Friday, September 4, 2009

The cost of credit

Even with interest rates currently negotiable at less than 4% and French property prices at an all-time low, potential buyers should look hard at the real cost of buying a property on credit, and whether the time to buy is now.

Conflicting evidence abounds, of prices holding up or reducing, and whether the situation will be the same in 2010. The number of sales of new and old properties has certainly declined, from 650,000 in 2007 to a predicted 500,000 in 2009 (for oldder properties) and 127,000 (2007) to 80,000 in 2009 for new-builds.

Although individual examples of dramatic price reductions of 10 to 15 - or even 25 - per cent can be cited in certain situations, according to FNAIM the average reduction in the asking price has been just 8.8% for houses and 5.7% for apartments, in the twelve months period to July 2009.

Signs are that owners are hanging on and hoping things will improve, while potential buyers delay their purchase decision in anticipation of a further reduction in house prices.

For those hoping to purchase a property on credit it is a delicate balancing act. as even a 1% rise in interest rates can add up to 10% to the square metre price of the property. In the case that property prices rise at the same time as interest rates, a potential buyer might be regretting his wait-and-see approach as early as the middle of next year.

Note that the average cost of buying a French property on credit can add as much as a third to the property price. So a typical 200,000 loan at 4.20% over 20 years will cost just under 100,000 euros depending on life assurance.

(Based on the annual survey of French property price trends in Capital magazine, September 2009.