Housing finance in France in 2012

In a context of declining housing sales and decreasing prices, the annual survey on housing finance carried out by the Autorite de Controle prudentiel et de Resolution (ACPR) recorded a 27.6% decrease in loans extended in 2012. Outstanding loans experienced their lowest annual growth since 2001 (+2.4%). The market remains characterised by strong fundamentals, in line with the assessments made by the Joint Forum and the International Monetary Fund, even though some risk indicators stabilised at high levels: - In 2012, the maturity of new loans at origination remained similar to 2011 at 19.8 years. However, the effective maturity, which take early redemptions into account, increased by almost 5 months to 13.3 years; - The proportion of the most indebted borrowers (i.e. with a debt service ratio above 35%) in the production decreased slightly in 2012 and the average debt service ratio was stable at 30.5%, although it remained at its highest level since 2001; - Since 2005, the proportion of fixed-rate loans has increased to reach almost 90%. Uncapped floating-rate loans, which entail the highest risk for borrowers, only accounted for 3% of total loans at the end of 2012. Interest-only loans continued to represent a very scarce proportion of the production (0.44% in 2012); - Almost every home loan is covered by a guarantee that has been issued by a credit institution or an insurance company in most cases; - The average loan-to-value (LTV) ratio at origination, i.e. the amount of the loan for home buying to the property purchase price, decreased by almost 2 points as compared to 2011; nevertheless at 79.9%, it remained higher than its 2008 trough (75.5%). Several other trends deserve attention: - The average loan amount increased faster than real estate prices in 2012, supposedly reflecting the continuing decline of interest rates over the year; - The ratio of non-performing housing loans grew again in 2012, but, at 1.47%, it still remained below the average ratio of non-performing loans; nevertheless, delinquency rates vary significantly from one segment to another, owners-buyers as well as floating-rate loans exhibiting the highest levels; - The average coverage ratio stabilised at 22% of specific allowances for loans to total gross impaired loans, a level still significantly lower than the average coverage ratio for all types of loans (51.5%); - While banks benefit from borrowers frequently taking out insurance against death or work disability, they are still exposed to unemployment risk as only a small fraction of their customers has subscribed a job-loss insurance; - The cost of risk on housing loans, which had continued to decrease in 2011 from its 2009 peak, rose by almost 50% in 2012, from 0.043% to 0.061% of gross outstanding loans, but it still remains at a very low level. In this context, the main market participants generally recorded a low to medium risk level. In 2012, the ACPR performed on-site examinations in French credit institutions. The purpose was to assess banks’ strategies regarding housing finance, their underwriting standards and the quality of risk management. These audits highlighted that, despite noticeable improvements, risks monitoring and internal control still called for a strengthening. A significant downward adjustment cannot be excluded given the strong increase in property prices since 1998. Credit institutions thus must make sure that interest rates on housing loans fully take into account funding costs, operating expenses and expected cost of risk. They must also avoid aggressive pricing strategies so as to ensure healthy conditions of competition. Borrowers’ debt service must stay limited to a reasonable proportion of their disposable income, and credit institutions have to pay attention to the LTV at origination as well as periodically thereafter. Finally, any excessive lengthening of loan maturities should be avoided.