Tuesday, April 29, 2008

French House Prices

There was an interesting piece in the Financial Times this morning about how the French property market was basically different from the Spanish and the Irish ones, and that no major "correction" in prices was to be anticipated in France (as opposed to a slight reduction in prices). Basically I think it would be a mistake to talk and think in terms of a eurozone wide property market (Germany and Italy had no major property boom in recent years) and factors like demographics and the lending attitude of the banks (fixed rate vs variable mortgages, loan to value ratios etc) seem to have been just as important as the lending rate set by the ECB (which has, of course, been the same for everyone.

Lending for house purchases across the eurozone rose at an annual rate of just 6.1 per cent in March, down from 6.6 per cent in the previous month (and we don't know the month on month changes, which are the ones that really matter), the European Central Bank reported on Friday. That was the weakest since at least 2000, when monthly data were first compiled.

In the coming downturn the outlook for the eurozone economies in general could depend crucially on the resilience of France, the 15-country region’s second biggest economy, where prices house prices have been buoyant in recent years, but where the Irish and Spanish (or UK) "excesses" seem largely to have been avoided.

French house price inflation peaked in early 2005 at an annual rate of 16 per cent but has since steadily declined and prices may now be on the point of turning negative if they has not already done so.

Policymakers’ may be deeply worried about the outlook in Spain and Ireland or – beyond the eurozone – in the UK. However, the risk that a dramatic housing market correction will seriously dent French economic growth seems limited.

House prices in France could fall by 3 per cent this year, according to some analysts. Nevertheless, the economic impact of fluctuations in property prices could prove much less pronounced than elsewhere.

France’s home ownership rate is 60 per cent, low compared with its European Union neighbours. Around 90 per cent of mortgages are fixed-rate, one of the highest proportions in the EU, and those that are variable are capped. There is virtually no “equity withdrawal” – which allows consumers to spend from borrowing on the back of the rising value of their homes – since it is tightly restricted.

French economic growth this year will slow, but more because of the pressure facing its corporate sector, for instance from a strong euro, high oil prices and tighter credit conditions.

Still, a slowdown in the property sector would weaken one of the bulwarks of French growth over recent years. The construction sector accounted for 38 per cent of all jobs created in France in 2005-06 and accounted for over a third of France’s 2 per cent gross domestic product growth in 2006.

The monthly survey series by FNAIM, the French National Property Federation, is showing a steady decline in the annual growth rate of property prices, from 3.4 per cent in January to 2.5 per cent in March. But a fall of apartment prices of 1.7 per cent in January has set alarm bells ringing among some analysts.

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