Ever wondered about contagion into France's housing market from subprime America? The country's national realtors federation - la Fédération Nationale de l'Immobilier (FNAIM) - has.

In its October 2007 (no. 50) quarterly newsletter on the topic the FNAIM's possibly self-serving pronouncement was:

“des risques de contagion de la crise de subprime limité...Les USA ne sont pas en France”

[“the risk of subprime contagion is limited…the USA is not in France”]
The assessment of their December (No. 51) letter was possibly even more confident.

"Alors qu’un scenario de crise des «subprimes» peut être écarté en France, les conditions de crédit restent bonnes en dépit d’un resserrement des taux"

[“…a «subprime» crisis scenario can be dismissed in France…credit conditions remain good despite a tightening of rates.”]
But come the April quarterly letter (No. 52) readers may have detected an unsubtle shift in tone:

"Néanmoins, dans un contexte de crise financière, limitée ou non aux «subprimes», et dans un climat de confiance des ménages dégradé, le spectre d’une spéculation, à la baisse cette fois, semble resurgir."

["Nevertheless, in a context of financial crisis, limited or not to «subprime», and in a climate of deteriorating household confidence, the spectre of speculation, to the downside this time, is resurfacing."]
The FNAIM team appears to have suffered a bit of a time warp between quarterly letters 51 and 52. Yet having butted upon reality considerable efforts are spent denying it as the team projects another annual increase in house prices of 2.7% in 2008:

“En dépit d’un recul des prix de -1.0%, observé au cours du 1er trimestre 2008, l’environnement du marché ne semble pas propice à la réalisation d’un scénario de baisse généralisée des prix.”

[“In spite of a decline in prices of -1.0% during Q1 2008, the market environment does not look positioned to enter a scenario of generalised price declines.”]
Which is an interesting hypothesis given that their own ex-new build graph to the left (but not, of course, their comment) shows 3 straight years of precipitously declining rates of price increase prior to this latest negative quarterly reading (one of only 2 in the last 36).

France is not the USA for sure. But its mortgage market has changed risk profile in the last five years. Traditionally a fixed rate market with over 95% of such loans before 2002 that figure is now 90% (having touched 80% at the height of the lending frenzy in 2004); average term is 21 years, up from 16 in 2002; and many more buyers are under 30 – up from one in ten in 2002 to better than one in three now. These are additional buyers, never bitten by a capital loss, to whom the last time France saw annual declines in property prices (1996) is irrelevant history.

So many observers would be pardoned for concluding the opposite of the FNAIM: demographic shifts in the market and overall conditions are actually reasonably weighted towards generalised prices declines in 2008 – particularly at the lower end with the inevitable knock on up the chain.

However, the FNAIM finds support from the (otherwise) marvellous Institut National de la Statistique et des Études Économiques (INSEE) who in its March 2008 report of French Household Income concluded that house prices would increase albeit at a slower pace.

INSEE is an amazing trove of reports and statistical method. But in this projection they use a demand driven model that focusses on purchasing power (p 105 of the above link). The notion that credit supply may be drying up is not seriously entertained; and they had not seen the Q1 data when they published.

The fact remains that Bank of France (BoF) data shows since late 2007 that tightened criteria are already in place for business lending; and the BoF anticipate housing loan demand to be hit in at least the first half of 2008.

To be clear, Gallic versions of subprime style defaults are highly improbable, nor will its corrosive social effects breach the French gates. But it is nonetheless a major dampener on credit supply whose impact here is still underestimated, misunderstood and unfinished.

It is a buyers market and likely to remain so through end 2008.

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