French mortgage trends. How is the ECB rate rise affecting the French mortgage market?True to form, the European Central Bank raised the main interest rate to 1.25% from 1% after two years without change – ECB president Jean-Claude Trichet forewarning us with the code words “strong vigilance” in the report of their monthly meeting. The ostensible reason for the increase in the base rate is to ward off inflation which stood at 2.70% on the day of the announcement. As in many countries around the world, the target for the Central Bank is a 2% inflation rate, which the ECB felt was too high to avoid acting on despite the debt related financial problems besetting many of the Eurozone members. It should not be forgotten that given the ECB’s position of presiding over monetary policy of a diverse set of economies, it must be seen to act with authority, conviction and clarity.
We have not seen much change in the rates on offer for mortgages in France since the announcement of the increase. Markets and banks had in fact already priced in this increase – the wily foxes. We have seen an average increase of about 0.20% in the cost of variable rate mortgages, with some banks opting to further increase their margins. Fixed rates have seen smaller increases but remain on the upward trend as concerns over the viability of some Eurozone economies have an effect on longer term bonds and interest rates.
We should expect further increases to the lowest rates on offer and a flatter market overall as it becomes more expensive for banks to refinance and maintain market beating rates. Although the ECB has indicated this rise in interest rates does not necessarily denote a series of increases, we can be sure that if inflation doesn’t recede over the next quarter, Jean Claude may start to feel strongly vigilant again.
|French property market trends: |
Prices still on the upward climb... but for how long?
|French property prices rose by more than 10% overall over the last year, with property price rises in Paris almost double that figure. According to a large estate agency in France, apartment prices increased by 0.25% in March – the fifth consecutive monthly increase – while house prices rose for the 17th month in a row, up almost 1% in the same period. The same agency also notes that the average difference between the published price and the actual sale price is approximately 5%, based on figures from more than 12,000 sales in March. |
We will watch with interest for indications of how the market reacts to interest rate rises, as each increase reduces the amount of money that individuals can borrow. Added to the increase in rates is a rising trend for extra underwriting scrutiny by many lenders. Whereas in the past a single underwriter could give a decision on a file, now many banks are employing extra credit committees to double check each file using more stringent sets of underwriting criteria.
The challenge for us at Athena Mortgages is to stay up to date with and adapt to the evolving criteria we face from each of the top 50 lending institutions we can work with across France. Fortunately we have longstanding relationships with these institutions, which means we have the communication procedures in place to maintain good customer service. We are happy to try to help those who have been refused and also those who are applying direct as we are confident we can beat almost any rate – especially if the borrower has a 30% deposit.
|Currency update: Euro Currency watch|
|Euro interest rates are going up, while sterling and dollar interest rates are not. That distinction has set the tone for these three currencies over the last month.|
Having promised in early March that it would act against an above-target rate of inflation – 2.7% at the last count compared to a target of 2% – the European Central Bank set the ball rolling in April by lifting its refinancing fate from 1% to 1.25%. Investors are in no doubt that further increases are in the pipeline.
Meanwhile, in London the Bank of England seems even less inclined to tighten monetary policy. At the beginning of the year investors pencilled in May 5 as the likely date for the bank rate to move North from the 0.5% position it has occupied since March 2009. That date has now been erased and replaced by November 10. Maybe. There are two reasons for the big change in sentiment. Firstly, UK inflation fell back in March from 4.4% to 4.0%. Secondly, the nine members of the monetary policy committee have fallen into a consistent pattern of voting six-three against a rate increase.
Across the Pond there is no suggestion whatsoever that higher US interest rates might be on the horizon. As in London, a vocal minority of the Federal Open Market Committee believes that perennially ultra-low rates simply store up trouble for the future, but the majority of voting members are fearful that to raise rates too quickly would prejudice America's economic recovery.
The net result has been a race to the bottom between the pound and the dollar as the euro strode ahead. The dollar is winning the contest, thanks to Standard & Poor's. The firm has attached a "negative" outlook to the United States' AAA credit rating. An unexpected improvement in UK retail sales provided the pound with a surprise bounce just before Easter but nobody is under any illusions that it signified a turnaround in sterling's fortunes.