Fitch Ratings says the significant drop in household confidence and increasing unemployment are expected to continue to dampen housing demand.

In a special report, Fitch says residential sales are falling sharply, which are reflected in declining loan applications. This downturn has been exacerbated by reduced access to the mortgage market as loan terms are less favourable and as bank underwriting limits tighten. The fall in market activity is resulting in increased delays to sell properties and a drop in mortgage loan origination.

"2008 was the turning point for the French residential real estate market," says Helene Weintraub, Director in Fitch's French Structured Finance team. "Despite various positive fundamental factors underpinning the French borrower's risk profile and financial institutions' lending practices, the extent to which the current economic downturn will impact the French residential real estate market remains uncertain."

As of February 2009, outstanding mortgage loans in France totalled more than EUR702bn. This amount is almost three times the amount since the last real estate crisis in 1993. During the same period, house prices have increased by approximately 2.25x. This reflects the previous dynamism of the residential market, supported by demand and more attractive funding conditions granted to individuals up to 2007.

Short-term expected price variations led Fitch to review, in 2008, its Asset Performance Outlook for French RMBS transactions to Stable/Declining from Stable to account for falling property prices. Nevertheless, the agency has maintained its sector Ratings Outlook at Stable in light of expected fair performance and deal features.