This report does not constitute a rating action.
Key Takeaways
- Property transfer fees (DMTOs) bottomed out in first-quarter 2024, paving the way for recovery.
- DMTOs are among French departments' main revenue sources and account for 20% of their operating revenues.
- This supports our expectation that French departments' financial performance will recover in 2025 as the rebound in DMTOs should gain traction.
- Nevertheless, downside risks remain as external shocks could impair economic activity in France, while fiscal consolidation could weigh on departments' budgets.
S&P Global Ratings estimates that DMTOs in France have started to recover since July 2024, following their sharpest decline since the global financial crisis over 2007-2009. The latest available data by the French environment and sustainable development authority (l'Inspection générale de l'Environnement et du Développement durable) indicate that activity in the French real estate market bottomed out in first-quarter 2024 (see chart 1). We expect the market recovery, which is spurred by the shift in the European Central Bank's (ECB's) monetary policy, will increase French departments' tax revenues, albeit with a delay due to the months-long lag between transactions and tax collection.
Chart 1
French departments suffered from the downturn of the real estate market over the past 18 months. DMTOs accounted for about 20% of departments' operating revenues in 2022. The decline in DMTOs by 33% in 2023 increased departments' overall deficit to a record €2.1 billion that year, representing 2.8% of their total revenues. If the current recovery continues, DMTOs will start to rise in fourth-quarter 2024, limiting the year-over-year decrease to 15%. In first-quarter 2024, DMTOs declined by 26% quarter over quarter.
Our expectation of a continuous recovery of the French real estate market is related to our projection that the ECB will cut its main policy rate to 2.5% by year-end 2025. Monetary easing has already reduced mortgage rates in France to 3.4% in July 2024, after they peaked at 3.6% in December 2023. After declining in 2023 and first-half 2024, real estate prices in France will stabilize, in our view (see table 1). This will support French households' purchasing power. We expect the recovery will gain traction over the coming months as buyers' hesitancy following the Olympics in Paris and snap elections wanes.
Table 1
| Nominal house prices in France are set to stabilize | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (%) | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||
| Year-over-year change in nominal house prices in the fourth quarter | 4.7 | -3.9 | -2.6 | 1.0 | 1.5 | 2.0 | ||||||||
| Average policy rate | 0.4 | 3.6 | 3.6 | 2.7 | 2.5 | 2.5 | ||||||||
| Source: S&P Global Ratings. | ||||||||||||||
The positive trend supports our view that French departments' financial performance will recover. We rate three French departments, namely the Collectivite Europeenne d'Alsace, the Department of Gironde, and the Department of Hauts-de-Seine. The outlook on our ratings on Gironde remains negative because we think Gironde's debt and financial performance would come under pressure if the real estate market does not recover in line with our expectations.
The departments are still facing downside risks, in our view. We expect the French economy will expand only moderately by 1.1% in 2024, 1.2% in 2025, and 1.4% in 2026. This could prevent potential increases in value added tax (VAT), which represents 28% of departments' operating revenues. Moreover, the central government could require local and regional governments (LRGs) to contribute to the country's fiscal consolidation over the coming years, which could impair LRGs' investment plans. For example, a 25% reduction over 2014-2017 in central government grants (DGF)--which, on average, accounted for 19% of departments' operating revenues over that period--resulted in a 7% decline in departments' investments over 2014-2017. If the central government were to cut DGF again, we believe departments would have to postpone or cancel investment projects--which remain their only budgetary lever--to meet the stricter budgetary objectives.
Even though the recovery in DMTOs will provide some relief to departments, we believe the structural imbalance between departments' revenues and expenditures will remain. Tax revenues--including DMTOs and VAT--represented 48% of departments' operating revenues in 2023, while countercyclical social expenditures accounted for 53%. Therefore, departments' revenues tend to fall during economic downturns, while their expenditures increase. This puts pressure on their operating budget balances, as was the case in 2023. Thanks to prudent financial management before the downturn of the real estate market, however, departments' cash position is solid and amounted to close to €12 billion in 2022. Departments partly used the cash in 2023 to fund their deficits.
| Primary Credit Analyst: | Hugo Soubrier, Paris +33 1 40 75 25 79; hugo.soubrier@spglobal.com |
| Secondary Contact: | Stephanie Mery, Paris + 0033144207344; stephanie.mery@spglobal.com |
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