N° 124 : Housing financing in 2020

At the same time, the INSEE price index for existing properties continued to rise by 6.4% in metropolitan France, in a uniform manner between the Île-de-France region and the rest of the country, despite the slight decline observed in Paris in the fourth quarter (-0.1%). In this environment, the annual production of housing loans amounted to EUR 252.4 billion in 2020, i.e. an increase of 2.4% compared with 2019; moreover, although it has decelerated slightly from its peak in May 2020, reaching 242 billion in March 2021 over a 12-month rolling period, loan production remains well above its annual average since end-2003 (156.7 billion). At the same time, outstanding housing loans grew by 5.4% year-on-year, while other loans to individuals fell by 0.5%.

Despite sound fundamentals, the evolution of household borrowing conditions in France remains a concern for financial stability. The French home lending model is based on three pillars:

1. these loans are almost exclusively granted at a fixed rate (99.4% of the production in 2020 and 96.7% of outstanding loans at the end of the year), thus limiting the risks associated with a potential rise in interest rates for households.

2. almost all outstanding loans (97.5%) benefit from protection, particularly of a guarantee or mortgage type, which limits bank losses in the event of a borrower’s default;

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

In 2020, the dynamics of real estate credit contributed to a rise in household debt: at the end of the year, it reached 102% of gross disposable income, a figure that was up 3.8 percentage points (pts) and higher than the euro area average (97.5%; +2.4 pts). The High Council for Financial Stability (HCSF) issued a recommendation on 20 December 2019, then amended on 28 January 2021, to limit the DSTI to 35% of pre-tax disposable income and the maturity of home loans to 25 years (to which a maximum grace period of two years may be added in cases where the date of entry into possession of the property is different from the date of granting of the loan). A flexibility margin of up to 20% of the quarterly production of new loans allows institutions to deviate from the criteria, provided that at least 80% of the maximum flexibility is reserved for purchasers of their main residence with at least 30% of the maximum flexibility reserved for first-time buyers (with the remaining 20% of the maximum flexibility, i.e. 4% of the quarterly production, being free to use).

Data collected by the Autorité de contrôle prudentiel et de résolution (ACPR) show a gradual normalisation of most credit granting criteria over the period from January 2020 to February 2021, without any decline being observed in the average loan amount:

• The average loan amount was EUR 181,029 in February 2021, i.e. a 3.2% increase, slower than real estate prices;

• The share of new loans with maturities above 25 years declined by 4.4 pts to 8.3%, while the average maturity receded slightly to 21.5 years (-1.4 month);

• The share of new loans with a DSTI ratio above 35% declined by 8.5 pts to reach 23.5%, while the average DSTI ratio for new loans fell by 0.8 pt to 30.1%;

• The average Debt-to-Income (DTI) ratio declined slightly from 1.1 month to reach 5 years;

• The ratio between the loan amount and the value of the property being financed (loan to value ratio, or LTV) fell by 2.7 pts to 82.7%. Moreover, the share of LTVs above 100% fell by 7.2 pts to stand at 24.2%.

The gradual normalisation of criteria such as maturity and DSTI has led to a decline in the share of loans that do not comply with the HCSF’s Recommendation R-2021-1, which in the first quarter of 2021 stood at 28.8% before taking into account the 20% flexibility margin provided for in the Recommendation; the trend continued in the second quarter of 2021, with the rate of non-compliant loans reaching 25.3% in April 2021 and 23.6% in May. For most institutions, on a consolidated basis, loan production does comply with the recommendation of a 20% or less flexibility margin, while compliance with the share of main residences and first-time buyers is also improving.

Based on the figures for April and May, the downward trend in non-compliant loans continues.

All in all, the risks remain contained, as evidenced by the low level of delinquency, both in terms of stock (the non-performing loan ratio that stood at 1.06% at 31 December 2020, is down by 14 basis points (bps) compared with 2019) and in terms of flows (12-month defaults accounted for 0.42% of outstanding loans in the first quarter of 2021, the lowest level since mid-2015). The cost of risk remains negligible, at 0.7 bps in 2020. This reduced level of losses is reflected in the low risk weights, which continue to decline by 0.7 pt in 12 months to reach 10.3% in June 2020, but which remain within the norm for countries covered by the European Banking Authority’s transparency exercise, especially when taking into account risk coverage by housing loan guarantors. Moreover, at the beginning of this year, the ACPR conducted a new stress-testing exercise for leading housing loan guarantors in France, following that conducted in 2018, which used the same scenarios and methodology as the exercise conducted by the EBA in 2021; following this exercise, it appears that all guarantors would be able to withstand a huge macroeconomic shock in the housing market while still covering banks’ losses.

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 use of the new "RENT_IMMO" reporting template, as implemented by ACPR Instruction 2020-I-04, shows that margins rose between the first quarter of 2020 and the first quarter of 2021, mainly as a result of lower internal transfer pricing. Despite the heterogeneity of calculation methods, the decline in internal transfer pricing reflects improvements in market conditions, including lower swap rates against Euribor, following the monetary policy measures implemented by the European Central Bank in the spring of 2020.

While risks remain contained, the ACPR and Banque de France remain particularly vigilant as regards the impact of the health crisis on housing loan losses, as well as the impact of the recent rise in long-term interest rates on the profitability of these loans. Moreover, the monitoring of granting criteria will be strengthened with the transformation of the HCSF recommendation into a binding standard by the end of the summer.