As we enter 2024, the French mortgage market is poised for significant shifts, largely influenced by the European Central Bank’s (ECB) monetary policy. This article examines the expected trends in mortgage interest rates in France for 2024 and how ECB policies will shape these developments.

1. The End of the ECB’s Rate Hike Cycle
The ECB has undergone an aggressive rate hike cycle, raising interest rates from -0.5% to 4% in just over a year. As inflation starts to stabilize, the focus is shifting towards potential rate cuts. This transition marks the end of the ECB’s cheap funding for banks and sets the stage for changes in mortgage interest rates in France​​.

2. Impact on Bank Lending and Mortgage Rates
The ECB’s monetary policy tightening has already had a significant impact on bank lending. Mortgage lending was down 42% year on year in November 2023. This slowdown in lending growth is a direct consequence of the ECB’s monetary policy and indicates a more cautious lending environment​​.

3. Mortgage Pricing drivers
Unlike variable-rate mortgages, where the interest rate fluctuates with a benchmark index such as Euribor, fixed-rate mortgages French fixed-rate mortgages are priced based on several key drivers. Fixed-rate mortgages are often tied to the yields on government bonds. Lenders use these yields as a benchmark to determine the interest rates on fixed-rate loans. The yield on French government bonds, such as OATs (Obligations Assimilables du Trésor), is a crucial factor. Lenders may use interest rate swaps to manage their interest rate risk. Finally, lenders include a profit margin in the interest rate to ensure they make a return on their lending activities. The margin accounts for the lender’s operational costs, overhead, and desired profitability.

4. Gradual Increase in mortgage
Despite the increase in ECB rates, the actual rise in interest payments has been relatively slow. This is partly because usury rates set out by the Bank de France have not increased as fast as cost of funds. Usury rates refer to the maximum interest rates that lenders are legally allowed to charge on mortgage loans.

5. Disinflation and Cautious Rate Cuts
Disinflation in 2024 is anticipated to result mainly from the ECB’s continued monetary policy tightening. However, the ECB is expected to approach rate cuts cautiously, likely starting in mid-2024 with gradual reductions. These rate cuts are intended to leave monetary policy still somewhat restrictive while making new investments slightly more attractive. This approach reflects a balancing act by the ECB, addressing the risk of being late in responding to changing economic conditions​​.

6. Mortgage Rate Outlook in France
As a result of these ECB policies, mortgage rates in France are likely to see marginal cuts.
Based on the Euribor forward rate curve, adjustable rates should come down by 200bps.

Euribor 3 months forward rate curve

Fixed rate mortgage are expected to hover between 4% and 5% in the first half and between 3.5% and 4.5% in the second half of 2024.

This environment presents opportunities for prospective buyers in France, although the decision between fixed and tracker mortgages will depend on individual financial situations and risk appetites​​.

In summary, the French mortgage market in 2024 is set to experience nuanced changes driven by the ECB’s monetary policy. The anticipated end of the ECB’s rate hike cycle, along with cautious rate cuts, will influence mortgage rates in France. Borrowers and investors should closely monitor these developments to make informed decisions in a changing mortgage landscape.