N° 50 : Housing finance in France in 2014

Trends in transaction volumes varied over the year: purchases of existing dwellings picked up in the first half of 2014, but then declined again over the remainder of the year (-3.5%), and this downward trend accelerated in the first quarter of 2015 (-4.8% at end-March); in contrast, transactions in the new housing market have rebounded markedly since the first quarter of 2014.

Against this backdrop, new residential lending by French banks contracted by close to 19%, despite the ongoing decline in loan rates, which have fallen to all-time lows. At the same time, the total outstanding stock of residential loans continued to rise, albeit at a very modest pace of +2.3%, which is lower than the rate seen in 2013 (+3.9%) and closer to that observed at the end of the 1990’s real-estate crisis.

Overall, an analysis of banks’ risk exposure on residential loans in France in 2014 shows no particular cause for concern: new residential lending, as well as stocks of existing lending, are still primarily comprised of fixed rate loans, and nearly all outstanding lending is secured, the majority by a credit institution or an insurance company. A number of indicators suggest that banks are tending to shift their focus more towards wealthier customers who, in principle, are lower-risk: despite the ongoing rise in the average loan amount, which appears to have disconnected from the trend in property prices since 2012, the average initial loan maturity and average debt service ratio have fallen since the crisis. According to estimates by the Autorité de Contrôle Prudentiel et de Résolution (ACPR – Prudential Supervision and Resolution Authority), average borrower income has increased by 28.1% since 2003.

Loan approval decisions are still mainly based on the solvency of the borrower rather than on the value of the financed property, and banks appear to be relatively protected against any shock to prices. The average LTV ratio for outstanding residential loans remained unchanged at 52.3% between 2013 and 2014, as the ongoing decline in property prices was offset by an acceleration in the rate of amortisation for outstanding loans, in turn stemming from the decline in initial maturities and in interest rates on new loans. On average, prices would need to drop by just over 47% for the value of financed properties to fall below the remaining principal of outstanding loans.

An individual analysis of the surveyed banks shows that the overall risk profile for the group is moderate. In the case of new lending in particular, the laxer credit standards applied by certain banks are generally offset by the tighter standards reported by others.

Despite this overall favourable appraisal, a number of issues need to be highlighted:

• After declining markedly in 2014, loan transfers have rebounded sharply since the third quarter of 2014, climbing to their highest level (in absolute and relative terms) since January 2010. Similarly, data collected by the ACPR show that certain banks have seen a sharp rise in loan renegotiations over the period. These trends, which reflect intense competition between banks, temporarily boost income due to the early repayment and renegotiation fees charged to customers, and generally have a more lasting positive impact on borrower solvency. However, they also raise doubts over whether the pricing of new loans is sufficiently high, and over the future profitability of banks’ residential loan book.

• Gross non-performing loans have been rising steadily since the crisis and account for a growing proportion of total outstanding housing loans – although this share is still smaller than in 2001, and smaller than the ratio of non-performing loans to non-bank borrowers. In parallel, the cost of risk on residential loans rose to its highest-ever level in absolute terms in 2014. As a ratio of total outstanding loans, it remains below its 2009 high, and below the average cost of risk ratio for the banking sector as a whole; however the ratio for residential lending has been rising since 2011, while for overall bank lending it has tended to decline. The rise in defaults on residential loans appears to stem primarily from the first-time buyer segment, where the gross NPL rate and cost of risk have quadrupled and tripled respectively since 2010. That said, an economic analysis reveals that, for the time being at least, French banks and loan guarantors have more than sufficient capital and similar resources (guarantee funds, technical reserves, etc.) to cover their cost of risk on residential loans.

• A large share of the new residential lending of two of the surveyed banks takes the form of hybrid products, which are loans combining fixed and floating rates, along with other options for the borrower. Based on the data collected for the survey, these loans account for only a tiny proportion of new lending in the French banking system. However, the banks in question should make a careful assessment of the associated risks, both for themselves and for the borrowers, and notably the risk in the event of a dispute with customers over the terms of these products.