N° 32 : Housing finance in France in 2013

The volume of transactions for existing homes, the main market segment, grew again (+2.1%) and housing loan production rebounded sharply (+56%). However, the latter trend reflects an unprecedented volume of loan transfers, which accounted for 18.1% of production in 2013. Against this backdrop, total outstanding loans showed a relatively small increase compared to the long-term trend (+3.9%).

In general, the market remains characterised by strong fundamentals, particularly borrower solvency, which is the main lending criterion, although some risk indicators stabilised at high levels:

• The initial maturity of new loans fell relative to 2012, to 19.1 years, and the average residual maturity declined from 15.4 years to 15.3 years;

• The share of borrowers with a debt service ratio (i.e. the ratio of repayment costs to income) of 35% and above in total production fell again in 2013, as did the average debt service ratio: at 30%, it showed its sharpest decrease since 2001, while remaining significantly above that year’s level (27.6%);

• The proportion of fixed-rate loans in total production rose again slightly to 92.8%, and they continued to make up the vast majority of outstanding loans (83.2%). Uncapped floating-rate loans, which entail the highest risk for borrowers, were no more than 4.8% of total loans at end-2013. Interestonly loans represent only a tiny proportion of production (0.3% in 2013);

• Almost every home loan is covered by a mortgage or lender’s lien, or by a guarantee issued by a credit institution or an insurance company;

• The cost of risk on housing loans, which had slightly increased in 2012, dipped slightly to 0.065% of outstanding loans.

However, there are certain trends that deserve attention, although some of them seem to reflect a change in borrower structure in favour of those with relatively higher than average income and/or assets:

• The average loan amount continued to rise in 2013 despite falling property prices throughout France. In addition, the average loan-to-value (LTV) ratio at origination, i.e. the loan amount relative to the property purchase price, having contracted in 2012, rebounded by more than 4 percentage points to 84.1%, its highest level since 2001. However, these two trends have not been matched by a rise in the average debt service ratio (see above). Moreover, the sharp rise in the average LTV at origination partly reflects some banks’ inadequate recording of loan transfers (see below) and the average LTV after origination may be estimated at just over 56% at the end of 2013, which is roughly unchanged relative to 2012;

• The ratio of gross non-performing housing loans continued to rise in 2013, but, at just under 1.5%, it remained significantly below the average ratio of non-performing loans overall (3.8%), which grew much more sharply relative to 2012. Nevertheless, delinquency rates vary significantly from one segment to another, with first-time buyers in particular now exhibiting the highest levels (2.8%);

• At the same time, the average coverage ratio for housing loans stabilised at around 27%. This is still significantly lower than the ratio for all types of loans to customers (55.4%), but it seems appropriate given the substantial guarantees provided to banks;

• While banks benefit from borrowers’ relatively good level of insurance against death or work disability, they are still exposed to prolonged unemployment risk as only a small fraction of their customers has taken out job-loss insurance.

The strong growth in loan transfers is a major focal point in this context. Such transfers, whose underlying objective of retaining customers and increasing deposit taking from individuals appears hard to sustain over the long run given the relatively finite total volume of savings, should not lead to the underestimation of borrower default risk, which must be properly reflected in lending rates. In addition, the annual survey of the French Prudential Supervision and Resolution Authority (Autorité de Contrôle Prudentiel et de Résolution - ACPR) reveals that some banks are not updating the valuation of the underlying properties when granting the new loans, which appears inconsistent with a proper assessment of risk and should be corrected. More generally, even though the aggregate value of financed property currently seems to comfortably exceed outstanding principal amounts, it is important that banks are able to regularly assess their tangible security throughout the life of the loans so that they are in a position to anticipate any sudden reversal in the housing market.

Finally, while lower property prices and historically low lending rates have driven some recovery in activity in the recent period, persistently difficult macroeconomic conditions should encourage French banks to keep a close watch on the development of risks within their housing loan portfolios.