N° 107 : Housing financing in 2018

In this flourishing environment, the annual production of housing loans amounted to EUR 203 billion in 2018, a figure that is still well above the annual average amount since 2003 (EUR 145 billion), although declining compared with 2017 (-26 %). This withdrawal is due to the decline in external loan transfers (-67 %), which decreased from 23.6 % of annual production in 2017 to 9.5 % in 2018 and has remained at that level in the first quarter of 2019. At the same time, the outstanding amount of housing loans exceeded the threshold of EUR 1,000 billion in 2018 (EUR 1,010 billion as of 31 December 2018), recording a growth of 5.8 % which continues in the first quarter of 2019.

Housing loans granted by French banks continue to be almost exclusively fixed-rate loans (98.5 % of production in 2018), thereby limiting the risks associated with a possible interest rates increase for households, while almost all outstanding amounts (96.9 %) are protected by collateral, mortgage or guarantee, which allows for a limitation of bank losses in case of borrower default. In addition to this, the credit provision policy is mainly based on the appreciation of the borrower's creditworthiness, which is measured using the debt service to income (DSTI) ratio rather than the value of the funded property.

Despite sound fundamentals, the sustained increase in household indebtedness in France is a matter of concern regarding the risks it could pose for financial stability. In this context, the issue of changing eligibility criteria remains paramount. However, as in 2017, household borrowing conditions continued to loosen at the beginning of 2019:

• The average lending loan has risen almost continuously since 2009 to reach EUR 170,187 in 2018, an increase of 5.5 % compared with 2017, which remains above real estate prices. • The average duration of loans continued to increase for the third consecutive year to regain its 2008 level at 19.9 years, i.e. an increase of 11 months compared with 2017.

• The average DSTI rate increased slightly for the third consecutive year to reach 30.1 % in 2018 (+0.4 percentage point (pt) compared with 2017) but remained below the 2009 level (31.6 %).

• The average debt ratio at the time of granting also increased significantly for the third consecutive year to reach 5.2 years in 2018 (+4 months compared with 2017), its highest level since 2004.

• The loan to value (LTV) ratio at the time of granting increased for the fourth consecutive year (+0.3 pt) to 87.3 %, its highest level since 2001. However, with almost all loans being depreciable and house prices being on the rise again, the average ongoing LTV is lower than the average LTV for granting and remains relatively stable since 2016 at around 69 %.

Consequently, the Autorité de contrôle prudentiel et de résolution (ACPR) and the Banque de France remain particularly vigilant as regards the development of risks related to the financing of housing; lenders should be cautious about the conditions under which they finance acquirers.

However, given the importance, in production, of borrowers that are already owners with incomes as well as a larger financial capacity, the risks appear to be contained, as evidenced by the low credit loss ratio, both in terms of stock (doubtful outstanding rates of 1.3 % as at 31 December 2018, declining by 13 basis points (bps) compared with 2017) and in terms of flows (12-month defaults accounted for 0.73 % of the outstanding in the first quarter of 2019, its lowest level since mid-2015). The cost of risk remains negligible at 3 bps in 2018, below its average since 2006 (5 bps). This reduced loss ratio is reflected in the low weighting ratio, which continued to decline (from 0.4 pt over 12 months to 11.3 % in June 2018) but remained in line with expectations, especially taking into account risk coverage by the bail-in bodies.

However, despite the stability of the average cost of liabilities and the slight decline in overhead costs, the net margin for the outstanding amounts of housing loans continued to deteriorate in 2018 as a result of the rapid decline in the average collected interest rate (from 2.2 % in December 2017 to 2 % in December 2018). With production rates remaining below the average outstanding rates, the renewal of the stock of loans is expected to continue reducing the average interest rate on outstanding amounts for some time, while exerting additional pressure on margins.