Recent Trends and Developments in European Mortgage Markets

In this ECRI Commentary, Sylvain Bouyon, Research Fellow at ECRI and CEPS, offers an up-to-date analysis of recent trends and developments in European mortgage markets. Ten years ago, persistent dysfunctionalities on mortgage markets inherited from the previous decade greatly contributed to the largest financial crisis in half a century. Since then, significant deleveraging processes have been observed in some EU markets, such as Ireland, Portugal and Spain, where the ratios of outstanding residential lending to household disposable income have contracted markedly. In these economies, the 2016 volumes recorded for both outstanding and gross residential lending were much below 2007 levels, although a timid recovery could be observed in recent years. By contrast, the volume of mortgage activities moved around significant upward paths in Belgium, France, Germany and Sweden, and stagnated somewhat in the Netherlands and Denmark. In terms of products, excluding Sweden, the share of adjustable-rate mortgages (ARMs) for gross residential lending has been moving along downward trends in all the analysed mortgage markets. And these downward trends have deepened in all countries (excluding the UK and Sweden) in the last three years. As a result, the aggregate ARM market share contracted markedly in the last decade. Whereas fluctuations in current spreads between ARM rates and fixed-rate mortgage (FRM) rates appeared overall to be a powerful driver behind the ARM market share over the last decade, this impact seemed to trail off in the last four years. In the current context where FRMs are considered to be historically low, many households are likely to anticipate increases in fixed interest rates on the foreseeable horizon, resulting in greater preference for FRMs, no matter the level of spreads. Other factors related to mortgage and household characteristics could also impact on this preference for FRMs: the average amount of mortgages, evolution of household income, etc. Finally, some encouraging signs of convergence in recent years in spreads, ARM market shares as well as ratios of household residential debt to disposable income could contribute somehow to reinforcing the consistency and efficiency of euro monetary policy.