What’s in store for French mortgage markets in 2012?

2011 has undoubtedly been a turbulent year in the financial markets which have had an impact on many people’s decisions as to whether or not they will proceed with their dream purchase in France. However, uncertainty and austerity as well as low returns from saving accounts has also ensured that many people are deciding not to wait any longer before making a commitment.

Despite a challenging year in 2011, many potential French property buyers have been carrying out their research and are waiting on the sidelines, ready to make their move once they feel the storm clouds are clearing.

In times of financial stress, property is an asset class that many people turn to in uncertain times. Property is tangible, familiar and in the case of France, allows you to enjoy lazy days enjoying the sunshine in Provence or the fresh powder in the Alps!

Here are some important trends laid out by the folks at International Private Finance.  These trends may affect the French property market, particularly in terms of International buyers, during the coming 12 months.

Eurozone interest rates – at the beginning of 2011 the Eurozone base rate was at 1.00%. Concerns over inflation ensured that the ECB made two quarter point (0.25%) interest rises in April and July respectively. One of these increases has already been reversed with further cuts being anticipated by the markets for December’s ECB rates decision.

We believe the outlook for growth and inflation in the Eurozone during 2012 gives further opportunities for ECB rate cuts going forward.

French mortgage rates – the interest rate you pay on your French mortgage is influenced by two factors; base rates in the Eurozone and the costs associated with banks raising funds in the money markets.

The recent financial turmoil has increased the associated cost of risk premium and the costs for French banks to raise funds in the money markets. This has resulted in some French mortgage rates increasing recently, despite the base rate being cut in November.

If Eurozone politicians can start moving towards a sustainable solution to the debt crisis thereby calming financial markets, we expect to see the costs associated with raising money to fall accordingly. This, coupled with a falling base rate in the Eurozone should ensure that French mortgage rates challenge historic lows during 2012.

Exchange rates – growth in the Eurozone is likely to be impacted by the recent challenges and many market commentators expect the Euro to weaken against Sterling in the short to medium term. Any weakening in the Euro exchange rate is likely to stimulate demand from international buyers who are looking to purchase their dream second home in France. This is likely to mirror similar trends seen in areas of the UK property market that have been popular with International buyers since Sterling started depreciating in 2008. To mirror this scenario entirely investors this is all subject to the Eurozone governments restoring confidence in owning Euro denominated assets.

Economic growth – headlines in the financial pages have recently been dominated by challenges in the Eurozone. Meanwhile the economic data coming out of the US over the past two months has been consistently better than expected. While the US economy faces many challenges, consumers in North America will hold a big say in how quickly the American (and World economies) recover in the coming years. US consumers provide the demand required for companies in China and other Asian economies to prosper.

Confidence is a huge factor amid current economic concerns and a change in mood cannot be underestimated in terms of the positive effect it could have.

Minimising your currency exposure – Fluctuating exchange rates have highlighted the potential risks associated with using Sterling or US dollar assets or debt to finance the purchase of a property in the Eurozone. Depending on your expectations for the future direction of exchange rates, using a Euro denominated mortgage to finance part of the purchase price will could significantly reduce the sterling cost of purchasing your French property.

Many savvy buyers who have the sterling funds to complete the purchase are taking out a flexible French mortgage, in Euros, with a view to paying this off when the Sterling/Euro exchange rate moves in their favor – as many industry commentators agree is likely in the short to medium term.

A resolution to the European (and US) debt issues, record low French mortgage rates, a depreciating Euro exchange rate, green shots of recovery in the global economy and a stable property market in France could provide the perfect environment for would-be International buyers of French property during 2012. The key will be which and what combination of these scenarios materializes during the course of the year.

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