February 2023 – Chris Mallin Macro Perspectives

“Deflating the EA mortgage market”

German and French dynamics drive the slowdown

The key chart

**Trends in the stock (EUR bn) and growth rate (% YoY) of EA mortgages**
(Source: ECB; CMMP)

The key message

The euro area (EA) money sector is sending a clear message at the start of 2023 – the ECB is succeeding in deflating the region’s mortgage market. Good news for financial stability, less positive for investors positioned for a recovery in EA growth.

Deflating the EA mortgage market

**Trends in EA mortgage lending annual growth rate (% YoY)**
(Source: ECB; CMMP)

Annual growth in the outstanding stock of mortgages slowed to 3.9% in January 2023, down from 4.4% in December 2022 and the recent peak of 5.8% in August 2021 (see chart above). Monthly mortgage flows also slowed sharply to €2.8bn in January 2023, down from €25.7bn a year ago and their recent peak of €30.1bn in June 2022 (see chart below).

**Trends in monthly HH mortgage flows (EUR bn)**
(Source: ECB; CMMP)

Mortgage dynamics in Germany and France are key drivers here. These markets account for 30% and 25% of the outstanding stock of mortgages and contribute 40% and 25% to total mortgage growth respectively (see chart below).

**EA mortgage lending (% YoY) broken down by country (ppt)**
(Source: ECB; CMMP)

At the point of peak EA mortgage growth in August 2021, Germany mortgages grew 7.2% YoY and contributed 2.1ppt (36%) to total growth. At the same time, French mortgages grew 8.2% YoY and contributed 2.0ppt (34%) to total growth.

**Trends in annual growth (% YoY) in EA, German and French mortgage lending**
(Source: ECB; CMMP)

Fast forward to January 2023, and German mortgage growth slowed to 5.2% YoY and contributed 1.5ppt (38%) to total growth. More importantly, French mortgage growth had slowed to 3.9% YoY and contributed only 1.0ppt (26%) to total growth. Note also that (more volatile) monthly flow data indicated net repayments in both Germany and France in January 2023.

**Trends in annual growth in EA lending (LHS) and contribution from Germany and France (RHS)** (Source: ECB; CMMP)

The trends summarised above are positive from a financial stability perspective. CMMP analysis highlighted RRE vulnerabilities in Germany based on the combination of house price and lending dynamics, the extent of overvaluation and the lack of appropriate macroprudential measures back in November 2021. It also warned of the risks associated with the rate of growth and affordability of French household sector debt in January 2022.

They are less positive for investors positioned for a recovery in EA growth, since mortgage demand typically displays a coincident relationship with GDP growth. Previous posts have noted a synchronised slowdown in mortgage demand in the EA and the UK, albeit with a more rapid deceleration in the former region. The Bank of England will publish UK mortgage data on 1 March 2023. More to follow then…

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“Rolling over, rapidly”

How will the “data-dependent” ECB respond to slowing money and credit cycles?

The key chart

**Growth rates in EA broad money, narrow money and private sector credit (% YoY, nominal)**
(Source: ECB; CMMP)

The key message

The message from the euro area (EA) money sector is increasingly challenging for the “data-dependent” ECB.

The EA money and credit cycles are rolling over rapidly – the annual growth rate in narrow money fell -0.7% YoY in January, for example. Leading, coincident and lagging monetary variables are all sending negative messages for the region’s growth outlook.

Monthly household (HH) lending flows are slowing sharply for both mortgages and consumer credit. A clear warning sign for future house prices and HH consumption in the region.

With inflation still running well above target at 8.6% YoY in January 2023, the ECB remains committed to a further 50bp increase in rates in March, however. The ECB’s foot remains firmly on the brake pedal as the money sector warns of slowing economic growth.

Positive “cold-water therapy” is increasing looking like a less attractive cold shower.

Rolling over, rapidly

The EA money and credit cycles are rolling over rapidly (see key chart above). The annual growth rate in broad money (M3) fell to 3.5% YoY in January 2023, from 4.1% in December 2022 and 6.5% a year earlier. The annual growth rate in narrow money (M1) actually declined -0.7% YoY in January 2022, from 0.6% in December 2022 and 9.2% a year earlier.

**Trends in broad money growth (% YoY) and contribution from overnight deposits (ppt)**
(Source: ECB; CMMP)

Recall that growth in narrow money was the key driver in the recent expansion in total EA money supply (see chart above). This reflected the hoarding of cash, largely in the form of overnight deposits at banks, by the regions household (HH) sector. Note, however, that monthly flows of HH overnight deposits have been negative since October 2022.

**Trends in annual growth rates of M1, HH credit and NFC credit (% YoY, real terms)**
(Source: ECB; CMMP)

Leading, coincident and lagging monetary variables are all sending negative messages for the region’s growth outlook. Real growth rates in M1, HH credit and corporate (NFC) credit typically display leading, coincident and lagging relationships with real GDP growth over time. Growth rates in all of these variables peaked some time ago and are current negative in real terms: -8.6% YoY for real M1; -4.6% YoY for real HH credit; and -2.3% YoY for real NFC credit.

Monthly household (HH) lending flows are slowing sharply for both mortgages and consumer credit. Monthly mortgage flows slowed to €1.9bn in January 2022, down from €26.7bn a year earlier and a recent peak of €30.1bn in June 2022 (see chart above). Similarly, monthly consumer credit flows fell to €0.3bn in January 2023, down from €1.1bn a year earlier and a recent peak of €3.4bn in February 2022 (see chart below). A clear warning sign for future house prices and HH consumption in the region.

**Trends in monthly HH consumer credit flows (EUR bn)**
(Source: ECB; CMMP)

Conclusion

Positive “cold-water therapy” is increasing looking like a less attractive cold shower.

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“After two decades of fuelling the FIRE…”

…What is the purpose of UK banking?

The key chart

**Trends and breakdown of UK FIRE-based (red and pink) and COCO-based (blue) lending (£bn)**(Source: BoE; CMMP)

After two decades of fuelling FIRE-based lending, is it time to ask, “what is the purpose of UK banking?”

Bank lending falls into two categories: lending that supports capital gains largely through higher asset prices (FIRE-based); and lending that supports production and income formation, i.e. productive enterprise (COCO-based). The former includes mortgage or real estate lending and lending to NBFIs. The latter includes corporate lending and consumer credit.

**Trends in the breakdown of UK sterling lending since 2002 (% total)**
(Source: BoE; CMMP)

Twenty years ago, less productive FIRE-based lending accounted for 67% of M4L, the Bank of England’s headline credit series. Today it accounts for 78%. The contribution of mortgages, the largest component of FIRE-based lending, has risen from 47% to 53% over the period. This means that nearly 80 pence in every pound lent by UK MFIs finances transactions in pre-existing assets (real estate) or in financial assets. Note that mortgages are the only component of M4L to register a record high at the end of 2022.

In contrast, only just over 20 pence in every pound lent in the UK finances productive enterprise. The contribution of lending to corporates, the largest component of productive COCO-based lending has fallen from 20% to 17% over the past two decades. Note that this lending supports sales revenues, wages, profits and economic expansion. Lending that increases debt in the economy BUT critically also increases the income required to finance it. The outstanding stock of sterling loans to UK corporates at the end of 2022 (£445bn) was £61bn or 12% lower than its peak (£516bn) recorded in August 2008.

Lending in any economy involves a balance between these different forms. A key point here is that the shift from COCO-based lending to FIRE-based lending as seen in the UK reflects different borrower motivations and different levels of risks to financial stability. This has negative implications for leverage, growth, financial stability and income inequality.

Classifying lending according to its productive purpose tells us what the purpose of UK banking is today – largely to support capital gains rather than production and (direct) income formation.

The obvious follow-on question is, “what should it be?”

Please note that the summary comments and charts above are abstracts from more detailed research that is available separately.

“Tightening into…”

…Subdued (EA) and slowing (UK) demand for consumer credit

The key chart

Quarterly consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)

The key message

The ECB and Bank of England are expected to deliver 50bp rate increases today (2 February 2023) in the face of relatively subdued (euro area) and slowing (UK) demand for consumer credit.

Both regions have experienced seven consecutive quarters of positive demand for consumer credit since 1Q21 (see key chart above). Euro area (EA) demand has remain relatively subdued, however, and has failed to recover to pre-pandemic levels. Quarterly consumer credit flows, for example, ended 2022 at €5.0bn, only 0.5x the pre-pandemic average of €10.3bn. UK consumer credit demand hit £4.4bn in 2Q22 (1.2x the pre-pandemic average flow of £3.6bn) but slowed to £2.8bn in 4Q22 (0.8x the pre-pandemic average flow).

This matters for two reasons:

First, increased borrowing is one way that EA and UK households can offset the pressures from falling real disposable incomes (along with reduced savings);
Second, consumer credit is the second most important element of productive COCO-based lending, after corporate credit. It supports productive enterprise since it drives demand for goods and services, hence helping corporates to generate sales, profit and wages.

The EA and UK money sectors are both sending clear messages of slowing demand for consumer credit and mortgages. The contrast with the US is interesting – the FED is slowing the pace of rate increases to 25bp despite the fact that US consumer credit flows remain well above their pre-pandemic levels.

Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.

“Steady as she slows – Part IV”

Synchronised slowdowns in monthly UK and EA mortgage flows are accelerating

The key chart

**Monthly mortgage flows (3m MVA) as a multiple of pre-pandemic average flows**
(Source: BoE; ECB; CMMP)

The key message

Current trends in the euro area (EA) and UK mortgage markets provide little cheer for investors hoping for a growth recovery in the regions.

The synchronised slowdown highlighted last month accelerated further in December 2022. Monthly mortgage flows have fallen below their respective pre-pandemic averages in both cases. The rate of slowdown is particularly sharp in the EA.

Given that mortgage demand typically displays a co-incident relationship with real GDP, the message from the UK and EA money sectors is one of rising risks to the economic outlook – the challenging context for central bank decisions this week.

Monthly mortgage flows – the key trends

Monthly mortgage flows have fallen below their pre-pandemic levels in both regions (see key chart above). The 3m MVA of monthly mortgage flows in the EA (€7.2bn) has fallen to only 0.58x the pre-pandemic flow (€12.5bn). In the UK, the 3m MVA of mortgage flows (£3.7bn) fell to 0.95x the pre-pandemic flow (£3.9bn). This was the first time that the UK’s monthly mortgage flow has fallen below its pre-pandemic average since December 2021.

The rate of slowdown in mortgage lending flows is particularly sharp in the EA. Flows have fallen from €26bn in June 2022 (2.02x pre-pandemic average) to €7bn in December 2022 (0.58x pre-pandemic average). This compares with respective multiples of 1.32x (June) and 0.95x (December) for UK mortgage flows.

Monthly mortgage flows – the UK details

**Monthly mortgage flows (£bn) and annual growth rate in outstanding stock (RHS)**
(Source: BoE; CMMP)

Monthly UK mortgage flows fell to 3.2bn in December 2022 down from £4.3bn in November 2022 (see chart above). December’s flow was only 0.83x the pre-pandemic average flow of £3.9bn and below the recent March 2022 peak of £7.5bn (1.9x pre-pandemic flows).

Approvals for house purchase, and indicator of future borrowing, decreased to 35,600 in December 2022 from 46,200 in November. The latest approvals were the lowest since May 2022 and represent the fourth consecutive month of declines. It is reasonable, therefore, to expect lower UK flows in coming months.

Monthly mortgage flows – the EA details

**Monthly EA mortgage flows (EUR bn) and annual growth rate in outstanding stock (RHS)**
(Source: ECB; CMMP)

Monthly EA mortgage flows fell to €4.5bn in December 2022 from €8.9bn in November and €30.1bn in June 2022 (see chart above). December’s flow was only 0.4x the pre-pandemic average of €12.6bn and was the lowest monthly flow since March 2020 (€3.8bn) at the start of the pandemic.

Monthly mortgage flows – why the slowdown matters

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.