New French Govt. Housing Measures Push House Prices Down

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On Sept. 28  the new French government announced a fresh series of measures as part of the 2013 draft Finance Act.

According to a report from Moody's investors Service released this morning, this is in keeping with the government's ongoing efforts to expand the country's housing supply and limit costs to borrowers.

The new proposed measures include increasing taxes on vacant properties to compel the owners to rent them; lowering taxes on capital gains from the sale of building plots to force owners to sell these in the short term; and auctioning public building plots at low prices or, in some cases for free, to encourage social housing building.

The French government will also replace the former tax incentive framework for housing investments with something more favorable to tenants who are going to be offered rental prices 20% below market prices. The alternative should also be restricted to only a few geographical areas.

Even though the government’s prior measures in August 2012 focused on rent controls, those in the 2013 draft Finance Act are more far reaching given the tax incentives and the sale of public building plots done to increase housing property supply, Moody's said.

While the new measures will eventually increase supply and thus drive down housing prices, Moody's said these will also further drive the short-term effects of the factors that have already placed downward pressure on property prices such as the reduction of mortgage lending, the shortening of loan maturities and the decrease in sale deal volume, the rating agency stated.

Because of the lead times for construction to be completed once the laws are passed, the expected effect of the measures on the available housing supply will not become known until the medium term, Moody's analysts said.

However, the rating agency stated that the credit implications for French RMBS and covered bonds will be limited because of the prudent lending practices in the country as well as accumulated price appreciation. This will allow borrowers to be comparatively immune to limited price changes.

Mortgages supporting French securitizations are less exposed to short- and medium-term variations in house prices for several reasons including mortgage lending is not equity-driven but based on the borrowers' ability to repay as determined by their available income; borrowers usually pay in fixed instalments instead of variable payments; and current borrowers have benefited from strong house prices increases, Moody's said.

Despite fluctuations, house prices are currently at their pre-crisis and historically high levels in France, the rating agency stated.

For RMBS deals, house price evolution since the lenders granted the loans has driven borrower’s equity higher by 10 points on average. Covered bonds have even lower current LTV ratios than RMBS so, although indexed LTV is not available for all programs, buffers insulating borrowers from house price drops should exceed those in RMBS, Moody's said.


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