principal residence or holiday home you have one of the best opportunities to be seen for 25 years. We are now seeing serious property investors moving back into the market to snap up prime property in the best areas. In Q3 we handled more €1 million plus mortgages than over the previous 2 years combined: in each case the buyer wanted to get into the market "before prices rise".

House prices were depressed but are now begriming to rise strongly in some areas, mortgage interest rates are still low but now moving back up to normal levels and exchange rates have started to turn against the Euro and in your favour. With a mortgage at today's rates it's still difficult to see a better medium and long term investment.

So, if you're thinking of buying in France, you need to factor into your thinking that French property prices are probably now as low as they're going to get and fixed rate mortgage rates may not be as low as this again for another 60 years.

The balance of risk is that if you delay a purchase you're likely to end up paying more for the property and missing the best mortgage deals for a generation. Some clients are already reporting that they are loosing properties because they are failing to offer the asking price.

Market commentary in the Anglophone world about banks withdrawing from the mortgage market may leave you wondering whether it will now be harder to get a French mortgage. Best French Mortgage clients will not be subject to any mortgage rationing by French banks because French banks trust Best French Mortgage to introduce creditworthy clients. French banks are continuing to make mortgages available on excellent terms to creditworthy clients.

The lower the LTV (Loan to Value ratio) you require, the better the rate you will be offered. French banking regulations require clients to maintain an indebtedness repayment ratio of one third or less, so taking a mortgage over a longer term or raising a slightly larger deposit can be helpful. As always in times of uncertainty, marginal applications may be looked at more carefully, but we have developed strong relationships with our partner banks and are confident in our ability to source property finance on excellent terms for creditworthy clients.

Remember, as an honest French mortgage broker, we don’t charge our clients any fees for arranging mortgages. To find out what type of mortgage we could find for your French property project, just complete the no obligation application form.

Our view, formed from analysing all the recessions back to the late 1800's, is that we're been through a couple of tough years with a noticeable "feel bad" factor and sentiment won't improve much anytime soon. But over 90% of people will keep their jobs, the £ Sterling will recover to around €1.35-€1.40 and the coordinated policy from the US Fed, European Central Bank and the Bank of England will ignite a bout of asset price inflation beginning around 2013. For the first time in a long time the advice to those seeking the French lifestyle and those wanting a good investment is now the same - buy French property on a Euro mortgage.

Surprised? Well, here are the investment facts.

1. Interest Rates. The Fed has maintained its key interest rate in the target range of 0% to 0.25% and in an acknowledgement that interest rates can't go lower has injected hundreds of billions of dollars by way of "quantitative easing" (or printing money if you're not an economist). However, though the key rates are being held low, the rate for emergency loans has now risen 0.25%to 0.75% and this probably marks the low point in the global interest rate cycle. In Europe the key rate is up slightly at 1.50% but in the UK the key rate is still 0.5% with £200 billion of quantitative easing. It's going to be difficult for money to get much cheaper, unless the banks decide to pay you to borrow and we don't foresee that ever happening. House buyer's conclusion - Lock in these low rates for the whole of the next interest rate cycle while you can.
   
   
2. Jobs and Wages. Unemployment will probably peak in the second half of 2012, and it will be very painful for those that lose their jobs. Against that, over 90% of us will stay employed and though the growth in our pay packets may stall for 1-2 years we will actually have a surprising amount of cash to spare because near term price inflation in many consumer product categories is very firmly in check. The pound in your pocket is going to go further. House buyer's conclusion - This is not the doomsday scenario, the vast majority of you will lose neither your jobs nor your purchasing power.
   
   
3. Exchange Rate. The pound is presently very low and the dollar depressed. What happens next is going to be a weakening of the Euro. We expect Sterling to return to around €1.35-€1.40 by the end of 2013. If you are buying Euros we can help you get the best exchange rates by sourcing your Euros at money market rates – much cheaper than buying over-the-counter- here's how. House buyer's conclusion - Don't pay cash, take a mortgage and repay when the Euro has fallen.
   
   
4. House Prices. The French market did not inflate to the same unsustainable levels as the Anglo-Saxon markets. Prices have fallen but are again on the way up and market liquidity is recovering. House buyer's conclusion - Prices at this level offer outstanding long term investment value and as these low prices won't be around for long delaying a purchase in the hope of a future lower price is now plain unrealistic.
   
   
5. Inflation Outlook. "Quantitative easing" means quite simply "we're going to print money like there's no tomorrow, until we have inflation running out of control again". Anyone remember the 1970's when house and gold prices took off because they represented the only tangible value? Anyone heard of the Zimbabwe dollar? - they're printing money right now! Printing money (i.e. increasing the money supply) will ease the economic situation in the short term but it won't increase the real stock of wealth so eventually real asset prices (gold, land, property etc.) will go up. House buyer's conclusion - Property will soon return to being the best hedge against inflation that most of us have access to.
   
   
6. Overall Investment Strategy. The people that make money from investing are often those that take a "contrarian investment view". Contrarians buy when prices are depressed and sell when prices are high. So let's pull the the threads together and see what the facts suggest. Historically low interest rates, a 90+% probability that you won't have been personally affected by the recession, increasing mortgage affordability as the Euro falls, a housing market just past the bottom and the probability that we will see significant inflation after 2013. There may even be a return to 1970's style "Stagflation" which will drive property prices rapidly higher in money terms. Is that a "buy signal" or is that a "buy signal"? If you already own French property there is an alternative strategy you can use to benefit from these very unusual market conditions - click here to find out more.

The French financial services industry operates very differently to that in the UK and the USA. This is nowhere more true than the way that shopping around for the best deal can actually increase your mortgage costs by up to 2.5% of the cost of a mortgage: this can amount to a staggering €2,500 on a €100,000 mortgage.

Because French banks only pay commission to the broker that first introduces a client to them, by going first to a broker that charges its clients an arrangement or dossier fee you prevent any other, honest, broker from providing a no fee mortgage offer from any bank which has already been approached with your application to borrow.

In France the role of the mortgage broker is to shop around for the best mortgage deal on your behalf, so shopping around between mortgage brokers will not necessarily produce a better deal and may end up costing you money.

The best strategy is to go to a reputable no fees broker in whom you have confidence and only consider shopping around other brokers if your first choice can't help and never go to a fee charging broker first.

Our advice is that you should be very sure that you are working with a reputable professional broker with a personal depth of financial sector experience and who is genuinely working in your best interests. Go to our Consumer Guide page for a simple checklist to keep you safe.

Because French banks rely on mortgage brokers to introduce serious clients, the cost of the introduction is included in the bank’s mortgage rates whether or not a mortgage broker is involved. You cannot get a cheaper mortgage rate by going directly to the bank. Often, it’s the reverse: special offers and negotiated conditions are only available through brokers.

Some long-established French brokers have become accustomed to charging their clients a mortgage arrangement fee or “dossier” fee. In effect, this means their client, you the borrower, is charged twice for the same service.

Double charging came about because the mortgage broker was able to “help” the more marginal French clients secure finance, but it just won't go away. When traditional French mortgage brokers, some established more than 25 years ago, began to seek overseas clients they decided to maintain their double charging practice, with some lifting the arrangement fees to levels higher than French borrowers are charged, supposedly to pay for bilingual staff.

Best French Mortgage will always suggest the best French mortgage available, taking into account your individual circumstances, and always without any form of brokerage fee, arrangement fee or other charge. Go to our section on French mortgage broking charges for a fuller explanation 

Most economic forecasting models are what is known as econometric models and use techniques such as:

• Simultaneous equations
• Economic base analysis
• Shift-share analysis
• Input-output models
• Grinold and Kroner models

They are generally good at predicting a continuing trend but much less helpful at predicting turning points in the economic cycle.

We, by contrast, use:

• Neural networks
• Monte Carlo simulation
• Box Jenkins models

running on long term time series data which we find produce very accurate probability forecasts and are especially good at forecasting changes in the direction of a trend.

If you would like to discuss our methodology please feel free to contact us here.