“We have never seen these rate levels with these price levels” – L’Express

L’Express: The real estate market is at its worst. How do you analyze the causes of this crisis?

Philippe Brassac : I would first like to emphasize that the risk of default on property loans granted to households remains very low and is hardly increasing. The reason is simple: in France, it is the banks which bear the risk of rate variations and not the borrowers. Unlike what is done in the rest of the world, they overwhelmingly grant fixed-rate loans for real estate: 96% of outstandings in France, less than 30% in Italy. This uniqueness, specific to the expertise of our banking intermediation model, protects the borrower from a rise in rates, including over a very long period. Furthermore, with rate levels for new loans around 4%, we are in areas that we already experienced not so long ago, without there being a real estate crisis. On the other hand, we have never experienced both this rate level and this price level, because the latter have generally only increased over the last ten years.

We have experienced an unprecedented shift in terms of speed, between the Covid period where rates were close to zero, and this normalization, perceived as very brutal because too rapid, and not leaving the necessary time for adaptation to many sectors economy. The monetary policy of the years 2020-2021, with extremely low rates and almost unlimited liquidity, really saved the economy, via state interventions. But this ultra-accommodating policy was not sustainable because its maintenance would have triggered a spiral of uncontrollable inflation and significantly degraded our currency in international trade. The accommodative monetary policy as a first step, and the normalization which was inevitably to follow as a second step, were necessary and timely. What we can regret is that this process lacked both pedagogy and progressiveness.

The case of inflation is an illustration of this: we very quickly went from “there is none, it is only temporary and technical” to “it is very high, we must therefore intervene very powerfully”. What we can fear, with regard to real estate, is that this sudden change in paradigm has not only caused the demand for credit to collapse, but that it has also added a wait-and-see attitude, linked to a decline prices expected by buyers and greater visibility desired by all stakeholders.

So the rise in rates is just an epiphenomenon?

No, it’s a very brutal phenomenon, but at the same time, and it’s a bit of a paradox, it’s a necessary normalization. When the scale of new loans increases from 1% to 4% over twenty years, this means a loss of real estate purchasing power of around 25% for new borrowers. But above all, low rates have accompanied a continued increase in prices. Look at new housing: between 2001 and today, prices have continued to grow, very regularly. The period of low rates between 2013 and 2019 undoubtedly postponed, if not masked, the progressive inaccessibility to property that we are seeing today, with rates returning to normal. Is the problem the current rise in rates, or their previous fall, which allowed prices to continue unsustainably? These are two ways of seeing the same difficulty.

Furthermore, what makes the current situation complicated is that the real estate market is complicated: we cannot segment between new and old, between ownership and rental. Everything is connected. A household that was renting and purchasing a property will free up rental capacity. This overlap means that a difficulty in one sector will probably desynchronize the entire machine. It will take time for everything to regain its cruising speed, because the agendas of macroeconomic confidence, order books, and works do not have the same elasticity.

Have there been any precedents in France?

The last major real estate crisis dates back to the 1990s. It was not linked to credit but in part to households who began to develop real estate, without having the skills, by subdividing land that they had bought. I personally experienced it on the Côte d’Azur where I was deputy director of Crédit Agricole in the Alpes-Maritimes. I have seen retirees dream of becoming villa builders overnight. This debacle has been purged. Today we have professional promoters, who see the cycles coming and who are solid. But let’s keep in mind that in many countries, real estate crises are otherwise painful because they put people on the sidewalk, like in 2008 in the United States. Thanks to the stabilizing effect of fixed rate loans from the French banking system, we are experiencing more attenuated crises which do not directly affect households already housed.

Isn’t the current crisis also the result of a succession of disparate measures: regulatory, fiscal, environmental, etc.?

Indeed, it can be partly linked to certain decisions, which all have their rationality when evaluated individually, but which, accumulated or superimposed, can disrupt the entire system. The fact of favoring individual housing less to slow down the artificialization of land is very well understood; as well as the constraints of insulation work which can slow down sales or rentals. As for the tax measures which can at certain times boost the market, it is not abnormal that they are periodically called into question. Let us add to this list the binding rules of the HCSF [NDLR : Haut conseil de stabilité financière] for new credits so that they meet reasonable standards and the risk of over-indebtedness is avoided. All this is understandable, but end to end, and at the time of a violent rise in rates, this is undoubtedly a lot. These measures do not in themselves generate a crisis, it is even the opposite in theory. On the other hand, the “momentum” of implementation can be the trigger for disruptive behavior.

In terms of positive signals, there are government announcements on the zero-interest loan (PTZ), maintained and expanded since 26 million households now potentially have access to it. At Crédit Agricole, to amplify this signal, we have decided, in addition to the State PTZ, to add a second zero-rate loan, entirely at our expense, and capped at 20,000 euros. There is an equivalent system at LCL.

Regarding the HCSF rules, while maintaining the main criteria – debt less than 35% and twenty-five years for the maximum duration – I think that there would also be a positive signal if the authorities removed the sub- constraints to be respected, within the 20% quota of possible exemptions. Because they are very difficult to optimize commercially.

You were talking about the renovation work. The public subsidies supposed to encourage them constitute a thick maquis… Is it the role of a bank like yours to help owners find their way?

I’m convinced. When we defend the French relationship banking model, this is what we are pointing out. We are not suppliers of off-the-shelf banking products, but facilitators on wealth issues. Crédit Agricole has created a new business line, Crédit Agricole Transition and Energies, to support economic agents in their transition, from large companies to low-income households. For them, we launched a digital platform, I ecorenove my home, which allows you to carry out simulations of the work to be carried out to optimize your energy performance diagnosis, evaluate their amounts and identify the associated aid measures, which the whether or not you are a Crédit Agricole customer.

But it is true that the recommendations in terms of solutions remain too vague or too fluid. When a household wonders what heating they should install to reduce their bill, it is not always easy. Particularly if he lives in collective housing. Paradoxically, the acceleration of innovations can be a brake. If I opt for a particular technology today, I don’t want a neighbor to come and tell me in six months that I should, in fact, have invested in something else. This creates a wait-and-see attitude, which is not that of non-adherence, but of indecision. There is obviously a need for greater readability and simplicity in the choices to be made.

The public authorities help financially, but it is more difficult for them to help with what and how. Take gas: it is considered a transitional energy so that many countries can do without coal as quickly as possible, and at the same time we are encouraged to abandon gas boilers in our apartments. For excellent reasons in both cases. But this maintains the idea that all this is not yet very clear and sufficiently stabilized.