Our Market Overview has been cautiously optimistic since way back in Q1 2009 based on our long term view of economic cycles even though our positive view has been unfashionable.
Most commentators have taken a pessimistic, if not downright negative, view of future prospects for the market, but things have been slowly changing and the commentators have been belatedly coming on board with our long term view – see our Knowledge Base.
However, following Brexit, it’s time to take a fresh look at the market fundamentals and make some forecasts as to what might happen over the coming months.
Despite Brexit, and the consequent upheaval in the markets, we think that remarkably little will change when compared with this point in previous economic cycles.
After the 2008 meltdown most economies – and their government’s finances – took a hit as they worked to recapitalise their banking system. Some countries, such as the US, achieved this relatively quickly whilst others, such as Italy, are still struggling with the problem.
There followed a period of austerity designed to bring government debt to GDP ratio back to manageable levels in many economies.
Austerity combined with globalisation has led to the relative impoverishment of the working and middle classes across the majority of developed economies whilst the top 1% prospered mightily as described by Piketty in Capital in the Twenty-First Century.
By the beginning of 2016 the political backdrop had become potentially explosive with the emergence of populist politicians in many countries.
Against this background Brexit may emerge as the catalyst that ends the period of austerity, which has already failed as an economic model, because it was so unexpected by the political elites.
Our expectation is that many governments will now try and quickly reflate their economies through borrow and spend policies. In economic terms this is just kicking the can down the road but in political terms it may be the only tool left for the political elites to avoid the wave of populist movements.
If our thesis is correct the next few years will look very similar to the end of most previous periods of austerity – reinflation of economies, competitive devaluations, imported inflation and rising debt to GDP ratios.
In our opinion the best guide to the next 2-5 years will be to look at how previous periods of austerity ended in your economy and to assume a similar sequence of events will unroll.
If true, then we will see a return to an upward trend in disposable income followed by a resurgence of inflation leading to higher interest rates. The cycle will just repeat itself with all the problems coming back some years’ downline.
Property Price Trends
We still see the French property market split into three distinct segments which align well with the thesis of Thomas Piketty set out in his latest book Capital in the Twenty-First Century.
In segment one – the segment we christen the “More for Your Money Rural Market” prices are depressed and are continuing to fall due to high levels of unemployment, an ageing population, a continuing drift of the younger French towards major towns with employment, infrastructure and entertainment and an exodus of expatriates who find that life in rural France is more difficult to sustain than they expected. In this segment it can be difficult to arrange a mortgage finance because many of these locations have been blacklisted by the better quality French lenders. Most rural Départements, excluding major towns, fall into this category.
In segment two – the segment we christen the “Reviving Urban Economy” – prices have stabilised and may be shading upwards as unemployment stops rising and the French economy shows the first shoots of a slow recovery. The major towns in rural Départements and the principle French cities fall into this category.
In segment three – the segment we christen the “Internationally Traded Hotspots” – prices are beginning to increase rapidly fuelled by the high disposable income and strong financial leverage of the high net worth International buyers. These are the locations in which the wealthy will always seek to buy, such as Paris 16, Cote d’Azur, Chamonix and the Île de Ré, where quality and exclusivity are again commanding extraordinary prices.
With market rates at today’s low level it’s 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 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 market deals for a generation.
As the Eurozone, the ECB and the French banks struggle to move on from the Eurozone crisis we see three factors that will affect the availability of mortgages in the short to mid-term:
- French banks will continue to shrink their balance sheets to achieve compliance with the European Capital Requirements Directive.
- French banks will come under increasing pressure to write off non-performing loans and mortgages under the ECB Asset Quality Review and this in turn will likely bring housing stock in the More for Your Money Rural Market onto the market at market clearing prices.
- Following the latest ECB decision on interest rates and monetary policy stance, French banks will need, at the margin, to de-commit from retail mortgage lending and/or increase their rates for marginal applicants. French banks are continuing to make mortgages available on excellent terms to creditworthy clients.
French Mortgage Brokers
Best French Mortgage is an independent French mortgage broker working with the major French banks.
We have confirmed with our bank partners that our clients will not be subject to any mortgage rationing by French banks because they trust us to introduce 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 a debt to income ratio (DTI) of 33% 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.