Mortgage demand in the eurozone is falling at record speed

Demand for home loans in the euro zone fell at an unprecedented pace, according to data from the European Central Bank, which showed how rising interest rates and falling consumer confidence are weighing on the property market.

The banks reported that demand for home loans fell at the highest rate on record — a net percentage of minus 74 percent, the agency said Eurozone bank lending survey January. The number was the lowest since records began in 2003 and down 42 from the previous quarter.

The fall in net demand “was mainly caused by general interest rate levels, lower consumer confidence and the deteriorating housing market outlook,” the survey said. A significant tightening of the award criteria for mortgages was also reported.

The numbers “painted a pretty bleak picture” for the property sector, said Fabio Balboni, an economist at HSBC, adding that the ECB’s recent tightening of monetary policy “is quickly spilling over to the credit channel and that in turn is taking its toll on the economy.” .

The ECB raised its deposit rate in December to 2 percent from -0.5 percent last June, marking the largest and fastest rate hike in monetary union history. Markets expect another 50 basis point gain at Thursday’s board meeting of the bank.

Eurozone property prices and transactions have boomed during the pandemic, boosted by record-low interest rates and strong demand from people looking for more space. However, with the sharp rise in interest rates, house prices and transactions are likely to fall sharply, economists said.

The decline in mortgage demand pointed to a 12 percent year-on-year decline in residential investment, forecasts Capital Economics. A contraction of that magnitude would shave 0.7 percentage points off annual economic growth, she added.

The latest official figures from Eurostat showed that house prices fell in six euro-zone countries – including Germany, Denmark, Italy and Sweden – in the third quarter compared to the previous three months.

Oxford Economics forecasts that house prices in many countries, including Germany and the Netherlands, will fall by more than 5 percent by 2023. Across the eurozone, home prices are expected to fall 2.4 percent, the consultancy added.

The ECB report also showed that banks’ criteria for approving loans to companies were tightened significantly earlier in the year, the most significant tightening since the euro-zone sovereign debt crisis of 2011. The credit standards for mortgages have also been tightened considerably.

The report explained that banks’ perceptions of greater risk to the bloc’s economic prospects, a decrease in risk tolerance and increased funding costs further tightened their lending standards.

“Banks are tightening their lending standards and credit demand is falling,” said Jack Allen-Reynolds, senior European economist at Capital Economics. He added that this indicates “significant declines in consumption and investment”.