“Deflating the EA mortgage market” – Chris Mallin Macro Perspectives

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.