January 13, 2020

Granting of real estate credits in 2020: Towards a banking of banks?

2019 has been an exceptional year, with the crossing of the million mark of transactions in old real estate. French confidence in stone seems to have been regained, accentuated by the windfall effect of extremely low interest rates. While the government seems to want to restore some order in the conditions for the granting of loans by banks, is this situation set to last in 2020?


A very unlikely interest rate hike

interest rates

It’s a safe bet that interest rates, whether key or commercial, will not see a significant rise in the coming months. The upturn is such that some banking establishments have even decided to do without intermediary distribution networks, such as brokers, forcing themselves to be more aggressive in order to win new customers.

Finally, the interest rates for mortgage loans are largely inspired by the key Fine Bank rates and, to a lesser extent, those of OATs (Assimilable Treasury Bonds). However, both remain constrained by political decisions which aim to avoid a surge in rates to limit the damage to the weight of sovereign debts. All this therefore suggests that banks will be present on the credit market in 2020, unless the public authorities get involved.


Banks now under surveillance


Suddenly, the Agree Bank and the HCSF (High Committee for Financial Stability) were worried this year about the lengthening of the duration of loans, the drop in contributions in funding files, the runaway private sector debt and the weakening of bank balance sheets linked to very low fixed rate outstanding loans. Let us admit that, posed thus, the subjects are important and the concerns admissible. And this until recommending a strict hardening of the debt ratio to 33% of revenues, and a limitation of the durations to 25 years… Except that on closer inspection, things are not as simplistic.

First of all, the lengthening of the initial term of the loans is above all a response to a context, that of the rise in house prices. It is therefore not a maneuver by the banks to solve the situation of households excluded from the market. In fact, the average length of detention has only recently varied (22 months more over the past 2 years) while remaining much lower than that observed in other European countries.

Similarly, if it is true that the market has observed a significant drop in the personal contribution rate on eligible files, this situation reflects above all the tensions that are exerted on the solvency of households.


Reduced intakes without serious consequences

Reduced intakes without serious consequences

This tension is due to 3 main factors. The first is inherent in the banks themselves and in the rather healthy attitude of households towards their savings. The current rate of borrowing, sometimes lower than that of investments made, encourages borrowers to increase the amount of their credit rather than going to draw on their reserves. On low risk profiles, bank advisers do not hesitate to encourage them to follow this path.

The second factor is the acceleration of social behavior in households. Single-parent families, like those known as “stepfamilies”, are increasing. The current tension on rents, the weakness of rental offers, the level of very low interest rates lead these households to favor a rapid return to home ownership.

Finally, the last impacting factor: the disappearance or reduced quota of aid in the preparation of home ownership files, which were previously assimilated to personal contribution.


Conditions for granting credit that will tighten

So, should we fear a slowdown in the allocation of credits? Before answering this question, it is important to remember that we have just lived several exceptional years in terms of real estate. If 2020 already promises to be an excellent vintage, a significant drop in transactions is to be expected, the year 2019 having broken all records. This drop, even a relative one, could trigger a feeling of concern. This is why the public authorities and the banks will have to carry out an adapted communication, in order not to tip the interest of the households for the real estate in a paralyzing anxiety, combined with a period of local elections never favorable to ambitious decisions. .

However, it is a safe bet that the banks will tighten their allocation criteria in 2020, to return to more variability in the conditions for granting loans. They will also pay more attention to the risks linked to the real value of the goods, especially in the event of a lull in transactions. 2020 should therefore remain a good vintage in terms of mortgage loans, but the preparation of projects will undoubtedly be more important and will be accompanied by the likely return of intermediaries, such as brokers.


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