N° 82 : Housing Finance 2016

Annual new housing loans extended by French banks (EUR 251.5 billion at December 2016) reflected this favourable environment, continuing to grow at a robust rate, particularly since the second half of 2016. It was up EUR 47.3 billion in December 2016 on its previous high in 2015 (an annual amount of EUR 204.2 billion) and according to Banque de France figures reached EUR 321.2 billion in April 2017. As in 2015, while loan transfers and renegotiations may have boosted growth in new lending, we can also see a solid increase in the other market segments, where new lending in general increased by 11% according to monthly monitoring data collected by the General Secretariat of the Autorité de contrôle prudentiel et de résolution (ACPR). Lastly, taking into account amortisation, the growth rate of outstanding loans (which stood at EUR 899.4 billion at end-2016) was largely unchanged, decreasing slightly from 4% at the end of 2015 to 3.8% at the end of 2016. Even though it accelerated sharply at the beginning of 2017 (5% growth rate at the end of April), it is still well below the levels seen in the mid-2000s, when it drew close to 16% at the end of 2006, or in 2011, when it reached almost 10% in the middle of the year.

As in previous years, the overall assessment of banks' risk exposure on housing loans in France remained broadly positive:

• Due to the continuing fall in interest rates, fixed rate loans accounted for almost all new lending (97.9%) and an ever-increasing proportion of outstanding loans, up 2.5 percentage points (pp) to 90.7%. The impact of an upturn in interest rates on borrower default risk would therefore be very limited.

• Banks still appear to be relatively well shielded against a price shock, even if the loan-to-value (LTV) ratio for outstanding loans deteriorated slightly by 1.3 pp to 69.4%.

• The vast majority of outstanding loans are secured, with the proportion of guarantees from a credit institution or insurance undertaking continuing to increase compared with loans guaranteed by a mortgage. In order to assure the risk coverage provided by guarantor bodies, the ACPR College also decided to impose a new minimum capital requirement (resilience level) set at 2% of the outstanding loans guaranteed by market participants (compared with an average cost of risk of 0.06% since 2006). This new requirement will take effect as of 1st January 2018.

• Finally, the ratio of non-performing housing loans fell back for the first time since the financial crisis, down 3 basis points (bps) to 1.54%. Furthermore, the cost of risk as a ratio of outstanding loans declined for the second consecutive year, by 0.4 bps to 5.9 bps.

While the risks in respect of outstanding housing loans still appear to be contained, lending policies, which continue to be based primarily on borrower solvency rather than on the value of the financed property, were relaxed to a certain degree in 2016:

• Average loan size (up 6% year-on-year to EUR 157.9 thousand) and LTV at origination (up 30 bps on average to 85.9%, and 63 bps to 84.7% excluding transfers) continued to increase in line with the trends observed in 2015 and before. However, a new development is the deterioration in other indicators that had been improving over several years. For example, the initial loan maturity lengthened by more than seven months to 18.6 years and the debt service ratio increased by 18 bps to 29.6%. Against this backdrop, the loan-to-income (LTI) ratio, which shows how many years of income the borrower would need to repay the loan, climbed by almost four months to 4.7 years and thus exceeded its previous historical high recorded in 2010. A certain degree of normality resumed however at the beginning of 2017, with slight decreases in the debt service ratio and initial maturity.

• As a result of the surges of loan transfers and renegotiations that magnified the decrease in the average interest rate of outstanding housing loans, the margins on those outstanding loans, which had remained constant at around a positive 0.4% since mid-2014, dropped rapidly in 2016 to a positive 0.05% at the end of the year (ACPR estimations) – a level inferior to the cost of risk; even if loan transfers dropped off sharply in April 2017 (down 23.3% in monthly volume compared with March), since interest rates at origination are still significantly lower than the average rate for outstanding loans and a new decrease in banks’ cost of funding seems unlikely, this decline should continue over the coming half-year periods.