A strong link with the improvement in lending conditions
The dynamics of real estate activity (acquisitions of new and existing dwellings, plus major works) are closely linked to households' ability to finance their investments (Avouyi et al., 2014). Bank loans are an essential resource for financing a large majority of real estate projects. According to the Ministry of the Environment, the flow of new housing loans extended to households accounted for 47% of the financing of real estate activity in 2014. Its importance is particularly crucial for first-time buyers who do not have any capital to be reinvested. By increasing demand in a market where supply is constrained by the availability of land, favourable lending conditions therefore put upward pressure on real estate prices. The existence of a causal link between the supply of credit and the level of real estate prices has been highlighted in several recent studies (Favara and Imbs, 2015, Labonne and Welter-Nicol, 2016).
An indicator of households’ borrowing capacity
The French system is characterised by the frequent use of guarantees by a credit institution (a third of outstandings in 2015) or by an insurance company (over a fifth), contrary to the Anglosphere where mortgages predominate. In France, the amount and decision to extend a loan are not so much based on the value of the property acquired and the outlook for local price developments, but on households' repayment capacity, which is measured by their income at the time the credit is granted. This primacy is a factor of financial stability but restricts access to credit to households whose future income is easily foreseeable.
Households’ borrowing capacity is the maximum amount a household can borrow to acquire a dwelling under the lending conditions prevailing in the market. Given the French system, the borrowing capacity is mainly the result of a combination of four factors: the level of income at the time the loan is granted, the maximum share of that income that can be used to repay the principal and interest, the interest rate and the initial maturity of the loan. We construct an aggregate indicator of households’ borrowing capacity by considering the average borrowing conditions observed on the credit market. This indicator reflects the changes in the sum – discounted at the market rate – of the maximum monthly repayment capacities over the average maturity of a loan. This indicator differs from that of the purchasing capacity, which takes account of changes in the real estate price index.
It can reasonably be assumed that the maximum share of income that a household is able to devote to the repayment of the loan is a structural component which does not vary over time. While it can theoretically influence the risk premium and thus the observed average rates, it has not affected the results concerning the dynamics of the borrowing capacity over the period under review. French banks usually set it at one-third of the current income, subject to a sufficient "living allowance" (remaining income after payment of the amount due, fixed according to the size of the household). The variation in the borrowing capacity therefore depends on the combined dynamics of income and lending conditions.
A borrowing capacity up by nearly 20% since 2014
Chart 2 shows the changes in our indicator of households’ borrowing capacity as well as the contribution of lending conditions (rate plus loan maturity) and gross disposable income per household to the changes in this indicator. Households’ borrowing capacity has increased by close to 20% since the beginning of 2014 (and by almost 7% over 1 year), due to improved lending conditions (hatched area), while households’ gross disposable income has hardly varied (blue area).