To Buy Or Not To Buy

It’s hard to escape the staggering events that continue to unfold in financial markets across the globe. As yet another leading bank falls by the wayside, felled by toxic credit from America’s sub-prime fiasco, the world watches with bated breath as the U.S. government tries to thrash out a plan to save the country from a grave and unprecedented recession.

No news bulletin or morning newspaper is without a stream of economic pundits warning that rising inflation is about to get even higher, that student loans will soon be almost impossible to obtain and that the cost of living will become yet more expensive in the coming months.

The cause of the global financial meltdown lies with the sub-prime market, which saw banks consistently lending money to people with poor or no credit history. When interest rates began to rise in 2005 and 2006, homeowners began to default on sub-prime mortgages, leading banks to literally run out of money.

And as the money ran dry, so did the available credit that had previously helped more solvent buyers to invest in property. As the housing markets began to falter, prices started to fall, and it’s the housing markets that continue to destabilize the world’s financial institutions, especially in the U.S., where sales of new homes plunged in August at the fastest rate since modern records began. Repossessions have also increased to an unprecedented level.

There seems, however, to be one exception to the rule: France. And for Americans with ready cash to splash out on a home under the European sun, there has never been a better time to buy.

Incredible but true, says Trisha Mason, of property consultants VEF, who even predicts a small growth in the French property market this year. “The French property market remains one of the most stable in the world at the moment,” she says. “Mainland Europe continues to hold its own during the credit crunch, with France on target to show growth of 1 percent this year, which is not a lot, but much better than America’s and Britain’s predictions of recession.”

So how has France escaped while its neighbors languish in property market stagnation? Mason explains: “French lenders have traditionally been much more cautious than U.K. and U.S. lenders and although a few banks have been affected by the sub-prime, it has not been a large enough problem to cause any real shortfall in mortgage funds.”

To limit risk, French banks usually spread their investments much more widely than those in the U.S. or U.K. Only about a quarter of banking activity is related to investment banking and dealer-broker activity, while the rest is retail banking.

French banks are also very careful about lending money, and to whom they lend it. It’s notoriously hard to obtain a mortgage in France. Would-be homeowners looking for a mortgage have to prove they earn-after taxes-three times what their monthly mortgage payments would be, and verifications are stringent.

Moreover, borrowing controls in France are about to get tighter. Finance minister Christine Lagarde recently said that the following criteria were about to be enforced: “Expect two conditions-a down payment of 20 percent of the value of the house, plus mortgage payments which will not exceed 30 percent of income.”

Banks are also being more cautious in the valuations they are putting on properties and in the loan to value for overseas buyers. But Mason says this is unlikely to cause too much trouble for the majority of U.S. buyers in France, who tend to be at least 45 years old and above, with the financial means to buy without requiring a large mortgage.

Not only does France seem to have sidestepped the toxic mortgage syndrome, it has also not seen the same level of property price spikes that the U.S. and Britain have experienced in recent years-meaning that the market has less room to fall. French homeowners buy houses to live in, and not primarily for investment, so prices have remained relatively more realistic.

“The types of property favored by the average U.S. buyer in France-mostly stone houses with character in a rural location-are still holding their values. All that is happening at the moment is that vendors who were formerly overvaluing their properties, expecting some 20 percent increase on 2006 prices, are now readjusting to the correct market price,” says Mason.

“In Paris and on the Côte d’Azur,” she adds, “prices are still increasing by 9.4 percent over last year. However we are being warned to be careful about Paris apartment prices, which have probably reached a ceiling at the moment. Desirable as a luxury apartment in Paris might be, the type of person who looks for that kind of property is likely to be among those most affected by the credit crunch.”

So it appears that every cloud does have a silver lining. And just when you thought things couldn’t get any rosier in la belle France, Mason recommends that potential investors watch the leaseback market for bargains to be snapped up. “There are good deals to be had on leaseback properties at the moment, with developers desperate to shift remaining apartments on developments,” says Mason. “Rental returns have come back up to five or six percent, after falling during the past two years to around four percent, and investors who had turned to Central Europe are now looking again at France-they view its property market as more stable and safer than some of the newer markets.”

Philip Weiser of Carlton International, an Antibes-based real estate agency with a portfolio of houses in the south of France, is slightly less optimistic. “The economic crisis in the U.S. has added to the difficulties that Americans have already been having from the plummeting value of the U.S. dollar over a considerable period. This devaluation had a negative effect on the purchasing power of potential American buyers well before the current  ‘crisis’ was identified. There has been diminished interest in buying by Americans for over a year. The crisis has only echoed the pre-existing problem.”

“There is, however, continued interest from the very high-end American who is unaffected by the crisis, by virtue of his wealth or the nature of his business activity.”

But David Kerns, manager of private client dealing at Money Corps, said that the dollar/euro exchange rate, which has been extremely volatile over the last 18 months, should stabilize once the government bailout plan gets underway.

“Today you will get $1.46 for every euro. Two years ago it was $1.25, so even better-but it has gone as high as $1.60 in recent months, so in comparison to then, now is a good time for Americans to be buying European property if you have the ready cash and don’t need to get credit from a bank.

The general sentiment, he says, is that the U.S. dollar will return now that the U.S. government has agreed to rescue the banks. That should lead to a decline in the value of the euro against the dollar.

He adds: “For the cash rich, it’s a great time to buy, as they will be able to pick up bargains. We are seeing a worldwide correction in the housing markets, and sellers are likely to crop prices as they are becoming realistic.”

But obviously the eventual direction of the dollar is still unknown. And until there is more certainty in the financial markets around the globe, potential investors in France might be wise to play the waiting game a little longer.

“Sales for VEF have definitely been adversely affected and we are currently some 35 percent down on anticipated sales for the year,” admits Mason. “But September has been one of the best months of the year, so we all ask ‘is there finally a return to the market?’ “

“In truth, our buyers have not generally been affected financially by the credit crunch. The reluctance to buy this year has been caused by what is happening in their heads rather than with their bank account.”

Originally published in the November 2008 issue of France Today.