Credit: Mortgage Rates Are Plummeting
During the last quarter of 2023, the average interest rate on loans in the competitive sector, excluding insurance and the cost of collateral, stood at 4.20%.
The rapid growth observed through October—averaging +18 basis points per month—has now slowed, with an increase of +9 basis points in November and +2 basis points in December.
After two years of steady growth, the average interest rate on loans has returned to its spring 2009 level. Despite an increase of 189 basis points in 2023, this rise remains significantly below the usury rate, which stands at 306 basis points for loans with terms exceeding 20 years.
This stabilization is attributable to the ECB’s decision to keep its main refinancing rate unchanged and to moderate growth in the average interest rate on household deposits. As a result, the profitability of new loans has increased, allowing banks to maintain their margins without rapidly raising interest rates—especially given the changing composition of their customer bases and markets, which has led to a reduction in loan terms.
For most borrowers, the 4.20% threshold has been far exceeded, even for 15-year terms. This interest rate environment has not been seen since the spring of 2009.
The average term of loans granted remained stable in the fourth quarter of 2023, standing at 248 months—or 20 years and 8 months—a level rarely seen in the past. However, this stabilization is no longer sufficient to offset the interest rate hikes of 2023, reducing households’ borrowing capacity by 16.7 percent.
Despite rising interest rates, down payments have increased since late 2021, exerting a downward pressure on demand four times greater than the impact of the rate hikes. This trend has led to a shift in the structure of loan issuance, with 65.1% of bank home purchase loans granted for terms of more than 20 years in December 2023, compared to 46.0% in 2019 before the HCSF recommendation was implemented.
Since the beginning of 2023, borrowers’ incomes have risen rapidly (+8.1% in 2023, compared with +4.3% in 2022). Tighter credit conditions are weighing on demand, which has already been weakened by rising interest rates. However, those who are still able to move forward with their plans often choose to look for homes in areas where housing prices are more affordable, or they opt for smaller properties. As a result, the cost of completed transactions fell by 6.2% in 2023 after a sustained increase of 5.1% in 2022.
Although the relative cost decreased in December 2023 (4.0 years of income), due to high down payments, this decline is equivalent to a 15.7% drop in real estate prices. At the same time, the level of personal down payments declined slightly after several years of rapid increases (-0.1% in 2023, compared with +11.4% in 2022), mainly due to the withdrawal of affluent borrowers from the market.
In 2023, increases in the usury rate facilitated a rise in lending rates, thereby restoring the profitability of new loans. The stabilization of ECB rates and the slight increase in the cost of savings improved profitability in the fall. However, the deterioration in the creditworthiness of borrowers dampened the expected impact on credit market activity.
(Source: Crédit Logement)
