RICS Global Real Estate Weekly – French housing outlook put at risk by interest rates

Sustained signs of recovery in the French economy are feeding through the French housing market. However, the sector faces a key risk as the ECB might soon raise interest rates in a move to counter above target inflation, says RICS (18 February 2010).

French new home sales for Q4 and housing data from January are due on Tuesday 22nd, and the French mortgage lending published in the ECB M3 breakdown on Friday 25th. The data is likely to indicate a broad recovery in demand and supply back to around their long run averages, even though lending remains rather flat. Total new home sales have rebounded sharply from their 2008 low (1.514 in Q4) to 29.989 in the third quarter of 2010. Monthly housing data is far more volatile, but taking into account a 6-month moving average, it appears the trend has stabilised around the long run average of 28.800.

Meanwhile, annual growth in mortgage lending is broadly flat, which compares with the long run average rate of about 15%.

RICS believes that the evolution of the French housing indicators will largely depend on the state of the economy, as evidenced here. GDP data released this week showed that the economy is continuing to grow at a slow but steady pace (0.3% q/q). In the meantime, leading indicators such as the composite PMI index * reached a 4-month high of 57.8 in January, which, if maintained, suggests a potential growth for the next GDP print. Eventually, six consecutive quarters of economic growth seem to be feeding through the labour market, with the unemployment rate falling from its post-crisis peak of 10% to 9.7% in the last reading.

Josh Miller, Senior Economist at RICS commented:

“Sustained growth and a gradually improving labour market is good news for the house building sector. It is unsurprising then that builders’ confidence, whilst still negative, has improved to its highest level in January since October 2008 according to the European Commission’s monthly sentiment data.

However, a key risk facing the sector is the future path of interest rates. The ECB has turned increasingly hawkish in recent months on the back of above target inflation readings and is signalling it may soon begin to hike rates.”