The French housing market
As forecasted, the French residential property market is turning down. Stocks are rising at their fastest rate since 1985, housing starts have slumped 6.7 per cent over the past year and home prices have decelerated from 6.6 per cent in the last...
As forecasted, the French residential property market is turning down. Stocks are rising at their fastest rate since 1985, housing starts have slumped 6.7 per cent over the past year and home prices have decelerated from 6.6 per cent in the last quarter of 2006 to 5.4 per cent in the first quarter of this year. These trends are the result of the erosion of household solvency, which can be attributed to the rising interest rates and past increases in property prices.
Another destabilising factor is the large number of houses put on the market since 2004, as demand has been slow to adjust. To top matters off, Mr Sarkozy's campaign announcement that he would introduce tax breaks for interest payments on primary residences has encouraged potential buyers to wait and see. The tax credit, which will be voted on this month, could trigger an increase in the number of transactions, although it is unlikely to reverse the downturn in the French housing market.
Stocks of unsold new homes have more than doubled since 2004 when the market last bottomed out. However, it is still lower than the peak recorded in 1991. The surge in stocks of unsold new homes is a result of the boost to housing construction given by the government's Social Cohesion Plan. Unlike in 1995, stocks of completed houses are stagnating at a low level, but the number of flats under construction is up sharply. Flats account for 86 per cent of all stocks of unsold new homes, and 57.7 per cent of them are still under construction.
Although property prices are still rising, the rate of increase has decelerated further. New home prices rose 7.1 per cent in the fourth quarter of 2006, while increases in rents for principal residences slowed to three per cent in the first three months of this year. Rent inflation is now close to its reference level, at 3.2 per cent.
Despite the continuing rise in house prices and slightly higher interest rates, the property risk premium has improved. This is because rents remain vigorous and the reversal of the downtrend in the risk premium is positive and buffers against a property market crash. The growing gap between rental profitability and risk free assets should sustain interest in buying.
Household solvency worsened again in the fourth quarter of 2006, falling back to its long-term average. Higher disposable income and mortgage term extensions have not offset increases in property prices and the gradual rise in interest rates. In order to identify the underlying causes of the deterioration in solvency, various components that influence household solvency were looked at. From this, it was found that the main factor at work was the rise in interest rates. House prices continue to undermine solvency, as their deceleration has been only moderate. The 0.7 per cent rise in average household gross disposable income and a fresh extension in the term of outstanding mortgages, from an average of 20.3 years in the third quarter of 2006 to 21.2 years in the first quarter of 2007, were not enough to enable households to maintain their purchasing power late last year. In 2004, the average mortgage term was 17.4 years.
Furthermore, the outlook for interest rates does not help matters. The 17 basis point increase in floating rates between October 2006 and January 2007 produced an average seven basis points jump in mortgage rates overall. The flattening of the eurozone bond curve explains these trends. Three-month rates have risen sharply, in line with the current tightening phase in monetary policy. Long rates eased slightly over the same period and the number of new mortgages dropped significantly, especially floating rate mortgages.
As usual, the run-up to the presidential election dampened interest in buying houses. Election proposals to boost the property market aggravated this effect. The Socialist candidate, Ségolène Royal, proposed to increase family housing credits, build more public sector housing, create a state-backed guarantee system for renters and to extend zero-rate loans, while the UMP candidate, now President, announced mortgage interest tax relief, a state guarantee for home loans and steps to strengthen the right to a home.
France's legislators have yet to vote on the details of the proposed tax breaks on mortgage interest payments, which will only be deductible for buyers of primary residences. The government has said that they would take the form of a tax credit, which means they would also benefit buyers who are not subject to income tax or whose income tax bill is smaller than their interest payments. The tax credit would correspond to a maximum of 20 per cent of interest paid subject to a capping.
Mortgage interest paid on existing loans will also be taken into account and limited to interest paid in the first five years of the loan. For these loans, the tax credit on interest payments would directly increase purchasing power. The implied increase in gross disposable income should boost consumption next year, although it is not expected to affect property market demand. According to the government, mortgage interest tax relief will be combined with zero-rate loans provided by the banks and subsidised by the government. The latter are to be offered on a means-tested basis. Although full details are not known, once the measure passes into law the number of transactions in the housing market is likely to pick up. That could happen as early as autumn 2007, which would help limit the decline in residential investment ahead of the application of the tax credit.
The drop in housing starts in the first quarter of 2007 can be attributed to the deterioration in the sector outlook, including the erosion of household solvency and an adjustment lag between the supply and demand for homes. The tax credit on mortgage interest payments should boost solvency and increase household purchasing power.
Once stocks are back to their long-term average, it is not expected that prices will accelerate sharply and it is not foreseen that there will be a return to the 2006 house price inflation rate of 12.1 per cent.
Hence, home sales should accelerate after the wait-and-see attitude ends in the second half of 2007 but the housing market should continue to slow through to year-end 2008 due to further interest rate increases.
• This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.
Another destabilising factor is the large number of houses put on the market since 2004, as demand has been slow to adjust. To top matters off, Mr Sarkozy's campaign announcement that he would introduce tax breaks for interest payments on primary residences has encouraged potential buyers to wait and see. The tax credit, which will be voted on this month, could trigger an increase in the number of transactions, although it is unlikely to reverse the downturn in the French housing market.
Stocks of unsold new homes have more than doubled since 2004 when the market last bottomed out. However, it is still lower than the peak recorded in 1991. The surge in stocks of unsold new homes is a result of the boost to housing construction given by the government's Social Cohesion Plan. Unlike in 1995, stocks of completed houses are stagnating at a low level, but the number of flats under construction is up sharply. Flats account for 86 per cent of all stocks of unsold new homes, and 57.7 per cent of them are still under construction.
Although property prices are still rising, the rate of increase has decelerated further. New home prices rose 7.1 per cent in the fourth quarter of 2006, while increases in rents for principal residences slowed to three per cent in the first three months of this year. Rent inflation is now close to its reference level, at 3.2 per cent.
Despite the continuing rise in house prices and slightly higher interest rates, the property risk premium has improved. This is because rents remain vigorous and the reversal of the downtrend in the risk premium is positive and buffers against a property market crash. The growing gap between rental profitability and risk free assets should sustain interest in buying.
Household solvency worsened again in the fourth quarter of 2006, falling back to its long-term average. Higher disposable income and mortgage term extensions have not offset increases in property prices and the gradual rise in interest rates. In order to identify the underlying causes of the deterioration in solvency, various components that influence household solvency were looked at. From this, it was found that the main factor at work was the rise in interest rates. House prices continue to undermine solvency, as their deceleration has been only moderate. The 0.7 per cent rise in average household gross disposable income and a fresh extension in the term of outstanding mortgages, from an average of 20.3 years in the third quarter of 2006 to 21.2 years in the first quarter of 2007, were not enough to enable households to maintain their purchasing power late last year. In 2004, the average mortgage term was 17.4 years.
Furthermore, the outlook for interest rates does not help matters. The 17 basis point increase in floating rates between October 2006 and January 2007 produced an average seven basis points jump in mortgage rates overall. The flattening of the eurozone bond curve explains these trends. Three-month rates have risen sharply, in line with the current tightening phase in monetary policy. Long rates eased slightly over the same period and the number of new mortgages dropped significantly, especially floating rate mortgages.
As usual, the run-up to the presidential election dampened interest in buying houses. Election proposals to boost the property market aggravated this effect. The Socialist candidate, Ségolène Royal, proposed to increase family housing credits, build more public sector housing, create a state-backed guarantee system for renters and to extend zero-rate loans, while the UMP candidate, now President, announced mortgage interest tax relief, a state guarantee for home loans and steps to strengthen the right to a home.
France's legislators have yet to vote on the details of the proposed tax breaks on mortgage interest payments, which will only be deductible for buyers of primary residences. The government has said that they would take the form of a tax credit, which means they would also benefit buyers who are not subject to income tax or whose income tax bill is smaller than their interest payments. The tax credit would correspond to a maximum of 20 per cent of interest paid subject to a capping.
Mortgage interest paid on existing loans will also be taken into account and limited to interest paid in the first five years of the loan. For these loans, the tax credit on interest payments would directly increase purchasing power. The implied increase in gross disposable income should boost consumption next year, although it is not expected to affect property market demand. According to the government, mortgage interest tax relief will be combined with zero-rate loans provided by the banks and subsidised by the government. The latter are to be offered on a means-tested basis. Although full details are not known, once the measure passes into law the number of transactions in the housing market is likely to pick up. That could happen as early as autumn 2007, which would help limit the decline in residential investment ahead of the application of the tax credit.
The drop in housing starts in the first quarter of 2007 can be attributed to the deterioration in the sector outlook, including the erosion of household solvency and an adjustment lag between the supply and demand for homes. The tax credit on mortgage interest payments should boost solvency and increase household purchasing power.
Once stocks are back to their long-term average, it is not expected that prices will accelerate sharply and it is not foreseen that there will be a return to the 2006 house price inflation rate of 12.1 per cent.
Hence, home sales should accelerate after the wait-and-see attitude ends in the second half of 2007 but the housing market should continue to slow through to year-end 2008 due to further interest rate increases.
• This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.