Banque de France cuts monthly interest rate in half in one market

A simple technical adjustment, but at the cost of a long battle: the Banque de France finally accepted as the law allowed. “exceptional circumstances”carry out a “technical regulation” the amortization rate – the ceiling rate for the loan (including fees and insurance) – will therefore be calculated temporarily, not quarterly, but monthly. And this is from February 1 to July 1.

That’s the idea put forward at a meeting between lenders Bercy and Banque de France last week.

The goal: to “smooth out” interest rate increases in order to “blue” the mortgage market in a period of sharp rise in interest rates. Therefore, we are talking about calculating the same rate of wear according to the 4/3 rule (the average of the indicators observed in the last three months, increasing by one third) – a rule. “Proven since 1996” – this is highlighted in the Banque de France, but to avoid every month “very big step at the end of the term”To use the testimony of Francois Villeroy de Galhau, governor of the Banque de France “Three little walks every month.” It is up to the networks to send the information to agency advisors each month.

Decrease in profitability

With the rapid increase in market rates since the summer, banks faced a sharp deterioration in the profitability of loan production, as they were unable to adjust lending rates as quickly as market rates, given the rate of attrition. As a result, banks increasingly tended to “freeze” their loan files in anticipation of the next interest rate hike at the end of the quarter.

“This amendment will have the advantage of spreading interest rate increases more gradually.” Jean-Marc Vilon, managing director of Crédit Logement, an interbank institution specializing in the guarantee of real estate loans to individuals, believes. The latter also noted that collateral requirements increased sharply after each increase in the attrition rate in the “reduction” movement of files.

Mortgage brokers, who were the first to recognize market fluctuations, had been warning government authorities about the dangers of this move for nearly a year. stop and go », Call for Attrition Rate Reform. Without success, so far, not on the Bercy side, and less so on the Banque de France side.

Worst year since 2008!

But surprisingly, the Bank decided to deviate from the rule of setting the monthly depreciation rate without going back to the calculation formula. First of all, the authorities are worried about the decline of the real estate market. “. “We are experiencing a decline in activity that is beginning to appear on Bersi’s side.” boasted about the specialist of the sector. With even a year-end slump in certain market segments, such as new single-family homes.

The latest figures from the Crédit Logement/CSA Observatory for the fourth quarter of 2022 are also clear, with a 35% drop in mortgage production over the period and even a 44% drop during December (spread quarterly).

“We are ending 2022 almost like never before. In the fourth quarter, the decline in production deepened and brought us back to the financial crisis of 2008. University professor and scientific director of the Observatory Michel Mouillart comments. The recession at the end of 2022 was flat “More important than observed during first arrest in 2020”, the economist adds. According to the observatory’s calculations, in total, the decline in production will be about 20% in 2022 and will reach 180 billion euros.

Moreover, the gloomy picture the observatory began painting last spring contrasts sharply with that of the Banque de France (see box), which in its latest publication pegged the mortgage market at an all-time high (except for 2021). , although the beginning of normalization appeared in the second half of the year, with an acceleration in December. According to Banque de France forecasts, mortgage lending should decrease by only 3% to 218 billion euros in 2022.

Trend reversal

According to the observatory, the origin of this decrease in production: a decrease in demand as well as supply. “In the first half of the year, we moved from a low demand regime to a combined low supply and demand regime”, observes Michel Mouilart. Even if the latter adds, even if banks try to soften the increase in rates for customers below 35, including the most modest, who constitute the locomotive of the real estate market. “the future of the profession”.

2022 will be quite exceptional with both household morale at its lowest level since 1972 and mortgage rates adjusted for inflation…at their lowest level since 1950! However, property rates continued to rise in the fourth quarter, with an average rate of 1.63% by the end of the year at 2.34% (vs. 1.06% a year ago), according to the Observatory. This increase occurred in several stages, most notably during the quarterly interest rate hike, which resulted in an increase in applied rates of approximately 20 basis points.

“Real estate loan interest rates will continue to rise in 2023”, Michel Mouillart warns with about 120 basis points, an average rate of 2.85%, which should reach the popular threshold of 3% next December. Otherwise, 3% loan offers should increase in the fourth quarter, but rates should begin to decline in 2024 and return to an average of 2.2% by the end of 2024.

All indicators in new and old are red, activity is decreasing. And given the forecasts for 2023, there is nothing to hope for a change in the trend in 2023. Including attrition rate reforms. “This reform will not change anything about the specific dynamics of the market “says the expert.

Unprecedented production structure

To offset some of the rising interest rates, borrowers continued to extend their loan tenure to an unprecedented 248 months on average. “In the last 20 years, the average term of the loan has increased by 7 years. It is important. And that’s why we have a mortgage debt that continues to grow at a steady pace despite the decline in production.” Michel Mouillart explains.

Today, 65% of home loan originations are over 20 years old, compared to 20% in 2012. Extension of tenure, however, is not the same for all categories of borrowers. It is aimed primarily at young customers who are sought after by banking networks.

But the extension of terms is no longer enough to cover the increase in interest rates and the increase in property prices. “dramatic growth” private contributions (+43% since the end of 2019). In this game, of course … it is the most humble who suffer the most with a personal contribution equal to 7 months of income.

Overall, the Observatory notes rising prices, a halving of household incomes and shrinking affordable housing in almost all cities. Even if this rate and demand shock begins to stabilize or even start to fall in real estate prices in certain large cities such as Paris or Lyon, many elements that should not participate in the rebound in production.

ZOOM – Battle of the numbers

Highest or worst year since 2008? Since last summer, the divergence between the two reference sources for real estate lending, Banque de France on the one hand and Crédit Logement/CSA Observatory on the other, has continued to grow, resulting in a very different market reading. Banque de France does not deny the problem. For him, the difference comes, first of all, from the limited scope of Crédit Logement, which works only with some banks (30-50% of the market), especially commercial banks that have drastically reduced their production for the second time. the mutualist heavyweights (Crédit Agricole, Crédit Mutuel) that could apply for the guarantee would maintain or even increase their production.

On Crédit Logement’s side, this difference is explained by a different database. While Banque de France only considers signed and issued loans, Crédit Logement intervenes well above when a loan is offered. However, it can take three or four months or even longer between the acceptance of the offer and the actual disbursement of the loan (especially with the attrition rate). ” For Banque de France, on average, we have a different view of the market that is closer to the market reality at time T for us. “, explains Michel Mouillart, scientific director of the observatory.

According to online broker Pretto, this delay in observing market reality is problematic: “This delayed awareness of the expected market inefficiencies.”