Eurozone home loans: ECB sees "sharp fall" in demand

The demand for loans for house purchase in the Euro Zone registered the largest contraction of the entire historical series in the last quarter of 2022. This scenario reflects the effects of rising interest rates, greater consumer pessimism and the deterioration of housing market prospects, as pointed out by the European Central Bank (ECB). The fall in demand for mortgages was felt mainly in Germany and France. A decrease was also registered in Portugal.

"The fall in net demand for mortgages was the strongest on record. Demand for consumer credit and other loans to households also fell sharply in net terms, though to a lesser extent than for home loans," says the European regulator in the latest edition of the study on bank loans, published on 31 January.

In this sense, the institution points out that the historic contraction in demand for home loans is a direct effect of the combination of three factors:

• rising interest rates;
• falling consumer confidence;
• evolution of the outlook for the real estate market.

These data "reflect the current environment of lower consumer confidence and economic slowdown, coupled with interest rate increases in response to rising inflation," the ECB said in the same document. For the second consecutive quarter, the outlook for the housing market contributed negatively to demand, something that had not happened since 2013.

And this scenario ultimately explains the recent slowdown in house price increases in the Eurozone. Moreover, in several European Union countries - Denmark, Sweden, Finland, Romania, Italy and Germany - house prices for purchase fell in the third quarter of 2022 compared to the previous quarter, according to the latest data from Eurostat.

Which countries felt the biggest contraction in demand for mortgages?

The cooling of mortgage demand was felt across Europe at the end of 2022, but to different extents. In Germany and France, the net fall in demand for home loans was most pronounced, as 93% and 90% of banks reported a contraction, respectively. This was well above the Eurozone average, where 74 per cent of banks felt this contraction in demand for home loans in the last three months of the year. In Spain and Italy, only 20% and 45% of banks, respectively, felt this cooling-off.

In Portugal, banks also felt a drop in demand for loans from individuals, "especially for house purchases," the Bank of Portugal (BoP) indicated in its January bank lending survey.

The factors that contributed to a fall in demand for home loans in Portugal are in line with those outlined by the ECB. "Consumer confidence, the general level of interest rates and, to a lesser extent, the outlook for the housing market contributed to reducing demand for home loans," explained the regulator led by Mário Centeno in the same document.

Even so, according to the ECB, the outlook for the housing market had a more significant negative effect on demand for home loans in France and Germany than in Italy. And they had no impact in Spain.
And what will it be like in early 2023? The central bank warns that in the first quarter of 2023, banks expect another "strong" net fall in demand for home loans in the Eurozone, with an estimated 49% - this being a lower figure than in the fourth quarter of 2022 (of 74%). In Portugal, a "decrease in demand is also expected, particularly sharp in the housing segment," admits the BdP.

Tighter credit standards for home loans in the Eurozone

On the credit supply side, Eurozone banks also reported a strong tightening of criteria applied to loans to households for house purchase and to consumer credit, says the ECB in the survey conducted between 12 December 2022 and 10 January 2023, which was attended by 151 banks.
And what are the factors behind this trend? "A higher perception of risk added to lower risk tolerance and the higher cost of resources and balance sheet constraints," the ECB explained, noting that this was the fourth consecutive quarter in which both perception and risk tolerance had a stronger impact on mortgage credit supply criteria.
Also in Portugal, lending criteria have become "slightly tighter on housing loans", the Portuguese regulator concluded. "The perception of risks associated to the general economic situation and outlook contributed to tighter credit standards for companies and individuals for house purchase," the BdP clarified.
In terms of terms and conditions of home loans, in Portugal there was a "slight increase in spreads on higher risk loans," due to "risk perception and risk tolerance," the regulator explained, indicating that it is expected that credit standards will be "slightly more restrictive for individuals" in the near future.