(8)

The ESRB’s assessment of vulnerabilities highlights the following in relation to France: a. Household indebtedness in France is relatively high in relation to disposable income. It has grown significantly over the past 10 years and the recent medium-term dynamics indicate that this trend could continue. The main risks associated with such a level of household indebtedness are the possibility of a contraction of consumption and second-round effects to financial stability in the event of a macroeconomic shock. However, some mitigating factors are present in the French economy. First, households have a high savings rate by international comparison. Second, important social safety nets exist which aim at mitigating the impact of a sudden decrease in borrowers’ income in the event of unemployment, thus reducing the potential second-round effects of a macroeconomic shock. Third, a high percentage of borrowers are not exposed to interest rate risk due to the high proportion of fixed-rate housing loans. b. The growth in housing loans has been relatively strong, both over the short and medium term. The increase in new housing loans is notable and this could lead to further growth in overall household indebtedness. Moreover, some indicators suggest that certain households with housing loans in France may be vulnerable to economic and financial shocks, in particular young and lower-income households with higher debt-service-to-income (DSTI) ratios. In addition, around a third of the new housing loans have a loan-to-value (LTV) ratio of over 95 % and the average loan-to-income ratio for new loans reached a historical peak in 2017. The average maturity of housing loans has also increased, while the distribution of DSTI ratios has deteriorated. Preliminary microdata used by the French authorities to monitor these developments suggest that a large share of high-LTV or high-DSTI borrowers are wealthy households whose loans are backed by collateral and guarantees. c. While there is no strong evidence of widespread house price overvaluation in France, residential real estate prices have increased significantly in some large cities (12) – the Paris area in particular – and this may have eroded housing affordability in some locations. At the local level, there is some indication that residential real estate prices are elevated, relative to income and rents. Given that a third of all loans granted have a high LTV ratio and that in the future house prices could adjust, some households may experience a negative wealth effect. However, direct credit losses from a potential decrease in the collateral values of mortgage loans, are expected to be low due to several country-specific factors. First, the use of the guarantee scheme to collateralise housing loans (13) mitigates the direct credit risk to credit institutions in the event of a decrease in house prices. Second, the potential wealth effects for households are estimated to be weaker than in other advanced economies as there is no possibility to withdraw cash or equity from house revaluations. d. Adverse economic and financial conditions or adverse developments in the residential real estate market could lead to the materialisation of direct and indirect risks to financial stability given the vulnerabilities mentioned above. Potential direct risks to the banking system in France relate both to the potential defaults of loans granted in an environment of strongly increasing house prices and low interest rates, and to indebted households and competitive pressures leading to some loosening of lending standards and narrowing of margins. In France a number of factors, such as the collateral channel which is expected to be relatively weak, important social safety nets and the prevalence of fixed-rate loans, are expected to mitigate direct credit risks related to housing market shocks. However, if, for example, unemployment increases and/or household income growth decreases, some households may find it more difficult to service their debts. The associated negative household income and wealth effects may reinforce the initial shock if households are required to reduce consumption in order to service their housing loans. This could lead to second-round effects and an increase in the risks to credit institutions and the financial system. e. The ESRB takes note of the fact that France has announced a 0,5 % countercyclical capital buffer rate to build up the resilience of institutions in a preventive manner. The calibration of this macroprudential measure took into account the indebtedness of the non-financial sector in France more broadly and that of the household sector more specifically, as household lending is also supported by the recovery of residential property prices. Therefore, the capital measure is expected to enhance the banking sector’s resilience to the accumulated vulnerabilities. However, it is not expected to curb either the dynamics of household indebtedness or the deterioration in lending standards. Although the national authorities in France have been monitoring credit conditions, there has been no formal guidance on what should be considered as prudent credit conditions. f. The current policy measures are assessed to be partially appropriate and partially sufficient to mitigate the identified systemic risks related to vulnerabilities in the residential real estate sector in France. In particular, the current capital-based macroprudential measures in place could be complemented by other measures to tackle the vulnerabilities related to increasing household indebtedness and to the signs of deteriorating lending standards. The ESRB acknowledges the efforts made by the French authorities to monitor risks in the residential real estate sector as well as their aim to further improve the monitoring framework in accordance with Recommendation ESRB/2016/14 of the European Systemic Risk Board (14). Notwithstanding this, further actions may be needed to address the vulnerabilities identified in France. In particular, given the rising household indebtedness and signs of deteriorating lending standards, the national authorities in France could consider the need for additional pre-emptive actions such as explicit guidelines for lending standards, in the form of either a recommendation or formal borrower-based measures.