The key chart
Trends in total EA mortgages (EUR bn, LHS) and annual growth (% YoY, RHS) (Source: ECB; CMMP)
The key message
The answer to the question, “Is there such a thing as the EA mortgage market?” seems obvious. Of course there is.
We know its size (€5,228bn), its structure (biased towards fixed rate lending) and its importance to banks (40% of total lending). We also know the current cost of borrowing (3.44%) and the speed with which higher policy rates have passed through to this cost (147bp so far). We can monitor the rate of growth in mortgages (3.0% YoY in nominal terms, -3.7% in real terms) and in monthly flows (slowing sharply).
Not so fast…!
The complication here is that these aggregate data points mask very important variations at the national level. These include:
Size (€5,288bn): five national markets dominate (“the big five”). Germany and France account for 56% of total EA mortgages alone and for 85% together with the Netherlands, Spain and Italy.
Structure of new mortgages (over 75% fixed-rate): varies from over 90% variable-rate in Finland, Lithuania, Estonia and Latvia to over 90% fixed-rate in Slovenia, Slovakia, France, Belgium and Ireland. Among the big five, relatively high exposures to fixed rate lending in France, Germany and the Netherlands, relatively low exposures in Italy and Spain.
Exposure to mortgage lending (40% of total lending): ranges from 50% in Malta and Slovakia to 25% or less in Luxembourg and Greece. Among the big five, above average exposures in the Netherlands, Germany and Spain, below average exposures in France, and more noticeably in Italy.
Cost of borrowing (3.44%, April 2023): ranges from 5.32%, 5.27% and 4.99% in Latvia, Lithuania and Estonia respectively to 2.24% and 2.61% in Malta and France respectively. Among the big five above average costs in all markets with the exception of France. Note that French banks have (1) relatively high exposure to fixed rate mortgages and, (2) unlike most other EA lenders, are constrained by the Banque de France on the amount they can charge borrowers.
Transmission mechanism of higher policy rates (147bp, so far): most rapid in Lithuania, Latvia, Estonia, Portugal, and in Italy and Spain among big five – all markets with above average exposure to variable-rate mortgages. Weakest in Malta, Ireland, Greece, and among the big five in France, Germany and the Netherlands. With the exception of Malta, these markets all have relatively high exposures to fixed-rate lending.
Growth (slowed to 3.0% YoY in April 2023, the slowest rate since May 2018): Skewed heavily towards German and French growth dynamics (1.1ppt and 1.0ppt of total 3.0% respectively). Large variations in nominal growth rates from 9.8% and 9.5% in Lithuania and Estonia respectively to -4.0% in Greece and -1.9% in Spain and Ireland. Among the big five, above average growth in France, Germany and the Netherlands, but below average growth in Italy and Spain. In real terms, mortgage growth peaked at 5.0% YoY in December 2020, eight months before the peak in nominal growth. It turned negative in February 2022 and has been negative ever since (-3.7% YoY, April 2023). Only Belgium and Malta are experiencing positive mortgage growth in real terms.
What does this mean?
The EA mortgage market is as an aggregation of heterogeneous, national markets that differ greatly in terms of size, structure, importance, cost, transmission mechanism and growth rates.
The challenge for bankers, investors and analysts alike is to understand these differences and their implications. The far greater challenge for the ECB is to incorporate them all in the design of a “one-size-fits-all” monetary policy. The context, in part, for this week’s ECB press conference on Thursday 15 June 2023.
Is there such a thing as the EA mortgage market?
Market size
Trends in the outstanding stock of EA mortgages (EUR bn) (Source: ECB; CMMP)
The outstanding stock of mortgages across the EA was €5,228bn at the end of April 2023 (see chart above).
Five national markets (the “big five”) dominate in terms of size and account for 85% of the outstanding stock collectively (see chart below) – Germany (€1,574bn, 30% share), France (€1,333bn, 26% share), the Netherlands (€555bn, 11% share), Spain (€505bn, 10% share) and Italy (€426bn, 8% share).
National mortgage markets ranked by size (EUR bn, LHS) and cumulative market share (%, RHS) (Source: ECB; CMMP)
Mortgage types
Twenty year trends in share of variable rate loans in total new mortages (%) (Source: ECB; CMMP)
At the aggregate level, just over three quarters of new mortgages are fixed-rate mortgages, up from 13% in March 2022 (see chart above). The structure varies, however, from over 90% variable rate mortgages in Finland, Lithuania, Estonia and Latvia to less than 10% variable rate mortgages in Slovenia, Slovakia, France, Belgium and Ireland (see chart below).
National mortgage markets ranked by exposure to variable rate lending (% new loans) (Source: ECB; CMMP)
Among the big five markets, the share of variable rate mortgages in new loans ranges from 41% and 39% in Italy and Spain to 20% in the Netherlands, 16% in Germany and only 4% in France. Note also that, in aggregate, the exposure to variable rate mortgages in the EA is currently higher than in the UK (18%).
Exposure to mortgage lending
National mortgage markets ranked by exposure to mortgages (% total loans) (Source: ECB; CMMP)
Mortgages account for 40% of total lending to EA residents at the aggregate level. This exposure ranges from 50% of total loans in Malta and Slovakia to 23% and 25% in Luxembourg and Greece respectively. Among the big five, banks in the Netherlands (48%), Germany (43%) and Spain (41%) have above average exposures to mortgage lending, while banks in France (39%) and, more noticeably, Italy (28%) have lower-than-average exposures.
Composite cost of borrowing for house purchase
National mortgage markets ranked by cost of borrowing for house purchase (%) (Source: ECB; CMMP)
In nominal terms, the CCOB for house purchases ranges from 5.32%, 5.27% and 4.99% in Latvia, Lithuania and Estonia respectively to 2.24% and 2.61% in Malta and France respectively (see chart above). Among the big five markets, the CCOB is above average in Italy (4.15%), Germany (3.89%), the Netherlands (3.62%) and Spain and only below average in France (2.61%).
Note that French banks have (1) relatively high exposure to fixed-rate mortgages and (2), unlike most other EA lenders, are constrained by a limit, set by the Banque de France, on the amount that they can charge for mortgages. In short, they have a lower sensitivity to the positive benefits of rising interest rates.
Note also that the CCOB of borrowing for house purchases remains below the current rates of inflation (HICP) in all of the EA economies except Luxembourg, Cyprus and Belgium.
Pass through of higher policy rates
National mortgage markets ranked by pass through (bp) of higher ECB policy rates (Source: ECB; CMMP)
The composite cost (CCOB) for new loans to EA HHs for house purchase has increased by 147bp since June 2022 to 3.44% in April 2023.
The pass through from policy tightening has been greatest (in nominal terms) in Lithuania (315bp), Latvia (284bp), Estonia (274bp) and Portugal (251bp) and in Italy (197bp) and Spain (179bp) among the big five markets.
The pass though has been weakest in Malta (11bp), Ireland (74bp), Greece (84bp) and in France (126bp), Germany (132bp) and the Netherlands (141bp) among the big five markets.
Change in CCOB since tightening (bp) plotted against current CCOB (% April 2023) (Source: ECB; CMMP)
Growth in mortgage lending
Trend in annual growth rate (% YoY, nominal) of lending to the private sector (Source: ECB; CMMP)
The annual growth rate in EA mortgages slowed to 3.0% YoY in April 2023, down 2.8ppt from the August 2021 peak of 5.8%. Growth has slowed 2.4ppt since tightening began in 2022. April 2023’s growth rate is the slowest rate of growth recorded since May 2018.
Contribution (ppt) of big five and “others” to growth in EA mortgages (% YoY) (Source: ECB, CMMP)
Germany and France have been the main contributors to aggregate growth since 2015. In April 2023, Germany and France contributed 1.1ppt and 1.0ppt to the total YoY growth of 3.0% alone. Netherlands and Italy contributed 0.4ppt and 0.2ppt respectively. The most obvious contrast between the post-2015 recovery in EA mortgage demand and the pre-GFC period is the lack of contribution/negative contribution from Spain for large parts of post-GFC period, reflecting the bursting of the Spanish real estate bubble.
National mortgage markets ranked by nominal growth rate (% YoY) (Source: ECB; CMMP)
Large variations exists in the nominal YoY growth rates at the country level. In April 2023, these ranged from 9.8% and 9.5% in Lithuania and Estonia respectively to -4.0% in Greece and -1.9% in both Spain and Ireland. Among the big five markets, growth was above average in France (4.1%), Germany (3.8%), and the Netherlands (3.6%) but below average in Italy (2.7%) and Spain (-1.9%).
Trends in mortgage growth rates expressed in nominal and real terms (Source: ECB; CMMP)
Inflation also complicates the analysis of EA mortgage dynamic. In real terms, mortgage growth peaked at 5.0% YoY in December 2020, eight months before the peak in nominal growth. It turned negative in February 2022 and has been negative since then. In April 2023, mortgage lending fell -3.7% YoY in real terms.
National mortgage markets ranked by real growth rate (% YoY) (Source: ECB; CMMP)
Conclusion
The EA mortgage market is as an aggregation of heterogeneous, national markets that differ greatly in terms of size, structure, importance, cost, transmission mechanism and growth rates. The challenge for bankers, investors and analysts alike is to understand these differences and their implications. The far greater challenge for the ECB is to incorporate them all in the design of a “one-size-fits-all” monetary policy. The context, in part, for this week’s ECB press conference on Thursday 15 June 2023.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.