Why delaying a property purchase in France could be a false economy
In this article we discuss the dynamics around exchange rates and borrowing costs for prospective UK property buyers in France. What has happened, how should we be looking at this and what does the future hold?
Since the Brexit vote, Sterling is down around 10% against the Euro and looks ‘settled’ at that rate for the moment. We know the UK growth rate has begun to slow down and markets have the jitters about Brexit. The lack of progress in the talks so far has meant confidence in the UK is not currently ideal.
Meanwhile, data from the Eurozone as a whole has been improving with France in a solid recovery. Political risk has receded with Macron making real progress on the reform agenda and Merkel back in office for another four years.
This chart shows the 10 year French government bond yield in purple, to which mortgage rates in France are correlated; the orange line is Sterling against the Euro.
Since very few experts, if any, can accurately forecast where currencies will trade, we’re not going to go there either! Instead, let’s focus on long term borrowing costs.
In France (and core Eurozone), these are still very depressed but are unlikely to stay this way indefinitely. In 2012, ECB President Mario Draghi fired the starting gun with his famous “whatever it takes” initiative to restore growth in the Eurozone with the ECB’s substantial quantitative easing. Five years and (alarmingly) over 1 trillion euros later, we can see the results.
In terms of the outlook for eurozone interest rates, the ECB is widely expected to start tapering the asset purchase programme at some point in 2018. Today the 10 year French government bond yields around 0.7%. Inflation is running at 0.9%. Real rates therefore are currently negative. Would they be if it were not for the massive ECB stimulus? It is reasonable, we believe, to expect borrowing costs to rise slowly in the near future as the ECB takes its foot off the gas.
So, what to do?
The 10% decline in Sterling is water under the bridge but unfortunately, a perceived concern for many potential buyers. However, look at the chart again. Since 2012, French bond yields (and mortgage rates) have more than halved. Amazingly, it is possible to lock into a 20 year mortgage, at historic lows, with other extraordinarily cheap borrowing options available depending on a buyer’s personal circumstances. In the long term it is arguable that this opportunity significantly mitigates, if not overwhelms, the current weakness of Sterling.
One final point: taking out debt against high value property in France always make sense to offset the Wealth Tax that would otherwise be payable. It not only provides somewhat of a hedge but also certainty as the borrowing costs are fixed in the long term. If the Euro rises further against Sterling, you effectively benefit from an increase in the translated value of the property. If it weakens, the interest payments will be lower in Sterling terms.
As with most things in life, it’s easy to find reasons not to do something. If however, you have longed for your own corner of France but have delayed your decision because of exchange rates it is probably time to seriously think again.