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France Leads European Real Estate
Financial regulators and rating agencies have named France the strongest real estate market in Europe. According to reports by the Joint Forum and Standard & Poor’s, that strength is primarily due to two French banking trends in particular: a large number of secured loans, and strict lending criteria.
According to Standard & Poor’s, secured loans – where the borrower pledges collateral to cover the loan in the event of default – give financial lenders “a first level of protection in the event that a borrower’s credit deteriorates.” These types of loans constituted more than half of all residential loans in France in 2010, a growth of over 25% from 2000. Elsewhere in Europe, only 28% of residential mortgages qualified as secured loans. What’s more, the standard practice in France is that secured loans are guarantied by specialized companies like Credit Logement, whose shareholders are the principal French banks themselves. According to the Joint Forum, such mutualization of risk, particularly where the banks themselves take on that task, succeeds in further lowering the risk of of secured loans. Strict lending criteria is the second source of added strength in the French market, according to the Joint Forum. In France, monthly payments cannot exceed 35% of the borrower’s monthly income. Borrowing is particularly difficult for buyers who do not have proof of steady income, such as an employment contract. What’s more, banks require most borrowers to provide at least 20% down on the property. And, with regard to the structure of the loans, Standard & Poor’s notes that 80% of all outstanding debt in France is comprised of fixed-rate loans, thus limiting the number of households subject to interest rate fluctuations. The remaining 20% are mainly adjustable rate mortgages with capped or fixed monthly payments. Taken together, these measures ensure that banks are loaning to creditworthy customers on terms that make them unlikely to stumble in a market downturn. These solid lending practices buoy the market and make it highly unlikely to collapse under even stressful conditions. The potential victims? Responsible individual borrowers who can’t meet the strict lending criteria. From the market perspective, a small price to pay. The Joint Forum is a group of financial regulators and central bankers overseen by the Basel Committee on Banking Supervision, an international forum whose focus is to evaluate the health of international real estate markets. Standard & Poor’s is one of the largest international credit rating agencies in the world.