How the socialist ceiling on mortgage lending in France backfired on Macron

In the last 18 months, mortgage owners have faced extreme difficulties. The increase in interest rates worldwide has significantly raised the cost of loans, making it harder for first-time homebuyers and complicating the financial situation for borrowers who had to switch to much higher rates once their mortgages expired. In the UK, the government has faced demands to intervene and prevent further rate hikes from lenders, but all efforts have been unsuccessful. In contrast, France has already implemented a system of market regulation. A long-term cap on mortgage interest rates was established in France to protect consumers from rising rates. However, last year, this mechanism had the opposite effect, making lending unprofitable for banks, which ultimately led to the withdrawal of some products from the market.

Usury rateIntroduced in 2016, it is set by the Bank of France and defines the maximum interest rate that a lender can charge on a fixed-rate mortgage. This rate is calculated based on the average rate over the last three months, increased by a third of that figure. When the European Central Bank began raising interest rates, the established limit could not adapt to the new conditions, resulting in banks' costs for attracting funds for lending becoming unacceptable, considering the need to remain below this threshold. Fiona Watts, managing director of International Private Finance, noted: "In September, the limit was so low that lending became unprofitable. Therefore, banks decided to simply withdraw these products."

In response to this, the central bank changed the frequency of reviewing this limit in February 2023, increasing it to monthly, so the cap is now updated but still based on data from the previous quarter. However, changes are only expected for one year. In the last review, set in December, the limit for fixed-rate mortgages with terms over 20 years was 6.11%, and for loans with terms from 10 to 20 years, it was 5.8%. In the last quarter of 2023, the average rate for a fixed 20-year loan was 4.58% and 4.35% for terms from 10 to 20 years. The reduction in the availability of mortgage products has led to a sharp decline in the number of approved applications. From August 2022 to August 2023, the volume of new mortgage loans nearly halved, dropping from €18.9 billion (£16.24 billion) to €9.9 billion (£8.51 billion), which represents a 47% decrease. Due to rising rates, residential property prices have also come under pressure. In France, fixed-rate mortgages are typically taken out for around 20 years or more, so the ability to lock in a higher rate becomes more burdensome than in the UK, where most fixed rates apply for a two- or five-year period.

The demand for housing has significantly decreased, and the volume of sales in the secondary market has dropped by 20% over the year compared to the previous 12 months. Matthieu Ragon, CEO of French Private Finance, stated: "In most cases, mortgage applications in 2023 were extremely challenging in France. At one point, about 50% of applications were rejected." This made the process difficult for those looking to purchase their first property, not because the clients did not meet the criteria, but simply because the bank could not offer them an acceptable solution. Long-term loans have provided some protection against the sharp increase in interest rates, which, in turn, has helped maintain property prices. A longer term reduces the number of mortgage holders who will face financial difficulties when refinancing at much higher rates, a problem that around 1.5 million homeowners in the UK will encounter as their mortgage deals end this year. Housing prices in France fell by 1.1% in the third quarter of 2023 compared to the same period last year. In the UK, prices dropped by 6.1% year-on-year until September, according to Knight Frank data. This marks the largest annual decline since 13.4% in the third quarter of 2009.

As borrowing opportunities continue to shrink, the French bank Groupe BPCE expects that transaction volumes for existing real estate will decrease by another 5% in 2024, with prices also falling, but to a lesser extent. The bank anticipates that prices will drop by 3% this year, with the number of new mortgage loans decreasing by about 20%. Regulations aimed at achieving zero emissions may also negatively impact prices. However, the market could face another shock as new standards for environmental efficiency threaten to collapse prices for older buildings. The country has about 37 million homes, and nearly one-fifth of them (5.2 million) are classified as the least efficient, holding ratings of F or G, according to the French government. As part of the country's roadmap to zero emissions by 2050, it will be necessary to insulate 370,000 homes annually until 2030, after which this figure is expected to rise to 700,000 per year. However, the current pace of modernization is significantly below this target, at around 50,000 to 100,000 buildings per year. The French president has already mandated that owners of the least efficient homes pay €800 for "regulatory energy audits" if they wish to sell their property.

This, in turn, negatively affects the number of mortgage applications. Monica Bissi, a partner at the financial consultancy Enness Global, stated that in some cases, banks require property buyers with low ratings to carry out upgrades within a certain timeframe as part of the lending conditions. If they fail to do so, the lender may demand early repayment of the loan. Jason Porter, a financial consultant at Blevins Franks, agrees that lenders at all levels—from standard residential properties to ultra-premium classes—have become more cautious regarding properties with low energy efficiency ratings. He also added, "This leads to lower valuations. As a result, you may not receive the desired loan amount, or you may have to pay a higher interest rate." Some banks do not issue loans for properties with low energy efficiency at all, as new regulations may render such buildings undesirable without investments in their modernization, while other banks set fixed criteria for the properties that will be financed. According to Groupe BPCE, about 74% of potential homebuyers consider the energy efficiency rating a decisive factor when choosing a property. Only 14% claim it will not affect their decision. Smaller rental properties and individual homes are likely to be the most affected by this influence. In these groups, the difference between properties with ratings of F or G and D can be as much as 15%.

The cost of renovations in France has significantly increased in recent years. Trevor Leggett, founder of Leggett International Real Estate, claims that these expenses have doubled - from €1,500 to €3,000 per square meter. Government subsidies of up to €70,000 are available to French homeowners, but many families have been excluded from this system due to their income levels. In Paris, the income thresholds for full grant eligibility range from €23,500 for a single person to €51,000 for a family of five. In the rest of France, maximum grants are provided to families with incomes between €17,000 and €40,000.

British citizens looking to purchase property in France are also feeling the negative impact of uncertainty in the French mortgage market. Just like with domestic loans, rates for non-resident loans have also started to rise, which has reduced the number of available options for foreign buyers. However, this week mortgage rates began to decrease, which brings hope for a revival of offers in the market. Acquiring property in France can be challenging in terms of affordability if you need a mortgage. France has set a maximum debt-to-income ratio that cannot exceed one-third of your income - 35%. This means that with a monthly income of £10,000, the maximum amount that can be allocated for debt servicing is £3,500, including any car loans, student loans, or credit cards. However, banks apply this rule differently. Some use your gross income to calculate creditworthiness, while others rely solely on net income, which significantly limits your borrowing options. "This actually favors people with high salaries or good bonuses," says Watts. "The system is completely different from that in the UK, so we explain to many of our clients how managing expectations differs. Most of my clients are quite wealthy, so they could get a mortgage, but that’s where the surprise lies. People can’t believe it."

Moreover, a small number of banks require international buyers to hold significant amounts in their accounts as additional collateral when obtaining a loan, according to Ragen. In previous years, this amount was only €50,000, but it has now increased. Some lenders expect buyers to deposit amounts up to €200,000 to secure a mortgage, although such sums are considered rare, explains Watts. "In fact, quite a few buyers don't necessarily need a mortgage but use it for liquidity," says Jack Harris, a partner in the international residential property department at Knight Frank, responsible for the south of France. "However, what is happening in the mortgage market affects demand and buyers' perceptions. Nevertheless, a cash buyer from the UK has become very attractive to sellers in France, as they are free from uncertainty."