N° 137 : Housing financing in 2021

• Between the fourth quarter of 2020 (Q4-2020) and Q4-2021, the INSEE price index for existing properties showed a further 7.2% increase in metropolitan France, with marked divergences between the Île-de-France region (+2.7%) and the rest of France (+9%), while prices fell in Paris (-1.6%; Chart 1);

• The number of transactions reached a new peak at 1,178,000, a 15% increase compared with 2020, and a 10.4% increase compared with 2019 (Chart 2);

• The increase in market rates has not yet been reflected in the interest rates on housing loans, which continued to fall in 2021, reaching a historical low in December (1.06% on average), and rose only slightly at the beginning of 2022 (1.16% in April 2022; Chart 3);

• The annual production of housing loans amounted to EUR 273.7 billion in 2021, an 8.5% increase compared with 2020 and an 11% increase compared with 2019 (Chart 5). Excluding loan transfers and renegotiations, the new loan production even reached an all time high at 224.8 billion in 2021, while the share of loan transfers and renegotiations fell by 5.7 percentage points (pts) to 17.9% (Chart 6). At the same time, outstanding housing loans grew by 6.8% over the year (Chart 7), while other loans to individuals increased by only 1.1%.

This sustained momentum in real estate lending has thus continued to contribute to the increase in household debt: in September 2021, household debt stood at 101.8% of their gross disposable income, 1.9 pt higher than in September 2020 and 5.3 pts higher than in September 2019. This makes France above the euro area average of 98.3% (+1.7 pts compared with September 2020 and +4 pts compared with September 2019).

However, the recommendation of the Haut Conseil de Stabilité Financière (High Council for Financial Stability, hereinafter referred to as HCSF) of 20 December 2019, as amended on 28 January 2021 and subsequently modified into a mandatory measure on 29 September 2021, has resulted in a number of improvements in risk factors. The data collected by the Autorité de contrôle prudentiel et de résolution (ACPR) shows that in 2021 the share of riskiest loans in the new production continued the downward trend started in 2020:

• The share of new loans with maturities over 25 years declined by 3.9 pts to 6.8% (Chart 24);

• The share of new loans with a Debt-Service-To-Income (DSTI) ratio higher than 35% decreased by 10.3 pts to 19.1% (Chart 30). The average DSTI ratio also declined by 0.5 pt to 30.2% (Chart 26). However, the share of new loans with a DSTI ratio comprised between 33% and 35%, which is the cap set by the HCSF measure, increased from 8.8.% to 13.8% (+5 pts);

• The share of new loans for which the Loan-To-Value (LTV) ratio exceeds 100% declined by 4.4 pts to 24.6% (Chart 28). Moreover, the average LTV over the life of the loan declined from 84.4% in 2020 to 83.3% in 2021 (down 1.1 pt; Chart 34).

Thus, the share of loans exceeding the cap set by the HCSF’s measure stood at 14.2% in the first quarter of 2022, a number that stayed within the flexibility margin allowed by the decision (Chart 40). All the major French banking networks individually meet these requirements. Moreover, loans for the purpose of acquiring a principal residence, which the HCSF wished to prioritise, remain largely prevalent: they accounted for 77% of new loans in 2021, up 1.3 pt compared with 2020, mainly as a result of the increase in the share of first time buyer loans (+1.2 pt at 33%; Chart 8).

Conversely, some features of new loans reflect the continued increase in borrowers’ debt. Between 2020 and 2021:

• The average loan amount increased by 5.4% to reach EUR 192,894 (Chart 17). Between Q4-2020 and Q4-2021, it even increased by 8.9%, faster than real estate prices (+7.2%);

• The average maturity increased by 2.4 months to 21.7 years, as the lengthening of maturities within the 25-year cap makes it easier for borrowers to comply with the maximum DSTI ratio set by the HCSF (Chart 20);

• The average Debt-to-Income (DTI) ratio increased by 1.4 month to reach 5.2 years of income (Chart 31).

These trends were mostly confirmed at the beginning of 2022. Between Q4-2021 and Q1-2022 (quarterly data):

• The average loan amount increased by 1% to EUR 203,025;

• The average maturity increased by 1.8 month to 22 years;

• The average DSTI ratio declined by 0.2 pt to 29.8%;

• The average DTI ratio increased by 0.3 month at 5.2 years of income;

• The average LTV ratio fell by 0.3 pt to 84.1%.

The French home lending model benefits from fundamentals that remain sound; in particular:

1. These loans are almost exclusively granted at fixed rates (99.4% of total loan production in 2021 and 97.3% of total outstanding amounts at year-end), thus limiting the risks associated with rising interest rates on borrowers’ creditworthiness (Chart 11 and Chart 12);

2. Virtually all of the outstanding loans (96.6%) benefit from a protection, particularly of a third party guarantee or mortgage type, which limits bank losses in the event of a borrower’s default (Chart 15);

3. The granting policy is based primarily on the assessment of the borrower’s solvency, as measured in particular through the DSTI ratio, and not on the market value of the financed property, thus limiting the phenomenon of financial amplification.

Overall, risks remain contained, as evidenced by the low level of delinquency:

• 12-month defaults accounted for 0.36% of outstanding loans in the last quarter of 2021, their lowest level since end-2015 (Chart 44);

• The non-performing loan rate remains low at 1.09% as at 31 December 2021, although up by 3 basis points (bps) compared with 2020 (Chart 46);

• The cost of risk remains very limited, at 1.3 bps in 2021 (Chart 53).

This historically low level of losses is reflected in the risk weights measured by banks’ internal models for the calculation of their solvency ratio. From a structurally low level, the average risk weights have decreased (-0.7 pt over 12 months to stand at 9.6% in June 2021). Taking into account the guarantees provided by Crédit Logement, which is itself subject to prudential banking regulations, the average risk weight for housing loans granted by French banks is within the European average (Chart 56).

Lastly, the HCSF also wished to draw the attention of credit institutions to the importance of pricing home loans in a way that does not undermine the French housing financing model. The analysis of data provided by institutions in this regard shows that margins on new loans were squeezed in 2021 due to a "scissor effect” triggered by lower interest rates on loans and higher refinancing costs as measured by internal transfer price rates. This trend intensified during Q1-2022 as market rates rose sharply while interest rates on new housing loans remained relatively stable, which even led to a negative net margin observed on the production for Q1-2022 (Chart 58). However, if we take into account the various ancillary revenues (such as application fees, insurance distribution fees, etc.) when assessing the overall profitability of housing loans, the margin measured on the new production remained positive but has also eroded in the course of 2021. The macroeconomic environment is likely to continue to weigh on margins, both through a probable increase in market rates and as a result of the entry into force of the new borrower insurance reform aiming at increasing competition for products that are widely distributed by banks. The ACPR will therefore remain vigilant as to changes in the profitability of housing loans over the coming months.