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Eurozone mortgage demand falls at record pace

Demand for housing loans in the eurozone fell at the fastest pace on record, according to European Central Bank data that showed how rising interest rates and declining consumer confidence are taking a toll on the property market.

Banks reported that demand for housing loans decreased at its largest rate on record — a net percentage of minus 74 per cent, according to the January eurozone bank lending survey. The figure was the lowest since records began in 2003 and a decline from minus 42 from the previous quarter.

The net decrease in demand “was mainly driven by the general level of interest rates, lower consumer confidence and deteriorating housing market prospects”, stated the survey. A significant tightening in lending criteria for mortgages was also reported.

The figures “painted a pretty dire picture for” the housing sector, said Fabio Balboni, economist at HSBC, adding that the recent tightening of monetary policy by the ECB “is starting to feed quickly through to the credit channel and, in turn, take its toll on the economy”.

The ECB increased its deposit rate to 2 per cent in December from -0.5 per cent last June, representing the largest and fastest increase in rates in the monetary union’s history. Markets are expecting another 50 basis point increase at the meeting of the bank’s governing council on Thursday.

Column chart of Eurozone, net percentage showing decrease in housing loan demand in Q4 2022 was the strongest on record

Eurozone house prices and transactions boomed during the pandemic, boosted by record low rates and strong demand from people looking for more space. However, with the sharp rise in rates, house prices and transactions are expected to fall sharply, economists said.

The drop in mortgage demand pointed to a 12 per cent year-on-year fall in residential investment, Capital Economics forecast. A drop on that scale would knock 0.7 percentage points off annual economic growth, it added.

The latest official figures from Eurostat showed that third-quarter house prices fell in six eurozone countries — including Germany, Denmark, Italy and Sweden — compared with the previous three months.

Oxford Economics forecast that house prices would fall by more than 5 per cent in 2023 in many countries, including Germany and the Netherlands. Across the eurozone, house prices were expected to contract by 2.4 per cent, the consultancy added.

The ECB report also showed that the banks’ criteria for approving loans to businesses tightened substantially at the start of the year, marking the most significant tightening since the eurozone’s sovereign debt crisis in 2011. Credit standards also tightened sharply for mortgages.

The report explained that banks’ perceptions of bigger risks to the bloc’s economic outlook, a decline in risk tolerance and increased funding costs continued to tighten their lending guidelines.

“Banks are tightening their lending standards and loan demand is falling,” said Jack Allen-Reynolds, senior European economist at Capital Economics. He added that this points to “significant declines in consumption and investment”.

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