Even though the authorities have recommended that banks exercise greater control over the granting of home loans, they lent 258 billion euros in 2019. What are the medium- and long-term risks? An overview of the subject.
Record home loan production
In 2019, against a backdrop of low rates, home loan production reached 258 billion euros, around +21% in 1 year. These figures are quite simply the second-highest annual production of home loans behind 2017 (273 billion euros). However, banking authorities such as the HCSF (Haut Conseil de Stabilité Financière) have repeatedly recommended that banks monitor loan production, and in particular that they comply with the "33% effort ratio" for households. This rate represents the weight of a mortgage in a family's budget. The aim is to ensure that it does not exceed one-third of a borrowing household's income.
The authorities have also asked banks to stop offering mortgages over 25 years. Over the past 10 years, outstanding mortgages have risen by almost 63% to reach 1,078 billion euros.
Explanations
One of the reasons why banks have lent out so much money despite the various warnings from the authorities is that many people have renegotiated a loan taken out at a less advantageous borrowing rate. In fact, this race to renegotiate mortgages is justified by the low level of interest rates, which averaged 1.17% at the end of 2019 according to the Banque de France (this rate does not include insurance).
The real estate market remains very active: the number of transactions remains high (over one million in 2019), and price levels have risen by an average of 4% across the country. However, there have been some surges in certain cities: Nantes (+14%), Lyon (+12%) and Rennes (+8%). These factors are pushing up the price of mortgages.
Towards another real estate bubble?
It's a legitimate question to ask. If property prices continue to rise, and incomes and employment contract, households will find it extremely difficult to repay their mortgages. Real estate bubbles are the harbingers of a future economic crisis, and excessive borrowing can be the spark that ignites it. As we know, French households are highly indebted. Their outstanding loans represent 120% of their net income over one year, compared with 77% in 2000.
The current situation is not like that, but the volume of home loans granted on conditions that are sometimes too flexible does raise questions.