Two centuries of housing finance: from a State-protected sector to a private market
24.03.2016 | History
Real estate is not an ordinary sector, as it’s closely linked to the issues of housing and the organisation of urban space. In addition, beginning in the nineteenth century, a period characterised by rapid urban growth, it became imperative for the French State to organise the mortgage market and to supervise the private players involved in it.
Housing finance from the nineteenth century to the late 1940s: from direct State intervention to indirect aid to the sector
The nineteenth century was marked by rapid urban growth and sustained industrial activity, causing increasing demand for housing. It was necessary to find housing for newcomers from rural areas, to integrate new neighbourhoods and to reorganise the space. In response to this demographic pressure, housing, construction and public works experienced strong growth between 1840 and 1880.
While the principal family-owned banks (Laffitte, André and Cottier) and the Crédit Mobilier invested successively in the construction of buildings and houses from the 1830s, they were subsequently challenged by the arrival on the market of large deposit-taking retail banks such as Société Générale and Crédit Lyonnais, and by investment banks such as the Banque de Paris et des Pays-Bas.
But following the war of 1870, the building construction index was 40% lower than it had been during the 1860s. This decline caused a crisis in the building industry at a time when the rural exodus was at its strongest; and from 1880 the banks ceased investing in the sector.
Thus, the increase in the size of the population and the emergency of new needs obliged the State to play an increasing role in real estate financing. It fostered the creation of new institutions that it sponsored and then tightly controlled. The creation of the Crédit Foncier de France (a housing credit institution) in 1852, a development welcomed by property owners and farmers, marked the willingness of the State to support construction and real estate loans.
Founded by decree, the mission of the Crédit Foncier was to make long-term loans and to issue securities backed by real estate loans to finance them. It enjoyed a monopoly on real estate loans. Over a period of several years, the role of the State expanded. It dominated the real estate financing market through massive investments in public facilities and by putting lending institutions under its direct or indirect control. This process was enhanced in 1894 by the Siegfried Law, which created low-cost housing via savings banks and encouraged private initiative through financial incentives.
Public funding of construction expanded significantly between 1912 and 1933, with the establishment of laws (the Ribot Law of 1922 and the Sarrault and Loucheur Law of 1928) encouraging the construction of public and regional government offices and low-income social housing. The State also standardised the terms of low interest rate financing (2%) for loans provided by savings banks. But beginning in the 1930s, it was obliged to revise its budgets downward due to the difficult economic environment of 1933-1938. In response to this, in 1937 the State initiated a series of indirect housing assistance measures such as interest rate subsidies granted to all those undertaking construction or refurbishment, whether with their own or borrowed capital. Thus the subsidised housing sector was born, and little by little, the indirect role that the State intended to play in the organisation of mortgage lending began to expand.
The mortgage lending market is opened up to new private players (1950-1959)
After the Second World War, a new organisation for housing loans emerged. While up until that time the big financial groups had not been interested in a property market that was both unprofitable and dominated by the power of public funding, they gradually began to invest the sector.
The new organisation of housing finance offered opportunities for private players. Loans to developers for land acquisition and supplementary loans to prospective purchasers were among the untapped niches. This was the situation when the Construction Credit Union (UCB) was created in 1951 under the leadership of Jacques de Fouchier. It reflected the shared intention of construction professionals and a number of banks, including Crédit Foncier de France, to expand housing finance and introduce new financial techniques. A subsidiary of the future Compagnie Bancaire (1959), UCB accounted for 50% of real estate lending at the start of the 1960s. Demonstrating a keen sense of innovation from the outset, UCB offered principal loans for the construction of non-subsidised housing.
Although the loan market for purchasers was monopolised by Crédit Foncier de France, new credit products were being designed, such as deferred credit products, the forerunner of the modern home ownership savings plan. This solution, launched in 1953 by the Compagnie Française d’Epargne et de Crédit (the future Compagnie Bancaire) offered the option of combining this with a gap loan (granted over seven years) enabling the applicant to instantly obtain a term loan twice as large as that available as a medium-term bank loan. These early developments by specialist loan financing groups were reinforced by the gradual disengagement of the State beginning in 1958.
The takeover of mortgage loan financing by retail banks
In 1963, the State implemented a plan to standardise the terms of housing finance in France. It focused in particular on an important measure: the reform of special loans (capping amounts, increasing interest rates, basing eligibility for receiving loans on social criteria) that widened the field of action for financial groups. The defining moment of the reform was reached in 1966 with the creation of the mortgage lending market.
This enabled credit institutions to refinance their various types of housing loans with a mortgage. It connected institutions that wanted to refinance – institutions providing securities backed with the various loans that they had granted – with banking and savings institutions that could provide the capital.
Specialised credit entities were not the only beneficiaries of this development, which also enabled the large nationalised banks to channel deposits towards housing loans on a massive scale. So much so that by the beginning of the 1970s, banks accounted for half of the market for mortgage loans.
This transfer of housing finance towards banks increased with the introduction of two new credit products: the home ownership savings account (CEL) in 1965 and the home ownership savings plan (PEL) in 1969. The CEL was a technique that could be applied to all networks. It combined a preliminary savings phase of at least eight months, which then qualified the customer for loans on favourable terms for the purchase of a home. The PEL extended the savings period to four years and significantly increased the lending opportunities compared to the CEL.
In 1972, the development of the formula of the home loan agreement (PIC), which could be distributed by banks under the terms of an agreement concluded with the State, confirmed the growing role of banks in housing finance.
The redefinition of the rules under which the real estate market operated continued with the housing reforms introduced in 1977. These had three underlying objectives: enhancing social justice, simplifying the system of State support, and promoting improvement of the quality of housing. The idea was to redirect part of public aid “from the stone to the person”, in the form of individualised housing assistance (APL). In addition, a single product, the home ownership loan was added, which replaced all previous forms of subsidised loans. Initially, it could only be distributed by institutions selected by the State (Crédit Agricole) and was then made generally available in 1982.
Accordingly, at the start of the 1980s, housing accounted for a significant component of banks’ financing. And housing finance largely relied on subsidised loans and home ownership savings loans.