French authorities are clamping down on lending standards to cool an overheating mortgage market at a time when yield-hungry banks are ramping up lending.
France's High Council for Financial Stability, which oversees the country's financial system, is taking measures to slow mortgage lending growth, recommending Dec. 12 that banks grant home loans with a debt service ratio of no more than 33% and maturities of no longer than 25 years. If banks do not take action, they will have to hold more capital to cover potentially risky loans, the council said.
A quarter of new loans have a debt service ratio of at least 35%, up nearly 3 percentage points since 2015, and loan maturities for new mortgages have expanded by two years since 2015 to reach an average of 20.1 years in May 2019. Up to 5% of new mortgages now last more than 25 years.
Mortgage lending grew by 6.7% in October, up from 6.6% in September, according to Bank of France figures. Central bank Governor François Villeroy de Galhau told Boursorama in a televised interview that the growth rate was twice that of France's European neighbors, with aggressive selling by banks.
"These are wise, preventative measures. We will maintain growth in mortgage loans but at a more sustainable pace ... with more healthy loans," he said.
The wave of growth came as a large number of renegotiations between 2015 and 2017 led to a decline in the profitability of outstanding housing loans, to the tune of 60 basis points in the net interest margin between 2016 and 2019, equivalent to €6 billion a year of net interest income, the council said. It has already warned of an overheating credit market and has twice introduced a rise in the countercyclical capital buffer to rein in lending growth, including an increase to 0.5% from 0.25% that takes effect in April 2020.
The credit market has been growing sharply amid the renegotiation wave and as corporations take out cheaper loans and banks boost volumes to maintain weak margins. Mortgage rates fell to an average of 1.24% in October, down from an already low level of 2.57% in January 2015, according to Bank of France data.
Among France's largest banks, lending has risen rapidly over the past four years. According to S&P Global Market Intelligence data, total net loans at Société Générale SA were up 10.4% between the first half of 2015 and the first half of 2019. At mutual bank Groupe BPCE, they soared 21.3%, at Crédit Agricole Group, they have grown by 21.7% and at BNP Paribas SA total net loans are up 14.3%.
Mutual banks such as Crédit Agricole Group, Crédit Mutuel Group and BPCE have been more aggressive in mortgage lending to maintain their strong market share, Arnaud Journois, an analyst at DBRS Morningstar, said in an interview.
The council also said banks could exempt up to 15% of new loans from the recommended guidelines, mainly for first-time buyers and those acquiring a principal residence.