In a previous post, Simon Ray mentioned the upturn in the real estate market, as shown by the increase in housing starts since the end of 2014 (see Chart 1). This growth momentum continued in 2017, albeit at a slower pace (see the Banque de France's macroeconomic forecasts). At the same time, prices for existing dwellings rose significantly, climbing by almost 4% year-on-year (see Chart 1), and did not experience the same slowdown as construction. However, they did not reach their end‑2011 peak, which was followed by fifteen consecutive quarters of decline.
Households’ borrowing capacity combines lending conditions and income
Households’ borrowing capacity is the maximum amount a household can borrow to purchase a dwelling under the lending conditions prevailing in the market. It results chiefly from a combination of four factors: the household’s 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 use an aggregate indicator of households’ borrowing capacity based on the average borrowing conditions observed in the credit market (Avouyi-Dovi et al., 2014). This indicator reflects the changes in the sum - discounted at the market rate - of the maximum monthly repayment capabilities, over the average maturity of a loan.
We assume 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 current income, subject to a sufficient "living allowance" (fixed according to the size of the household).
After rising by 20% between 2014 and 2016, households’ borrowing capacity stabilised in 2017
Chart 2 shows the changes in the indicator of households’ borrowing capacity as well as the contributions of lending conditions (interest rate and loan maturity) and gross disposable income per household to the changes in this indicator. After rising sharply by 20% between 2014 and 2016 due to improved lending conditions (hatched area), households’ borrowing capacity stabilised at a high level in 2017.