Whilst things remain uncertain in relation to the eventual form of Brexit, perhaps this is the beginning of the end of a period of uncertainty over the past two and a half years in the French property market for which British buyers make up the majority of foreign ownership.
In summer 2016, the French property market was buoyant with a strong pound and ultra low interest rates. Many British buyers were taking the plunge and buying a dream property in France, engaging in a new chapter in their family’s history. The Brexit vote caused the value of sterling to decrease by circa 10%, increasing purchase costs by this amount.
The effect of this increase in the upfront costs was mitigated by the low fixed rates on offer from French banks where you could still fix your interest rate at 2% for 20 years, thus many people have continued to purchase property over the past 2.5 years.
However, not all sections of the market were affected equally. The prime end of the market and those looking for a cheap and cheerful property were less concerned by this increase in real terms of the cost to purchase their property
The fact is that when you have the €280,000 available to purchase a prime property for €1m with 80% on finance, if the cost increases by 10% (€28,000), this is not necessarily going to stop the purchase in its tracks. Chances are that if you are looking at a property in this price bracket, you have the funds and the confidence available to continue with the purchase.
Likewise at the lower end of the market, where the banks have seen growing numbers of requests for loans in the €100,000 region in recent times, increases in initial purchase costs are perhaps only a few thousand euros and small enough not to be a factor relative to budgets and income.
It is the so called squeezed middle, whose aspirations for a property in France exceed what would be wise from a risk perspective given deposit and Brexit concerns, who have not had the confidence to buy in large numbers.
Brexit has been dragging on now for more than two years. A difficult negotiation has been made even more so by the high emotion which surrounds the issue. As we get to the business end of the horse trading, we will soon see the outcome or at least have some more visibility on the outcome to enable the middle of the market to begin buying in France at a higher volume.
In the event of a no deal Brexit, many of the agreements between the EU and UK would become null and have to be renegotiated. However, what wouldn’t change are the specific agreements which exist between France and the UK. These agreements relate mainly to double taxation and provide a basis for the ongoing relationship as they pre-date our membership with the European union and have been updated along the way. Of course a No-deal Brexit would be traumatic in the media and result in a tougher 2020 as businesses adjust, taking some time for the British economy to recover from all the bad press, the loss of income and the higher initial expenses.
The overall effect of a no-deal would be a lower value of sterling for an initial period and thus those with existing mortgage payments in euros would see the cost go up by another 10%. Of course, commensurately anybody who owned a property in France would see the value of the property increase by the same amount. This means we might see some more property come onto the French market in tourist locations which again might drive the price down a little, keeping the status quo.
Those seeking to buy in 2019
For people looking to purchase in France from the UK, a no-deal Brexit would push up costs on the purchase price by approximately 10%. A small amount to consider if you have found the property of your dreams and you can finance up to 100% of the purchase price (leaving 30% with the bank in a collateral), but a serious issue if funds are tight. For this reason, I would want to say that the lower end of the market might see falls in prices in popular areas but that would be tempered by the fact that we have seen a return of French buyers over the past two years being quite active and looking for value in the prime tourist areas, exactly at this level between €300,000 to €750,000. Because of this, I am not sure we would see much of a change in property prices at those levels.
A deal of some kind, is the end in sight?
As we have seen recently, the risk of a no deal has been reduced with the UK Parliament taking more of an active role in the negotiations. This has lead to an increase in the value of sterling of roughly 3% in January. This is due to the fact that we have a relatively strong economy with a very low unemployment rate which can be invested in if we have some more certainty which in turn, will lead to higher interest rates and returns for investors in the future. In this scenario, the sterling will continue to appreciate, bringing down the cost of mortgage payments for existing mortgage holders and reducing deposit and property purchase costs for UK buyers. This should then bring the volume back to all levels of the market as we begin to get back to where we were in 2016.
Reversal of the referendum
In the event of a “People’s Vote” which resulted in the cancellation of Article 50, we should work our way back to 2016 levels, sterling at €1.35 to the pound and French property looking even more attractive. The ultra low interest rates will begin to disappear as Europe and the UK pick up investment and we all wonder why we wasted two years. There will still be some uncertainty caused by the Brexiteers complaining and asking for a best of three with a neverendum situation as they have in Canada, with constant talks and threats of a new vote which may be a bit of an economic drag.
Extension of Article 50
This option also seems quite likely and would simply preserve the status quo, perhaps it might strengthen sterling which seems most sensitive to the prospect of a No deal. This would continue things as they are. Buyers continue where deposit costs are not a factor and avail themselves of mortgages at 80% LTV and in some cases at 100% LTV (with 30% collateral with the bank). The truth is that many see buying a euro denominated asset as a hedge and security against a downturn in the UK’s economic fortunes.
Buy now or wait?
So to the question of what is the best thing to do. Well like any good adviser, I would say it depends entirely on your situation. If the place of your dreams has been found and you have the deposit for it and it does not present a risk to your family, then now is a good time with low long-term mortgage rates available. This advice stands at any stage of the market. The French property market is known for long steady growth rather than the boom and bust of the UK, so providing the mortgage is affordable, it is a good long-term investment to be enjoyed for generations.