N° 92 : Housing finance in France in 2017

Reflecting this favourable environment, annual new housing loans extended by French banks (EUR 272.1 billion in 2017) continued to grow at a sustained pace, especially in the first half of 2017, before declining in the second half. According to monthly monitoring data collected by the General Secretariat of the Autorité de contrôle prudentiel et de résolution (ACPR), new lending excluding loan transfers and renegotiations, increased by 21% in 2017. Unlike last year, however, the share of loan transfers gradually declined over the year, from a peak at 37% of new lending in January 2017 to 8% in December 2017. Continuing its trend of the second half of 2017, new residential lending slowed sharply at the start of 2018: as a result of the fall in loan transfers and renegotiations, the 12-month cumulated new lending was down by 36.5% in April.

In this context, the year-on-year growth rate of outstanding loans, which had reached 6.3% in October 2017, also gradually slowed: at end-April 2018, it stood at only 5.5%.

As in previous years, banks’ risk exposure on housing loans in France remained contained:

• Due to the continuing fall in interest rates, fixed-rate loans accounted for almost all new lending (98.7%) and an ever-increasing share of outstanding loans (up 2.7 percentage points (pts) to 93.4%); a rise in interest rates would therefore have a very limited impact on borrowers' credit risk;

• Banks still appear relatively well-shielded against a price shock, even though the loan-to-value (LTV) ratio for outstanding loans deteriorated slightly by 0.3 pp to 72.3%;

• The vast majority of outstanding loans are secured (96.8%), by guarantees that protect the banks, such as sureties;

• Lastly, the ratio of non-performing loans fell for the second time since the financial crisis, down 6 basis points (bps) to 1.43%; in addition, the cost of risk as a ratio of outstanding loans decreased for the third consecutive year, by 1.4 bps to 4.3 bps.

However, several developments call for continued vigilance:

• Despite the stabilisation of loan rates, even at very low levels, the effect of the rise in prices and resulting tensions on households' purchasing power could no longer be offset. Even though borrower solvency remains the main criterion of analysis, rather than the value of assets financed, certain lending standards applied by French banks continued to deteriorate in 2017: the average loan amount (up 4.9 % to EUR 161.4 thousand) and the debt ratio (up 2.2 months to 4.9 years) thus reached record highs; the initial loan maturity, which increased by 4 months to 19 years, and the debt service ratio, which rose slightly by 0.2 pp to 29.7%, were still below their respective highs recorded in 2008 (20 years) and 2009 (31.6%);

• Despite the stabilisation of the average liability cost and the overhead rate, the net margin ratio, as measured by the ACPR, continued to deteriorate in 2017 due to the continued rapid decline in the average interest rate on outstanding housing loans; this decrease in the profitability of housing loans is particularly problematic as it is no longer, since the start of 2018, offset by the large volumes of loan transfers and renegotiation fees that banks had benefited from in 2017. In addition, the availability of the income derived from borrower insurance, generally obtained from the lending bank when setting up the loan, could be threatened by the adoption of the Bourquin amendment, which now makes it possible to change contract every year.