The French correction: Falling house prices sting expat owners

Published 08th Jan 2009

Back in April last year, the IMF warned that after the crash in Spain, French property, along with the UK and Ireland, was "particularly vulnerable" to a fall. But while Britain and Ireland saw steep declines, France seemed to carry on regardless. In the 12 months to July, according to the French National Estate Agents Federation (Fnaim), property prices overall were still up by 1.7%, with the strongest places continuing to report gains.

For many Brits – and they are estimated to own more than 75,000 second homes in France – it has been the only chink of light in the overwhelming property gloom, which has seen prices in the UK fall by as much as 16% .

However, that has now changed. Sales have dropped off sharply over the past few months, with Fnaim noting in September that "the brutality of the slowdown" had surprised seasoned observers. In December the association's executive director, Henry Buzy-Cazaux, told French radio that agents were faced with a 20%-25% fall in activity since the beginning of the year.

This has begun to hit prices: the third quarter saw falls of 1.3% and Fnaim expects prices to have finished 2008 around 5% down. Estate agent Laforêt Immobilier, which has 875 offices throughout France, puts the figure at 10%. No one now seriously expects anything but further falls in 2009.

"I think [the] next year will be very hard," says agent Leo Attias, who heads up Fnaim's Paris office. The problem is credit – while French banks avoided the sub-prime crisis hitting America and the UK, they are worried about the possibility of rising unemployment. Lending criteria for mortgages – already strict by UK standards – have been further tightened by lenders. "They are very reluctant," says Attias.
Rural problems

Outside Paris and the cities, and particularly in the rural areas favoured by the British, the problems are likely to be even worse. Charles Gillooley is manager of estate agent Immobilier Causses et Vézère in Thenon, and president of Fnaim for the Dordogne. His region has the highest density of British people in the country, and if you ask how the market was in 2008 you get a one-word answer: "Hard". Agents are reporting sales down by 50% and prices down a quarter. "France is going the same way as the others," he says, adding that many properties simply won't sell.

In rural areas the problem is not just the credit crunch but the exchange rate, which has seen the British, who make up as much of a third of the market, pull out. For them, even a 20% drop in prices has not made owning a second property in France any cheaper.

"There was a gradual decline in transactions since the start of the year, but it has been much steeper since September," says another agent selling in the region, Jerry O'Neil at Premier French Property.

How much worse it will get is debatable; as O'Neil notes, there sometimes seem to be as many forecasts for property in France as there are economists. In the end, though, it may depend on which part of France you look at. In the cities where there is strong domestic demand, particularly in Paris and Nice, many argue that 2009 will only see modest falls. "It is likely they will drop a little, but we are not anticipating double-digit falls," says Laurence Boone, an economist in the Paris office of Barclays Capital.

Boone says the French market is very different from those elsewhere in Europe and as such, may not be hit as badly. Yes, prices in many parts of France have boomed in recent years, doubling in the past decade alone. At the end of the third quarter the average house price outside the Paris area was €196,000 (£183,500). But they have lagged behind both Britain and Spain.

Furthermore, the banks have stuck to their policy of prudent lending. A typical French mortgage is for 70% of a property's value, has a term of 15 years at a fixed rate, and banks generally insist that repayments account for no more than a third of the borrower's take-home pay. That means there are unlikely to be repossessions on a level being witnessed in the UK. Finally, without the sort of building boom seen in Spain, there is no question of over-supply in the French market.

Fnaim suggests prices could drop by 10% over the next year. In some places, though, there could still be a fair deal of pain ahead – much will depend on the fate of the pound.

Andrew Sutton bought a villa just outside Villeréal in south-west France in June. Like many others, he took out a mortgage in France and has been hit by sterling's slide – at the start of last year £1 bought €1.34; by the end of the year it bought just €1.04. At the moment, he says, this is making life less comfortable, if bearable, for British owners in the area. The real worry, though, is if the situation continues.

"My major concern is that this trend goes on to see the pound and euro reach parity," says Sutton. "If that happened it could have quite a serious effect here." For now, the French market is still holding out against a crash, but for many British buyers, at least, there is still some way to go before they are out of the woods.

Case study: A Brit abroad

Margot Parker from Ealing recently bought a one-bedroom flat in Paris with her boyfriend Jean-Marc Eskdale. She says a temporary fall in its value doesn't really bother her. They wanted a foot on the French housing ladder since they eventually plan to move there, and were not looking to make a quick profit. "We are in it for the long term," Parker explains.

The exchange rate, on the other hand, has had a more immediate impact. When the couple started negotiations on their flat, the rate was about €1.4 to the pound. By the time they completed in August it was €1.31 and has since slid even further. After just a couple of months it is costing them £150 a month extra on the mortgage.

Fortunately, the payment is still affordable for them: when they were planning the purchase they checked that they would be OK even if the pound and euro reached parity. "We did it on what we thought was the worst-case scenario," laughs Eskdale.

Source: ' Guardian '

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