N° 114 : Housing financing in 2019

In this environment, the annual issuance of housing loans amounted to EUR 246.4 billion in 2019, a 21.3% increase compared with 2018. At the same time, the outstanding amount of housing loans grew by 6.8%.

The French housing lending model relies on three mainstays:

1. these loans are almost exclusively granted at a fixed rate (98.5% of issuance in 2019), thereby limiting the risks associated with a possible increase in interest rates for households;

2. nearly all outstanding loans (97.3%) are secured by credit protection, including in the form of a third party guarantee (“caution”) or mortgage, so as to limit losses for banks in the event of borrower default;

3. the lending policy is still mostly based on the assessment of the borrower’s creditworthiness, measured in particular by the debt service to income ratio (DSTI), and not on the market value of the financed property.

Despite sound fundamentals, the evolution of housing borrowing conditions in France is a concern for financial stability. While French household debt increased by 1.9 percentage points (pt) to 61.6% of the gross domestic product in 2019, at the same time and similarly to 2017 and 2018, household borrowing conditions have continued to ease. Thus: 

• The average amount of a loan has increased almost uninterruptedly since 2009 to reach EUR 179,026 in 2019, up by 5.2% compared to 2018, and higher than the increase in real estate prices.

• The average loan duration continued to increase for the fourth consecutive year. It has exceeded its 2008 level and has now reached 20.3 years, a 4-month increase compared to 2018.

• The average borrower debt-service-to-income (DSTI) ratio rose slightly for the fourth consecutive year to reach 30.3% in 2019, but still remains below its 2009 level (31.6%). In addition, the share of loans extended with a DSTI ratio above 35% rose by 1.2 pt to 26.1%.

• The average debt-to-income (DTI) ratio also increased for the fourth consecutive year to reach 5.4 years in 2019 (+2 months compared with 2018), its highest level since 2004.

• Finally, the ratio between the amount of loans and the value of the property financed at the time of granting (loan to value or LTV) increased for the fifth consecutive year (+1.5 pt), reaching 88.8%, its highest level since 2001. However, as almost all loans are amortisable and property prices continue to rise, the average LTV ratio during the life of a loan is lower than the average LTV at origination and has remained relatively stable since 2016 at around 73%.

In this context the Haut Conseil de Stabilité Financière (HCSF, the French macroprudential authority) issued a recommendation on 20 December 2019 aimed at capping the DSTI ratio at 33% and the maturity at 25 years at the time of granting for housing loans distributed in France. The implementation of this recommendation will be monitored through a dedicated report (named “CREDITHAB”), revised by ACPR Instruction No 2020-I-02. The first submissions of this report are expected for September 2020.

Yet, risks appear to be contained, as evidenced by the low delinquency, both in terms of stock (doubtful outstanding rate at 1.3% as at 31 December 2019, down 4 basis points (bps) compared with 2018) and in terms of flows (12-month defaults accounted for 0.71% of outstanding amount in the first quarter of 2020, the lowest level since mid-2015). The cost of risk remains negligible at 2 bps in 2019, below its average since 2006 (4 bps). This reduced delinquency is reflected in the low risk weights which continue to decline (-0.4 pt year-on-year to reach 10.9% in June 2019) but remains in the norm compared to all countries covered by the transparency exercise of the European Banking Authority (EBA), especially when taking into account risk coverage by the housing loans guarantors.

However, despite the stability of the average cost of liabilities and the slight decline in overhead costs, the net margin for the outstanding housing loans continued to deteriorate in 2019 as a result of the rapid decline in the average interest rate (from 2% in December 2018 to 1.8% in December 2019) and due to the intensity of competition in this market. With new loans rates remaining below the average outstanding rate, the renewal of the stock of loans is expected to continue reducing the average interest rate for outstanding loans, putting additional downward pressure on margins. Against this backdrop, the HCSF also wanted to draw the attention of credit institutions to the need of pricing housing loans in a way that does not undermine the French housing financing model. To this end, the new report “RENT_ IMMO” established by ACPR Instruction No. 2020-I 04 will ensure that costs and risks are adequately covered. The first submissions of this report are expected in September 2020.

Owing to the current health crisis, the beginning of 2020 was marked by a sharp decline in the number of real estate transactions once lockdown measures were implemented. While monthly credit issuance was very robust in January (+33.7% compared with January 2019) and February (+41.8%), it slowed down to +7.6% in March and then to +10.9% in April. At the same time, a sharp rise was observed in loan transfers and renegotiations, which increased by 126% over the first 4 months of 2020. The share for such transfers and renegotiations rose from 25.4% of monthly production in December 2019 to 47.1% in April 2020. Excluding these loan transfers and renegotiations, monthly issuance decreased by 6.1% in March and by 28.9% in April. These new loans, which correspond, for the most part, to transactions initiated commercially at the end of 2019, do not allow for the impact of the HCSF recommendations to be observed yet.