Mortgage loans: government wants to ease lending conditions

Recent changes in the property market raise the very serious question of the options available in the short and long term for households wishing to purchase property. Not only limited by the loss of purchasing power linked to rising interest rates, they are increasingly hitting against lending criteria that are becoming ever more stringent and causing carnage among loan applications, which are overwhelmingly rejected.

With no natural solution on the horizon, property professionals are sounding the alarm and are being heard by the government, which is seeking solutions.

Mortgage credit is weakening, month after month

This is a fact: mortgage loans granted are decreasing each month in both number and amount, and quite dramatically. Statistics from the Observatoire crédit logement show that over a rolling year, the decline is 29.2% in the number of loans granted (from March 2022 to March 2023, therefore, compared with the previous 12 months). The amount loaned, for its part, fell by 30.6%.

Beyond credit, the signing of preliminary contracts also appears to be struggling: given the difficulties mentioned, 68% of households say they would rather postpone their property purchase rather than commit to a complicated process and one that could potentially be detrimental to their monthly budget, according to a survey conducted by OpinionWay.

Despite this, property demand remains strong in reality, showing just how much the market is not actually in crisis: we might rather say that the decline in purchasing power is affecting household morale, with households waiting for solutions to proceed more calmly with their projects. The willingness to proceed is there, and only the constraints imposed by the banking system are holding back the recovery in the number of actual transactions and therefore the number of loans granted.

Criteria that have become (too) restrictive

The rules that banks follow come from the High Council for Financial Stability (HCSF), which until recently had powers that were more akin to recommendations. Since 1 January 2022, however, its guidelines have had binding force on banks, covering:

• The maximum debt duration, set at 25 years (27 years if building);
• The effort rate, or fixed expenses relative to income, capped at 35%.

Some flexibility is allowed for 20% of loans and in certain cases, particularly to facilitate access to credit for first-time buyers, which is nevertheless not fully used by banking institutions (only 14.5% of loans deviate from the rules).

Be that as it may, the limits are being decried by property professionals and seem poorly suited to the current market, where solvent households are nevertheless unable to take out mortgage loans.

The executive is listening to property professionals

The government has a role to play in regulating the property market as a sector essential to the national economy. Measures have already been taken recently, such as the monthly rather than quarterly revision of the usury rate, set at 4.24% for loans taken out over 20 years or more for April (against 4% in March).

At the request of Bruno Le Maire, Minister for the Economy and Finance, the executive is currently working on a thorough evaluation of the lending criteria to determine what easing could help unlock the mortgage credit market.

Some attribute an underlying intention to the government to bring down property prices in the face of the impossibility of selling properties at current market prices. After all, the reverse mechanism has been in place for many years, where the increasing ease of obtaining credit at ever-lower costs has certainly boosted the market and the surge in prices.

Whether intentional or not, the reversal of this trend is already showing signs of coming to fruition, and the guidelines that will be decided by the government will reveal whether it is in favour of this development.

The Banque de France opposed to easing

The Banque de France’s reaction to the idea of easing HCSF rules is measured, and in a note published on 5 April, it expresses serious reservations. According to its analysis, revising the lending rules could lead households to increase their debt ratio to a situation of over-indebtedness. In France, household debt is already equivalent to 66% of GDP, a percentage already higher than that of the rest of the eurozone.

Nevertheless, the very existence of the prudential rules issued by the HCSF is being questioned: in other countries with comparable economies to ours, control or even vigilance is not the norm. Trust in market rules and in the sound judgement of banking institutions is enough to maintain a reasonable level of debt – we would stress that in these same countries, households are less indebted than in France.

It is also clear that banks will go to great lengths to avoid steering their borrowing clients towards a situation of over-indebtedness, not to harm their long-term business and regardless of the possible intervention of credit insurance.

The debate between the government and the Banque de France is open, and only time will tell how our country will attempt to re-engage the property market on a positive credit spiral. Watch this space!