N° 71 : Housing finance in France in 2015

On the existing homes market, the number of deals increased by 16% over the year, climbing above its long-term average, while sales gained 17.9% on the new homes market, building on the recovery that began in late 2014. The pick-up took place as prices for existing dwellings held steady in 2015; after previously falling for three years running, prices were 0.1% down nationwide, but 0.3% higher in Paris and 0.2% in the rest of France.

Against this backdrop, new housing loans extended by French banks surged by 77.2% in 2015 according to Banque de France statistics. While the low interest rate environment continued to support loan transfers, there was also a fairly sustained upturn in new lending in other market segments, with an average increase of 20.3% according to monthly monitoring data gathered by the Autorité de Contrôle Prudentiel et de Résolution (ACPR – Prudential Supervision and Resolution Authority). This translated into a mild acceleration in the growth rate of outstanding loans, which rose from 2.3% at end-2014 to 4% at end-2015. As a result, housing loans to individuals were steady at just above 10% of the total assets of French banks.

As in past years, the overall assessment of the risk exposure borne by banks on housing loans in France was broadly positive. Lending policies continue to be based primarily on borrower solvency rather than on the value of the financed property:

• In a setting of persistently low interest rates, fixed rate loans rose to account for a record 96.7% of new lending as well as 88.2% of outstanding loans;

• Loan transfers, which contributed to an accelerated decline in the average interest rate on outstanding housing loans by encouraging loans to be renewed at lower interest rates than those applied at origination, seemingly topped out at EUR 8.7 billion in September 2015, with monthly flows shrinking to a quarter of that level by March 2016 at EUR 2.3 billion;

• The debt service ratio, which is measured by dividing the borrower’s repayments by his/her income, continued to decline from the high of 31.6% reached in 2009, falling to 29.4% in 2015 – its lowest level since 2004;

• Since virtually all loans are amortising loans and since the rate of amortisation for outstanding loans is accelerating with the decline in the average maturity of new loans, which is linked in turn to the fall in interest rates, banks look relatively well shielded against a price shock, with the loan to value (LTV) ratio for outstanding loans reaching 68.3% at end 2015;

• Almost all loans are secured, most often by a credit institution or insurance company; moreover, guarantees provided by insurers continued their steady growth;

• The cost of risk for housing loans fell by more than 15%, breaking with the uptrend in place since 2011.

Notwithstanding the broadly favourable assessment, several issues deserve to be highlighted:

• Average loan size continued to increase, pushing up the loan-to-income (LTI) ratio despite the decline in the debt service ratio: the average LTI ratio, which shows how many years of income the borrower would need to repay the loan, climbed from 4.25 to 4.33 between 2014 and 2015, returning to the peak of 4.34 years recorded in 2010;

• With no marked improvement in the jobs situation, gross outstanding non-performing loans (NPLs) continued their post-crisis pattern of growth, although the pace eased compared with 2014. However, while they made up an increased proportion of total outstanding housing loans, the share was slightly smaller than that observed in 2001 and considerably smaller than the share of NPLs in all non-bank lending.

The ACPR is keeping a close watch on the regulatory changes currently being discussed within international supervisory bodies, which could challenge France’s robust financing model for housing finance.