Finance in France: Buy now, pay later

Contrary to the explosion of negative stories in the media about property markets and the economic outlook in general, it is a good time to buy French property. Why? I do not need to tell FPN readers about France’s beauty, diversity and culture. But there are good practical reasons for buying now that are often overlooked.

The stable French property market, low eurozone interest rates and a weakening pound suggest it makes sense to buy French property now rather than deciding to ‘wait and see’. Firstly, the French property market is expected to do better than the UK and Irish property markets in 2008. As many readers will know (all too well we suspect), the UK property market is stagnating.

Predictions for 2008 vary from the most positive (growth of 1%) to the most negative (a fall of over 10%). My favourite economist, the BBC’s Evan Davies, predicts that prices in the UK will fall by 5%-10% over 2008. That is substantial. A sensationalist UK media and the unanimously unpopular HIPs no doubt play their part in this dreary prediction. The outlook for Ireland is similarly poor. But what about France? Despite the US subprime crisis – which has affected the UK much more than France – property prices in France are expected to grow this year. The national average price rise is expected to be 6-8% for 2008, but certain areas and types of properties will outperform the national average.

We expect prices in key areas within the Languedoc, Dordogne, south Limousin and Lot-et-Garonne to rise above the national average predictions, perhaps with growth of up to 15%. Older stone properties in particular should see the highest price rises. Such properties are much in demand and obviously of limited supply.

Pound in decline

Readers will know that the pound has pretty much consistently weakened against the euro since July/August 2007. So, if you had bought a French property with sterling, in cash, six months ago, you would have saved money. However, one point often overlooked in many discussions about the pound is that, even if the pound had not fallen against the euro, buyers still would have saved money if they had bought six months ago.

Why? Because French property prices rose! The point of this quite obvious statement is that we can’t turn back the clock, but we can look to the future. And so the next obvious question is “where will we be in six months time?” As I mentioned above, French property prices are set to rise. And, the pound is, according to most commentators, set to fall further in 2008. Predicting the movement of currencies is fraught with difficulty.

Even the leading economists tend to be quite circumspect on this matter. However, looking at a range of authors – from renowned professors such as Professor W Buiter of the London School of Economics to FT writers such as John Auters – I feel confident enough to predict that the pound will weaken further in 2008. What does this combination of a falling pound and rising French property prices mean? Quite simply, for French property buyers paying with sterling, prices are rising on two counts. It does not seem to make financial sense to wait – those who are serious about getting their property in France should get moving!

Financing matters

Having said that, there are ways of minimising the effect of a weaker pound, through intelligent financing of your French property. For example, by obtaining a French mortgage you would reduce the amount of euros you have to buy now. French mortgages can be a sensible option for many buyers. First of all, interest rates in the eurozone are lower than in the UK (the official rate in the eurozone is 4% against 5.5% in the UK at the time of writing). Thus the cost of borrowing is cheaper. But taking a French mortgage now also means you do not have to pay for the property in its entirety in sterling. Buyers only have to buy enough euros to pay the deposit and transaction costs, the remainder is paid monthly as mortgage repayments.

It is true that each monthly repayment of a French mortgage will involve changing sterling for euros (for those using a sterling income to finance their property purchase) but these payments are much smaller and they are spread out over a long period. This means that mortgagees effectively spread the risk. This often makes sense, as no-one knows what will happen to the value of the pound in the long run. And for those who reckon that the pound will recover after a year or so, there are even more interesting options.

It is now possible to get a French mortgage that can be fully paid off – without an early repayment penalty – after 12 months. For cash buyers who are concerned about the value of the pound, but believe it will recover, this is a perfect solution. When the pound recovers, these buyers can pay off the entire mortgage. If the pound does not recover, the mortgage owner can continue the mortgage, making smaller repayments until they decide upon the appropriate time to pay off the balance. The message here is that French mortgages can be a great option for many buyers, but they are not the only financing options available.

Make the most of your UK home

It is true that that you get much better value for money in France than in the UK. If you live in the south-east of England, for example, average property prices are the equivalent of €496,000. Taken as a whole, French property prices are a whopping 48% less expensive! For example, in central Limousin for €475,000 you could own a charming eight-room stone property with pool and 5,000m2 of land. Or, in Calvados Normandy, a fivebedroom, character property for €380,000. But the slump in the UK and Irish market may mean homeowners may not wish to sell, or are having slightly more trouble selling at home. But this should not stop French property buyers from going ahead with their project, especially homeowners.

UK homeowners can raise money against their UK property through re-mortgaging or equity release, and this option has its own distinct benefits. Firstly, UK mortgages and re-mortgages are often faster to arrange than their French counterparts, although using an experienced French mortgage broker will speed up the process on the French side. Secondly, life insurance is not compulsory for UK mortgages but generally is for French mortgages – thus the UK process is simpler. In addition, UK lenders are generally more amenable to self-certified mortgages for UK citizens than French lenders are. Of course, you will still have to allow for the exchange loss, but by using a currency exchange specialist you will be able to significantly reduce this risk.

There are plenty of options available to help property buyers complete their purchase, and with rising prices in France and a weakening pound, all the indicators suggest that now is good to time to buy. But there is another more compelling reason that transcends all the facts, figures and practical considerations – fulfilling your dream of owning a French property.

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