French real estate: Slight improvement in new-build in 2015

Transcription

1 Quarterly No.42 October 214 French real estate: Slight improvement in new-build in 21 The housing market continues to correct itself slowly. The fall is modest, and is far more limited than in most other European countries. The correction is more pronounced in the new-build sector, however. In the pre-owned sector, unit sales remain high, at 732, in the 12 months to end-august, down just 9 relative to the highs of Prices fell very slightly, by 1.3 over 12 months in the second quarter of 214. Since the start of the price downtrend, in late 211, the cumulative fall is only 6. In the developer new-build sector, however, sales are down 32 relative to the highs of 27. Construction is showing a fairly marked downturn. How to explain this gradual correction and two-speed market? The answer is a combination of generally negative economic environment factors and positive structural fundamentals. Three negative factors have been weakening demand in 214: rising unemployment, tax measures, and excessively high prices. But these negative factors are partly offset by positive ones, such as the fall in mortgage lending rates, and the market fundamentals, including housing demand and mortgage supply. The corrective trend looks set to continue in 21 as prices edge slowly down. A closer look at two points is worthwhile, however. Mortgage lending rates could stabilise, or even rise slightly. This is because bond rates are likely to rise very gradually throughout 21. In addition, the new support measures for new-build housing should halt the drop in developer new-build sales and lead to a slight recovery in 21. The measures will only have a limited effect, however. In 214, transaction volumes should be down slightly in the developer new-build sector compared with 213 and stable in pre-owned. Prices in the pre-owned sector are forecast to fall 2. y/y, after -1.9 y/y in 213, for a cumulative fall of 7 between end-211 and end-214. In 21, pre-owned housing sales volumes should be stable, and should rebound slightly in developer new-build (+). Preowned house prices are forecast to fall 2. Contents Recent trends in pre-owned...2 Sales holding up well in Price falls still very moderate... 2 Recent trends in new-build...3 New-build sales trending downward... 3 Housing stock levels high... 4 Low housing starts and building permits... 4 Price falls still very measured : market still edging down... Gentle correction continues in Negative factors... 6 Favourable factors... 7 Pre-owned and new-build: contrasting trends : correction to continue, gradually... 8 A new-build housing stimulus plan...9 Main measures... 9 Limited impact... 9 Correction to European real estate markets: overview... 1 United Kingdom... 1 Spain... 1 Ireland Netherlands French Real Estate Market Indicators Olivier ELUERE Group Economic Research

2 Recent trends in pre-owned Sales holding up well in 214 The market for pre-owned homes is still relatively sustained. Unit sales of pre-owned homes, which had begun to correct in 212 (down 12) picked up slightly in 213, by 1.9, to 717,. In 214, the number of sales continues to rise, with a total 732, in the 12 months to end-august. The number of pre-owned housing transactions, which was still very high in 211, at 82,, fell 12 in 212, to 74, (source: Conseil Général de l Environnement et du Développement Durable, based on fiscal and notary databases). Unit sales volumes rose slightly in 213, to 717,, up 1.9 over 12 months. The uptrend was confirmed in early 214, with 732, sales in the year to August, an increase of 8 over 12 months. The housing market is proving resilient, therefore, despite, among other things, a lacklustre economic climate and higher taxation (see following sections). Relative to the high points in the recent cyclical upswing, (81, sales per year in 26-27), the present level is only 9 lower. Unit sales of pre-owned homes in the Greater Paris (Ile de France) area, which had fallen in 211 and 212, also picked up slightly in 213, by 4, to 92,. In the first half of 214, the rebound came out at over 12 months. Price falls still very moderate Prices for pre-owned housing are still falling very gradually, by 1-2 a year at national level. Prices were still rising in 21 and 211, by an annual and 6 respectively. In 212, prices fell back a little, by 2.1 over 12 months in Q4, and by. on average over the year. In 213, the fall was again very modest, shedding 2.1 on average over the year, and 1.9 y/y in Q4. In 214, prices fell by -1.9 over 12 months in Q1 and by in Q2. The cumulative fall in the pre-owned sector since the beginning of the correction (end-211) has, therefore, been quite small, at 6, compared with a 1 cumulative increase in prices between 1998 and 211. The trends have been fairly comparable in the large regions. In Q2 214, prices fell by.8 y/y outside the Paris region, by 2 y/y in Greater Paris, and by 1.1 y/y in Paris itself (sources: INSEE, Notaries). On the basis of data available for some regions, prices in Q1 214 fell by 1.4 y/y in Nord-Pas de Calais,.4 in Rhône-Alpes and 2.3 in Provence-Alpes-Côte d Azur. On a city-by-city basis the trends are far more contrasted: in Q1 214, price falls for pre-owned apartments were generally in a range of -3 over 12 months. But there were falls of 9 in Rouen, 7 in Saint-Etienne, and of 6 in Clermont-Ferrand. Conversely, prices rose by 12 in Bordeaux, 8 in Metz, and by 6 in Tours. According to Paris and Greater Paris notaries, on the basis of pre-sales contracts, prices in Paris should be falling slightly over the coming months. In Q2 214, the average per square metre price for pre-owned apartments stood at 8,12 in Paris, 4,34 in the inner suburbs ( Petite Couronne ), and 3, in the outer suburbs ( Grande Couronne ). The average price of pre-owned homes in France is an estimated 2,79 per square metre Sources: CGEDD, Notaries, CA SA y/y France: Existing housing transactions Est. number of transactions per quarter France: Existing housing prices Sources: INSEE, Notaries, Crédit Agricole S.A. y/y, index 8 6 change over 12 months Q1 21=1 index France: Unoccupied existing houses sold in Greater Paris Source: Chamber of notaries Number of transactions No.42 October 214 2

3 Recent trends in new-build New-build sales trending downward Sales of new-build homes remain very low. Developer sales (developers, programmes of at least five homes) experienced a fairly marked correction in 211 and 212, respectively of 8 and 1 over 12 months. Full-year unit sales stabilised in 213, at 89,3, up.3 compared with 212. Sales were again down in the first half of 214, by 8 over 12 months. The correction in sales of developer newbuild homes that has been ongoing since 28 has been quite marked, at a cumulative fall of 32 between 27 (the high point in the cycle) and early 214. We must also mention an increase of almost 9, in the number of on-plan sale cancellations in the past year, a rise of 31 over 12 months (withdrawals relative to sales reservations made in previous quarters). The downtrend is even more marked when it comes to the sale of individual, non-developer homes. These stood at around 12, units (cumulative, 12 months) in August 214, a record low, showing a drop of 8 over 12 months and of 44 since the 27 peak (182, units). In Greater Paris, new-build (developer) sales stabilised in 212 (.2 over 12 months). Sales then picked up smartly, by 1., in 213. But this was offset by the level of sale cancellations. Sales were down 1 y/y in the first half of 214. According to the INSEE survey of developers, demand for new-build homes again deteriorated in July and is running at its lowest level since the series began in New housing starts should continue to deteriorate in the coming months. Weak demand in the developer new-build sector is largely down to the buy-to-let segment (households buying a home to let it out), which constitutes a high proportion of developer new-build, generally close to 4- of the market, compared with 1-1 in the pre-owned sector. This proportion, which had risen to 64 in on the strength of the Scellier scheme, fell to 7 in 211 and 43 in 212 as buy-to-let sales fell by 48 overtwo years due to fiscal belttightening measures: the reduced tax break in the Scellier scheme and the sharp reduction in the capital gains allowance on real estate sales. In 213, buy-to-let sales saw a further fall of around 6, with the proportion running at 4. This is linked to the fairly slow take-up of the Duflot scheme. While this offers an attractive tax break by 18 of the property value, the social restrictions on rents and tenant solvency have been tightened. In the first half of 214, the proportion of buy-to-let sales stayed close to 4. In the developer new-build segment, the home buyer segment (households buying a home to live there) has been more resilient. In 211, its share in total sales had risen to 43, and 7 in 212, following a 6 and then a 16 rise in transactions. The rebound is related to the fall-off in buy-to-let sales and to the fact that access to the PTZ+ interest-free loan has been restricted to the new-build sector since early 212. In 213, sales to home buyers rose 3 and their market share increased to 6. In the first half of 214, this proportion was still close to 6. For the outlook for , see page France: Sales of new-build homes s per quarter On market Source: Ministry of Ecology s France: Inventories of new-build homes Sales months Source: Ministry Stock for sale of Ecology Stock by months for sale (rhs) 7 2 France: sales of new build homes by type of buyer Périssol Besson Investors Sources: Ministry of Ecology, FPI Robien- Borloo Home-buyers Scellier Duflot No.42 October 214 3

4 Housing stock levels high The number of houses up for sale was quite high in 212, at 119, units, down 4 over 12 months. In 213, the number fell fairly sharply, by 13 over 12 months, to 13, units. In addition, a number of building programmes were cancelled. In the first half of 214, the rate of fall has increased, to 24 over 12 months. Developers have reduced their supply due to the fall-off in sales and the fairly high level of housing stock up for sale. This has actually fallen slightly, dropping from 1, units in September 213 to 13,7 units in June 214 still a fairly high level, however. The ratio of stock to sales, which measures the average time it takes to sell a home, stood at 1 months on sale compared with 14 months at end- 213, and 12. months at end-212. The ratio is significantly higher than the average level of 8.3 months in Inventories per se, ie, the stock of homes up for sale that are finished or under construction, are far lower, however, at 4, units: 6 of the stock is completed, 37 under construction, and 7 at the planning stage. In Greater Paris, the stock of homes continues to increase gradually. By months on sale, the ratio amounted to 11.1 months on the market in Q2 214, compared with 11.4 months in Q4 213 and 9.6 months at end-212. Low housing starts and building permits Home building, which was still sustained in 211, with 421, new housing starts, fell sharply in 212, by 18 over 12 months. The number of building permits delivered fell 7. This was linked to the fall-off in sales and the increase in unsold housing stock. In 213 there were further falls, of 4.2 over the full year for housing starts, and of 12.6 for building permits. The decline accelerated in early 214. New housing starts were fairly markedly down. In August, the 12-month total was down 12, at 33, units. The drop in building permits was even more marked, at 14 for the cumulative 12-month total, at 394,. Over the last three months, the number of permits issued increased slightly relative to the previous three months, but the increase is fragile. There has been a very sharp, 3, fall in new housing starts since the 27 peak of 466,. Price falls still very measured New-build home prices have hardly moved in response to the fall-off in sales and the high level of unsold housing stock. Apartment prices fell slightly in Q2 214, by.8 y/y, compared with 1.3 in Q House prices rose 2.8 y/y in Q2, compared with.9 in Q4, 213. In annual terms, apartment prices were stable un 213, while house prices fell by.9. In Greater Paris, the fall was a little more marked. Apartment prices fell by 3.1 over the full year, and house prices by 2.7. The fall-off in prices is modest, partly due to the need to offset higher production costs, especially in connection with land prices and changing building standards: energy consumption ( low energy consumption buildings ), car parking requirements, standards for disabled persons' access, and so on. These concern on-plan prices. s Source: Ministry of Ecology France: New-build inventory (Greater Paris) s, cumulative 12 months months 3 Stock for sale Stock by months for sale (rhs) Housing starts Source: Ministry of Ecology annual change France: Housing starts and building permits France: Home prices Building permits New appartments Sources: Ministry of Ecology, Insee-Notaries Existing dwellings No.42 October 214 4

5 214-21: market still edging down Gentle correction continues in 214 The housing market, after a marked cyclical upswing between 1998 and 27, has been in a correction phase since 28, as in most other European countries. But this correction is slow and measured (whereas the slide was rapid and very marked in some countries, especially Spain and Ireland), and it is not linear. The fall was fairly sharp in due to the economic and financial crisis, after which there was a rebound in , and a gradual correction has been underway since France: Housing prices and unemployment rate As we have seen in the previous pages, the new-build and pre-owned markets are trending differently. In the pre-owned sector, unit sales totalled 717, in 213, up 1.9 over 12 months. There was a further increase in early 214, with units sales rising to 732, in the 12 months to August. This is a high level, and just 9 below the market highs of The market is still relatively dynamic, therefore. Prices are only slightly down, by an annualised 1.3 in Q2 214, compared with a drop of 1.9 at end-214. Since the start of the price downtrend, in late 211, the cumulative fall has only been 6. There are obviously contrasting trends from one city and region to another, but on average, in France, the fall is modest. New-build, however, has seen a sharp correction. Sales in developer new-build fell fairly sharply in 211 and 212. In June 214, the 12- month total came to 86, units, down by 32 since the 27 high. Non-developer sales of private houses were down 44 over the same period. This automatically fed into a sharp fall in new housing starts, down 3 in the 12 months to August 214 relative to 27. In view of the very high proportion of pre-owned homes in total sales, the market is in moderate decline overall. In this respect, France stands out as a special case in Europe, where in most countries (Spain, Ireland, Italy, the Netherlands, Denmark, Greece), there has been a substantial correction in terms of sales and prices since 27. In addition, in France, mortgage lending is still high, partly due to the high proportion of external mortgaging that goes on. But this should not hide the fact that a fairly marked connection is underway in the new-build sector. How does one explain this gradual correction and this two-speed market? The answer is a combination of generally negative economic environment factors and positive structural fundamentals. Three negative factors have been weakening demand in : a rising unemployment rate, tax measures, and excessively high prices. But these negative factors are partly offset by positive ones, such as the fall in mortgage lending rates and market fundamentals, including housing demand and mortgage supply Sources: Notaries, Insee annual change Housing price rise over 1 year Unemployment rate (inv. rhs) France: Price of new-build homes Source: Ministry of Ecology 12 8 France France: Existing apartments sold unoccupied in Paris Greater Paris - 12 y/y, Source: Chamber Nb. of sales per quarter of notaries Price rise per sq.m. (rhs) No.42 October 214

6 Negative factors Low growth and rising unemployment GDP growth virtually stagnated in 213 (an annual.4 by volume, as in 212). It should come in at around the same in 214, with. forecast, and should see a moderate uptick of 1 in 21. The unemployment rate was a still high 9.7 in the first half of 214. It is likely to rise even further, to an annual 9.8 in 214 and 9.9 in 21. Some potential buyers, and first-time buyers in particular, are likely to have to abandon their plans. Fiscal measures Several tax increases were implemented in , in particular as regards capital gains on real estate and the PTZ interest-free loans. The Duflot scheme has had a very poor take-up rate: despite the tax break it offers, this is probably due to the fairly tight restrictions on rent ceilings and tenant solvency requirements. A raft of new measures was, however, announced in June 214, and in particular a widening of access to the PTZ interest-free loan, an easing of some of the restrictions in the Duflot scheme, and a simplification of standards. More measures were presented in late August, with a further easing of the Duflot scheme that provides for a new 6-year rental package in addition to the classic 9-year package, and a 3 tax break on capital gains on land sales until the end of 21 (measures set out in more detail on page 9). Overvalued selling prices For the time being, prices have not fallen very far and are, accordingly, fairly overvalued, with the 1 cumulative price increase between 1998 and 211 having only been partially offset by lower mortgage rates, longer mortgages, and rising incomes. In 213, this overvaluation was estimated at 1 for pre-owned homes in view of the theoretical affordability ratio 1 of 33 in 213, compared with 3 in 24 (see graph). The overvaluation is nevertheless lower than in 28, when it stood at 2, thanks to the slight drop in prices and lower lending rates. An approach based on risk premiums 2 gives a similar result. Acquisition costs remain high, therefore, and have increased for many first-time buyers following the 212 abolition of the PTZ+ interest-free loan for pre-owned housing France: Theoretical affordability ratio Annual mortgage repayments/income Sources: BdF, Notaries, CA calculs Sales s France: Sales and inventories of new-build homes Source: Ministry of Ecology 6 4 Sales France: Risk premium on real estate risk months for sale On market Sources: Insee, BdF, Crédit Agricole S.A. 1 The affordability ratio is the annual repayment cost of a mortgage (principal and interest) divided by the annual income of the purchasing household. The theoretical affordability ratio is calculated using market conditions (prices, interest rates, length of mortgage), but assumes that buyers always have the same income profile and always buy the same type of home in terms of surface area and quality). 2 The risk premium compares the internal rate of return of a property investment with a fixed-income rate. In , we use a smoothed fixed-income rate in view of the record low rates during this period. No.42 October 214 6

7 Favourable factors These negative factors are partly offset by a couple of favourable ones: lending rates and market fundamentals. Mortgage lending rates at record lows Rates fell throughout 213 to an annual average of 3.2, compared with 3.8 in 212, and began to edge back up in late 213, only to fall again in recent months: to 3.17 in April, 3.11 in May, 3. in June, 2.96 in July, and 2.9 in August. This decline in the cost of borrowing is driven by the steady fall in OAT rates. This is obviously good news for buyers as it improves their solvency levels and offsets the fact that prices are hardly falling at all. Note that a 1bp drop in the mortgage lending rate is the equivalent of a drop of about 8 in real estate prices. Structurally strong demand for housing This is driven by solid, lasting factors including the desire for home ownership (the ownership rate in France was only 63 in 211, compared with an average 71 in the EU), relatively dynamic demographics, the family separation phenomenon, preparations for retirement, saturation in the rental market, and the safe haven effect: faced with a sluggish economic environment and uncertain and volatile financial markets, French households are showing a preference for real estate, seen as less risky and more reassuring. In addition, real estate has been less affected than most financial investments by tax increases. A cautious lending offer This was true throughout the cyclical upswing, with fairly strict lending conditions. There has been non need, therefore, to tighten lending conditions sharply (unlike in other countries). Lending conditions were only slightly tightened in 213. The ratio of nonperforming loans is low and fairly stable, at 3.48 in Q1 214 for consumer lending, and 1.4 in 213 for mortgages. Mortgages are granted mainly on the borrower s ability to repay. The affordability ratio must not exceed one-third of the borrower s income. Most mortgages are fixed rate and maturities are reasonable. The cautious mortgage lending model largely explains why the correction is more gradual and more moderate than in other European countries (see page 1). Pre-owned and new-build: contrasting trends In the pre-owned sector, demand is being sustained by the fundamentals, (by the safe haven effect in particular) and by very low mortgage rates. The most resilient sector is that of second-time buyers, ie, people selling their principal residence to buy another, for whom the preparation for retirement factor is significant, and for whom high prices are less punitive. Second-time buyers accounted for of new lending at end-213, compared with 4 in early 212. Conversely, the proportion of first time buyers has fallen, from 32 in early 212 to 18 at end-213. High levels of unemployment, overvalued prices, and the abolition of interest-free loans for pre-owned housing purchases have had an adverse impact on this category, and especially on young households on moderate incomes. The market has, therefore, shifted in favour of second-time buyers, and to a lesser degree towards buy-to-let investors. Prices are falling only slightly due to the relatively high level of sales. 8 total households Deflated series, 1=Q Sources: Notaries, Datastream Percentage of owner-occupiers in Europe France: Real estate and the stock market Sources: 211 data, Eurostat France pre-owned prices Paris pre-owned prices CAC 4 (rhs) France: Existing home prices and stock of new-build homes months m price increase New-built stocks by months for sale (inv. rhs) Sources: Notaries, BdF No.42 October 214 7

8 In the developer new-build sector, the buy-to-let segment is sharply down as a result of new fiscal measures, including the restrictions on the Duflot scheme, measures affecting capital gains, and uncertainties about other upcoming measures. All this makes investors very hesitant. The first-time buyer segment is more resilient, but is affected by high unemployment levels, restrictions on the PTZ+ interest-free loan, very high prices and the burden of building standards as regards energy use, environmental issues, accessibility, etc. These negative factors are having an even greater impact on the individual, non-developer homes segment. Prices are stable in the developer new-build sector, but these are on-plan prices, which are not a mirror image of the end-acquisition price paid by the buyer. 21: correction to continue, gradually The ongoing correction is likely to continue at a slow pace in late 214 and through 21. The same positive and negative factors will continue to operate. Two points are worth looking at more closely, however. Mortgage lending rates are likely to stabilise, or even pick up very slightly. This is because long-term rates are tipped to rise very gradually in 21, on the back of a forecast rise in US long-term rates. The uptrend is likely to be more moderate in the eurozone, and longterm rates should remain very low. But the very fact that lending rates have stopped falling is likely to lead to a decline in sales and/or to slightly more marked price falls. The new housing support measures should halt the decline in sales in the developer new-build sector and lead to a small recovery in 21. But the measures will only have a limited impact (see page 9). In 214, transaction volumes are forecast to be down slightly relative to 213 and stable in the pre-owned sector. Prices in the pre-owned sector are forecast to fall 2. y/y after a drop of 1.9 at end-213, for a cumulative fall of 7 between end-211 and end-214. In 21, volumes should remain stable in the preowned sector and pick up a little, by, in the developer newbuild segment. Prices look set to fall modestly in the pre-owned sector, by 2. In this central projection, the main uncertainty concerns changes in bond yields, which determine the level of mortgage rates. The most probable scenario is, in our view, a very slow, measured rise. However, one cannot rule out a scenario where French bond rates rise more quickly, in connection, for example, with increased investor distrust of French sovereign risk, even if such a scenario seems unlikely. Were this to happen, the resulting rise in interest rates should lead to a more marked correction in real estate sales and prices France: Mortgage lending rates quarterly average s s Av. rate for fixed-rate mortgage (APR) 1-year OAT rate Sources: BdF, CA Source: Ministry of Ecology Sales of new-build homes (Greater Paris) On market France: Existing housing sales and prices for. Sales Sales 12m price increase (rhs) Sources: CGEDD, Notaries, Crédit Agricole S.A. -1 No.42 October 214 8

9 A new-build housing stimulus plan Plans to stimulate the housing market were announced by the French prime minister in late August. These mainly concern new-build housing and are designed to halt the decline in sales and building observed in recent years and described in the previous sections, above. The aim is to make tax incentives more attractive, both for buy-to-let and first-time purchases, and to bring down prices, whose very high level is one of the main obstacles to the purchase of new homes. Most of these measures are set out in the draft 21 Finance Act. Main measures Changes to the Duflot scheme (renamed Pinel) for buy-to-let. In the initial scheme, investors locked themselves in for nine years, with a tax break that amounted to 18 of asset value. Henceforth, investors will be able to lock themselves in for only six years, for a tax reduction of 12, and for twelve years, for a reduction of 21. It will also be possible to rent the home to family members. Last June, a revision to the map of areas where housing markets were under greater or lesser pressure was also announced. This therefore makes the Duflot scheme more flexible, with less stringent social restrictions. Freeing up of building land. The very high cost of building land substantially increases construction costs, squeezes home-builder margins, and results in excessively high sale prices. To push down the price of land it is necessary to boost supply. The tax regime of capital gains on land sales is, therefore, to be aligned with that for completed buildings, with a total income tax exemption after 22 years. In addition, a one-off 3 abatement will be implemented until end-21. Simplification of standards. Highly complex building standards also push up construction costs and lead to restrictions on building types (eg, the size of rooms that meet the the standards for disabled persons' access, the type of façades in connection with insulation requirements, the number of parking spaces, etc.). The simplification of construction standards, unveiled in June, will therefore be extended and a first measures will be put in place by the end of the year (eg, one, not two, parking spaces per home, easing of the standards for disabled persons' access access requirements, etc.). Lead-times for obtaining building permits are to be shortened, and permit validity extended from two to three years. Improvements to the PTZ interest-free loan. The period in which PTZ loan repayment may be deferred is to be extended. There are also plans to ease PTZ lending conditions, to make it more accessible in areas where there is less pressure on the housing market, and to extend it to pre-owned rural properties in need of refurbishment, if initial works account for 2 of the cost of the home. Limitation on rent controls. The initial measure, combined with fiscal tightening in , tended to make investors extremely hesitant, especially in the pre-owned segment. Rent controls will henceforth only be applied in certain major cities such as Paris or Lille on an experimental basis. Limited impact These measures are a step in the right direction. It seems essential to encourage price falls in the new-build segment and the two main drivers helping to achieve this are land prices and building standards. The measures covering these two factors are thus welltimed. We feel, however, that the scope of the measures is limited. Engineering a significant fall in land prices would call for a massive freeing up of building land, with incentives given to municipalities. Similarly, an even greater simplification of standards could be considered, as well as a reduction in VAT. The investor segment in the developer new-build sector could see a slight pick-up, therefore, thank to the tweaking of the Duflot scheme. But the reduction in new-build prices driven by this stimulus plan is likely to be quite modest, and sales to the new-build home-buyer segment are not, therefore, likely to pick up in the short run. No.42 October 214 9

10 Correction to European real estate markets: overview The French housing market is going through a slow, relatively modest correction phase. In this respect, France remains a case apart in Europe, where in many countries (the UK, Spain, Ireland, Italy, the Netherlands, Denmark, Greece) there was a strong surge in prices in 2-27, followed, from 28, by a marked correction to sales and prices. The European countries where these cyclical shifts were most pronounced were the UK, Spain, Ireland, and the Netherlands. A more accommodative distribution of lending and greater risk taking than in France can largely explain these different cyclical profiles. The question now is : where do we currently stand in the correction process, and what can we expect to see in these countries in 21? United Kingdom The UK market adjusted rapidly after from mid-27 as a result of recession and tighter lending conditions. Lending had been very accommodative and risk-taking was high. In view of the cumulative excesses, the recession, and of difficulties in the banking system, from 28, the banks applied a credit squeeze, and since then have been more cautious and selective in their lending. This resulted in a 2 drop in prices from mid-27 to mid-29, and a fall in the number of transactions and mortgages granted. The number of housing transactions fell sharply, to 884, in 211, compared with 1,668, in 26 a drop of 47. Things have recovered a little since then. After a slight uptick in 21, prices again fell in Between mid-27 and mid-212 prices fell a cumulative 19. Since end-212, prices have risen sharply by 29 in London and 12 in the rest of the country at end-august 214. This is partly linked to low mortgage lending rates, the Bank of England s measures to boost lending, the improvement in the economic climate, and government measures to help first-time buyers. In Q3 214, price were up almost 1 over 12 months, but signs of a slowdown are emerging as a result of stricter regulation. The market is still not completely cleaned up (fragile banks, excessive prices), sales are relatively low in number, and the ratio of mortgage debt remains at a very high 117 of income. The real estate market should continue to recover, but at a more modest pace. The threat of a bubble, fuelled by overvalued prices and high debt levels, is still present. There is no excessive inventory of unsold homes, however. In addition, the proportion of non performing loans is modest. The percentage of mortgage arrears (securitised or not), which identifies arrears over 9 days or more, rose from 2.6 in Q1 27 to 3.64 in Q1 29, before falling back to 2 in early 214. Note that, while preserving the specific features of the UK real estate market and its financing methods, the UK s regulatory authorities seem to want to move closer to the more cautious lending policies observed in several eurozone countries. Spain Following the boom phase, a long-running bust was observed in the wake of the financial crisis and the deterioration in the economic climate. Spain, forced to submit to a three-pronged adjustment to its banking sector, its construction sector, and its public finances, has remained in recession almost continuously from 29 to 213. The very high unemployment rate and the importance of the construction sector (12 of GDP in the boom years, compared with a eurozone average of 6.) fuelled a vicious circle involving a drop in construction unemployment a rise in credit defaults a credit 2, 1,8 1,6 1,4 1,2 1,,8,6,4,2, French mortgage lending: Ratio of non-performing loans to total loans Source: APCR Number of housing transactions Sources: HMRC, INE, Notaries Spain UK France 3 2 Q1 1997=1 Housing prices UK Spain France Ireland Sources: Halifax, Ministerio de Fomento, Insee, DS No.42 October 214 1

11 squeeze a fall in house prices. House building, which had been superabundant, collapsed, falling by 96 between 27 and 214, and there are still large-scale inventories of unsold new-build homes: around 7, in 213, compared with 6, in 29. It could take another four or five years to absorb the surplus stock. Sales volumes have fallen very sharply in recent years, to 328, sales in 213, compared with 948, in 2 a drop of 6. Prices have plunged 3 since end-27. They are now probably close to their fair value. Prices continued to fall in early 214, but at a slower rate, coming in at -2.9 over 12 months in Q1. Mortgage defaults have increased significantly, while the percentage of non performing loans stood at 6.3 in early 214, and significantly more in lending to developers. Even if demand from foreign investors seems to be picking up gradually, especially in southern Spain, the market correction still has some way to go, given weak demand, overabundant supply, and the difficulties facing the banking sector. The assets repossessed by the banks and held on their balance sheets before being transferred to the Spanish government s bad bank, SAREB, are now being put back on the market, but only very gradually, to avoid a market collapse Mortgage debt (total mortgage lending/household income) France Spain United Kingdom Sources: Central Banks Ireland The market saw a sharp correction (prices fell by 1 between 27 and 213) as a result of the recession and a credit crunch, given how prices and lending had spiralled during the boom years. As a result, transaction and mortgage numbers have plummeted. Prices have now probably reached a level close to their fair value (equilibrium price) and began picking up once more in They rose 7.8 over 12 months in Q1 214, after a rise of 6.4 in Q The ratio of non performing loans (arrears for more than 9 days), which was close to 4 in 29, soared to a record 19.6 at end-213. A sustained recovery in the market seems unlikely in view of the problems in the banking sector. Netherlands The cumulative price increase stood at 14 during the boom years. Since 28, we have seen a 2 decline in prices. The drop in the market is linked to the poor economic climate and to a series of austerity measures. Mortgage debt is still massive, however. At 14, it was the highest in the eurozone in 27. Since then, whereas it has fallen in the countries described above as a result of deleveraging, the Dutch figure has risen even further, to stand at 17 in early 214. This can be explained by very high acquisition costs and the specific characteristics of Dutch mortgage lending, including the fact that mortgage interest is tax deductible, loan-to-value ratios are often higher than 1, interest-only mortgages are very popular, and many people have recourse to mortgage equity withdrawal. The very low increases in incomes also go some way to explaining the rise in the mortgage debt ratio. Total mortgage lending rose hardly at all in 213 and early 214, and the market should continue to adjust slowly. Buyer demand should remain low, even if it could benefit from a recent measure to means test for renting social housing. Prices stopped falling in Q1 214 (+1.2 over 12 months), but it would be premature to see this as a trend reversal s, cum. 12 mths Spain: building permits and new housing starts Housing starts Source: Ministerio de Fomento Building permits No.42 October

12 French Real Estate Market Indicators Residential Non residential Pre-owned New-build Sales Demand Prices Supply Construction Vacancy ratio Rental value Completed on 27 October 214 Crédit Agricole S.A. Group Economic Research 12 place des Etats Unis Montrouge Cedex Publication manager: Isabelle Job-Bazille Chief Editor: Jean-Louis Martin Information centre: Gisèle Walter Statistics: Robin Mourier Sub-editor: Fabienne Pesty Contact: Access and subscribe to our free online publications: Website: ipad: Etudes ECO application available in App store platform Android: Etudes ECO application available in Google store platform This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. No.42 October