Mortgage interest rates in France have reached since 2015 historically low levels,an opportunity for the households who were eager to acquire a residential accommodation this last fall. However, this situation is less advantageous for banks that reduce their profit margins to attract new clients. What future evolution for interest rates can be expected? What would be the consequences for credit institutions?
Current state and historical background
Interest rates are nowadays at a historically low level. As a matter of fact, average rates for real estate transactions have reached over the months historical floor rates after a 2015 year marked by low interest rates, despite a slow upturn at the end of the year. In August 2016, according to the French Observatoire Crédit Logement CSA, the interest rates of the sector were at 1.48% on average in August compared to 1.55% in July and 1.62% in June, all amounts and terms included, except insurance and warranty costs. All loan durations are concerned by this rate decrease. Furthermore, the average duration is of 209 months, the equivalent of 17.4 years in July 2016.
How can we explain this situation?
This situation results from the current economic environment, characterized by the European Central Bank (ECB) monetary policy, the French government bonds and the near-zero inflation. The Brexit effect has also an impact on investors’ anxious behaviour.
- ECB monetary policy
The ECB decided at the beginning of September to maintain the status quo in terms of monetary policy.
The monetary easing program, called QE for Quantitative Easing, remains at 80 billion per month until March 2017 or above if necessary. Rates remain also unchanged. The deposit rate has been negative since June 2004 and is at a standstill at -0.40%. Its main rate decreased from 0.05 at 0% in March 2015 and in September, the ECB decided to keep its rate at 0%. Its marginal lending rate also decreased in March 2015 to reach 0.25%.
This policy faces many criticisms concerning its real efficiency.
- French government bonds
Banks rely on ten-year government bonds as a financing cost indicator to determine loan rates on similar periods. The weaker the bond level is, the cheaper are the resources needed to finance the loans. French bonds were under 1% in 2016.
- Zero inflation
In 2015, the inflation rate is of 0.0% in France.
How are rates going to change?
This current situation should continue: media and brokers anticipated a decrease in interest rates during September 2016.
Banks have set the same business objectives in 2016 as in 2015 and try to catch up the difficult end of 2015 year. At the end of 2015, mortgage loan activity withdrew because of a slight increase in rates and terrorist attacks.
Money is cheap for banks at the moment. According to brokers, banks show competitive rates.
However, French presidential elections should bring new legislative measures, more or less attractive for buyers, concerning real estate.
Who is benefitting from these rates?
Real estate market rose again and this situation is beneficial for households, essentially for first-time buyers.
Existing property market has recovered a before-crisis activity volume with 809,000 operations in 2015, an increase of 16% in a year, according to the French notary website. New properties’ market has also increased after a period of crisis.
Moreover, households can now borrow for shorter durations and higher amounts.
What are the consequences for credit institutions?
Low rates constitute a new situation with various consequences.
This situation brings many cases of loan agreements’ renegotiation. Banking institutions decrease their profit margin in order to keep their clients. However, property lending buy-back also allows institutions to collect early repayment fees.
Consequences for investors
Low rates also constitute a loss of certainty for investors who do not find significant returns without taking risks. For instance, the French ownership savings scheme (Plan d’épargne Logement) rate is at the moment at 1% and housing-savings accounts at 0.5%. French bankbook Livret A remains at 0.75%. Life-Insurance contracts and bankbooks, that generally constitute attractive products thanks to their eye-catching rates, don’t register very interesting returns at the present time.
Consequences for banks’ economic balance
Low rates deeply modify the existing financial model.
Today, banks try to catch up with administrative fees over real estate credits. Banks are also tempted to make their clients pay account fees. This measure does not only concern traditional banks that own a strong physical agency network in the French territory, such as BNP Paribas, Société Générale, LCL… but also online banks that launched a fee-based offer to attract new clients. For instance Boursorama Welcome is a new offer launched at the end of September 2016 and accessible without income conditions or outstanding amounts. However, fees for inactive accounts are limited by a ministerial ruling. (arrêté du 21 septembre 2015).
This situation is not without consequences for credit institutions. For example, the British bank HSBC decided to reduce its workforce. 466 jobs should be cut by 2018, mainly IT function, back-office in retail banking and administrative and financial functions. This measure is one of the consequences of the interest rates decrease, which negatively impacts credit institutions’ profitability. Other factors were taken into account for this decision, but in general, banking institutions are weakened. Other European institutions are also concerned. For instance, Commerzbank is about to cut 9,600 jobs.
Moreover, banking institutions fear tougher capital requirements by the end of Basel IV Committee. Indeed, the Banking Federation of the European Union estimates the impact on capital of the new rules in preparation at hundreds of billion euros. These new requirements would be harder than Basel III rules enacted at the end of 2010, creating thus for banks a general fear over their future profitability.
Low interest rates weaken banks’ economic model, that is already impacted by the regulatory constraints driven by 2007 subprime crisis. Retail banks have to take up the challenge of keeping more and more demanding and volatile clients. They have to compensate the decrease in their intermediation margin (credits) by commissions’ incomes (insurance…) to maintain their profitability