Monthly mortgage flows since January 2019 (Source: ECB; CMMP)
The key message
Monthly mortgage flows suggest that Spain is re-joining the “euro area mortgage party” but this presents mixed messages for investors.
Spain remains the euro area’s (EA) third largest mortgage market despite the fact that the outstanding stock of mortgages (€510bn) is 23% below its December 2010 peak (€665bn). Spain’s market share has fallen from 19% of EA mortgages in December 2008 to 11% in June 2021 and Spanish MFIs have recorded 120 consecutive months of negative contributions to EA mortgage growth since April 2011.
Monthly mortgage flows turned positive in February 2021, however. Annual growth rates turned positive in May 2021 and Spanish MFIs made a positive, albeit small, contribution to total EA growth in June 2021. I highlighted four factors that suggested a more positive demand-side outlook two months ago (see “More consistent than Rapha”). First, the HH debt ratio has fallen back in line with EA averages following a decade of deleveraging. Second, the cost of borrowing is at a record low. Third, the HH debt service ratio is below the LT average and close to its 20-year low. Finally, Spanish house prices are 28% below their peak in real terms with less extreme valuations than elsewhere in the EA.
The latest dynamics present mixed messages for investors. On the bright side, a sustained positive contribution to EA growth represents an important signal for investors positioned for a wider recovery in Europe. Germany and France have been the main drivers of mortgage growth in the recent past, but demand is now widening with Belgium, the Netherlands, Italy, Austria and Spain making larger collective contributions.
That said, these trends also reflect the broader substitution of productive COCO-based lending with less-productive FIRE-based lending in the euro area, which has negative implications for leverage, growth, financial stability and income inequality in the region. Spain has seen the largest shift in percentage points from COCO-based to FIRE-based lending since January 2009 but uniquely this reflects falls in the outstanding stock of both COCO-based (-€488bn) and FIRE-based lending (-€125bn) over the period.
The underlying message here is that mortgage dynamics in the periphery of the EA remain very different from those in the core re-enforcing the message that a “one-size-fits-all” policy response will not suffice.
“Bienvenido de nuevo” in charts
Market share of EA total mortgages (Source: ECB; CMMP)Outstanding stock of Spanish mortgages and market share (Source: ECB; CMMP)Spanish MFIs contribution to EA mortgage growth (Source: ECB; CMMP)Country drivers of EA mortgage growth (Source: ECB; CMMP)Trends in balance between COCO-based and FIRE-based lending (Source: ECB; CMMP)Spanish COCO-based lending (Source: ECB; CMMP)Spanish FIRE-based lending (Source: ECB; CMMP)
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Spanish MFIs’ record of negative contribution to EA mortgages
The key chart
EA mortgage growth (% YoY) and contribution from Spanish MFIs (ppt) (Source: ECB; CMMP)
The key message
Spanish MFIs have a more consistent record than Rafael Nada at Roland-Garros.
While Rafa has won eight of the last ten French Open men’s singles championships (2011-2020) and a record 13 titles in total, Spanish MFIs have delivered an unbroken decade of negative contributions to euro area mortgage growth.
120 consecutive months of negative contribution since April 2011.
While the YoY growth rate and contribution were both marginally negative in April 2021, the last three months have seen positive monthly flows. Are Spanish MFIs about to rejoin the EA mortgage party in 2021?
The latest bank lending survey suggests a neutral/slightly negative supply-side outlook but, in combination, four factors suggest a more positive demand-side outlook:
The HH debt ratio has fallen back in line with the EA average (63% GDP) following a decade of deleveraging
The cost of borrowing is at a record low (1.49% in April 2021)
From (1) and (2), the HH debt service ratio has fallen to 6.5%, below its LT average of 7.9% and close to a 20 year low
House prices remain 28% below their peak in real terms and estimated valuations are less extreme than elsewhere in the EA
None of these four factors are new in themselves and future developments remain “highly dependent on the recovery path and the ability of Spanish and EA policymakers to prevent cliff edges by not abruptly ending support measures” (ECB, 2021). Nonetheless, Spain remains the EA’s third largest mortgage market and mortgage debt represents c80% of total HH debt. A continued rebound in monthly mortgage flows and sustained positive contributions to EA mortgage growth would represent an important signal for investors positioned for a recovery in Europe.
More consistent than Rafa!
Spanish MFIs have a more consistent record than Rafael Nada at Roland-Garros. While Rafa has won eight of the last ten French Open men’s singles championships (2011-2020) and a record 13 titles in total, Spanish MFIs have delivered an unbroken decade of negative contributions to euro area mortgage growth – 120 consecutive months of negative contribution since April 2011 (see key chart above).
Outstanding stock of mortgages provided by Spanish MFIs and market share of EA (Source: ECB; CMMP)
The outstanding stock of mortgages has fallen 23% from €663bn in April 2011 to €508bn in April 2018 (slightly above January 2021’s recent low of €506bn). Over the same period, the outstanding stock of EA mortgages has risen 27% from €3,767bn to €4,798bn. The market share of Spanish MFIs has fallen from 18% to 11% due to these divergent growth trends (see chart above).
Stable “collective” market shares masks significant differences between the big 4 (Source: ECB; CMMP)
As an aside, the market share of German, French, Spanish and Dutch MFIs has remained remarkably stable over this period at 75%. This aggregate share trends masks very different trends at the country level, however. The market shares of German and French MFIs have risen from 26% to 30% and from 21% to 25% respectively, while the market share of Dutch MFIs has remained constant at 11%.
YoY growth in Spanish MFI mortgages (Source: ECB; CMMP)Monthly mortgage flows – three consecutive positive months (Source: ECB; CMMP)
While the YoY growth rate and contribution were both marginally negative in April 2021, the last three months have seen positive monthly flows (see charts above). Does this meant that Spanish MFIs are about to rejoin the EA mortgage party? The latest bank lending survey suggests a neutral supply-side outlook, but four factors suggest a more positive demand-side outlook: HH debt ratios; the cost of borrowing; HH debt service ratios; and house prices and valuation.
HH debt ratios
HH debt ratios (% GDP) for EA and Spain since December 2000 (Source: BIS; CMMP)
The HH debt ratio has fallen from 86% GDP (2Q10) to 63% GDP, in line with the EA average. To mix sporting metaphors horribly, the past two decades has been a “game of two halves”.
Twenty years ago, the HH debt ratios for the EA and Spain were similar at 49% GDP and 46% GDP respectively. At their respective peaks in 2Q10, these ratios had risen to 64% GDP and 86% GDP. (Note that the BIS considers 85% GDP to be the threshold level above which HH debt becomes a constraint on future growth.). By 4Q19, the EA and Spanish debt ratios had fallen back to 58% GDP and 57% GDP respectively and ended 2020 at the same level of 63% GDP. (Note also that the increase in the debt ratio in 2020 was driven by GDP falling more than the fall in debt levels.)
Sustained HH deleveraging was a key explanatory factor behind negative growth and contributions from Spanish MFIs in the past.
Cost of borrowing
Cost of borrowing at a record low (Source: ECB; CMMP)
The cost of borrowing has fallen to a new low of 1.49% (April 2021). The cost of borrowing has fallen 23bp YoY and recent press articles suggest increased price competition in May and June particularly from those MFIs that lost market share during the lockdown.
Fixed versus floating (Source: ECB; CMMP)
Price competition is particularly strong in the fixed mortgage market. Spain has historically had a bias towards more floating rate lending than other EA economies (see chart above). However, in April 2021, the share of mortgages with a floating rate or an initial fixation of up to one year fell to 28%, slightly above the record low of 27% in March. For reference, the share of floating rate mortgage loans in the EA also hit a new low in April at 15% to total mortgage loans.
HH debt service ratios (affordability)
Affordability risk close to twenty year low (Source: BIS; CMMP)
The HH debt service ratio (DSR) in Spain is currently 6.5% (as at end 4Q20). This compares with a peak level of 11.7% in 3Q08 and a LT average of 7.9%. With lower debt ratios and record low costs of borrowing, it is unsurprising that affordability is not a significant demand constraint for Spanish HHs, currently.
House prices and (over)valuation
Real YoY growth in house prices over past 20 years (Source: BIS; CMMP)Real house price index trends 2010 = 100 (Source: BIS; CMMP)
House prices are 28% below their peak in real terms and valuations less extreme than elsewhere in the EA.
Spanish house prices peaked in 3Q07. They did not recover in real terms until 2Q14, almost seven years later. Despite the recovery since then, prices remain 28% below their peak level in real terms.
Overvaluation estimates as at end 2020 (Source: ECB; CMMP)
In “Herd immunity”, I noted the resilience and risks in global housing since the COVID-19 pandemic hit, especially in advanced economies, and the fact that some of the largest increases in EA house prices during 2020 had occurred in economies where house prices were also among the most overvalued (Luxembourg, Denmark, Austria). According to ECB estimates, house prices in Spain are overvalued by around 5%, a more modest level than elsewhere in the region.
Conclusion
None of the four factors highlighted above are new in themselves and future developments remain “highly dependent on the recovery path and the ability of Spanish and EA policymakers to prevent cliff edges by not abruptly ending support measures” (ECB, 2021). Nonetheless, Spain remains the EA’s third largest mortgage market and mortgage debt represents c80% of total HH debt. A recovery in mortgage demand and sustained positive contributions to EA mortgage growth would represent an important signal of a recovery in the EA.
“Vamos, Rafa” – good luck in Friday’s semi-final against Novak!
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately
