EUROPE HOUSING FINANCE MARKET

INTRODUCTION

Investment is a vital aspect for an economy, any economy which generates savings will channelize them into investment (as per the economic identity of savings and investment), in order to realize returns on the savings generated. A higher investment translates into higher gross domestic output and thus caters to higher economic growth.

Out of the various forms of investment, residential investment, or investment in real estate is still a very popular investment option not only in Europe but all across the globe.

Residential investment is largely financed by bank loans and thus, interest rates have a major say in household financing. In Europe, household financing contributes to a lion’s share of household liability. Following the disastrous subprime crisis, most countries have renewed strong interest and kept a thorough vigil on household financing.

EUROPE HOUSING FINANCE MARKET TRENDS ACROSS 1999 – 2007

The rise in housing finance across several European countries show how the demand for household loans has improved; an ECB study of debt to GDP over 3 time periods – 1999, 2003, and 2007 show the increasing trend – from 27% of GDP in 1999 to 42% of GDP in 2007, with subsequent cross country heterogeneity. The robust growth in housing finance can be attributed to two primary factors – lower interest rates and a competitive market for mortgage products.

The study noted some more interesting conclusions, namely:

• Over the same period, the ratio of interest payments to disposable income ratio decreased initially from 1999 to 2003, and then increased during 2005-2007
• Slovenia recorded the maximum growth in terms of loans for house purchase at 49.6% over the period 1999-2007, whereas Germany showed the least growth at 3%
• In terms of the proportion of households with a mortgage, the picture is quite diverse, with Italy at 12% and the Netherlands and between 35%-40%. It is also interesting to note that the same metric has a monotonously positive relation with the income level
• The ratio of mortgage to total assets which is a strong indicator of the ability of a household to repay its loans show the highest value at 30% for the Netherlands, with the distribution very asymmetric across several age classes, with the younger population boasting of higher share
• When considering the complete picture, the share of gross housing wealth in GDP rose exponentially to 353% (2006) from 272% (2000) for the Euro area zones,
• The net housing wealth ( measured as gross housing wealth net of mortgage loans) grew at an estimated 5%-5.% between 1999 – 2002, and between 8% – 8.5% from 2003 – 2006
• In the non-Euro countries, the outstanding stock of loans grew from 12.2% (2004) to 22.4% (end 2007). The strong growth in the non-Euro zone can be attributed to both demand and supply-side factor: a strong rise in disposable income, accompanied with a house subsidy stem in many European countries spurred the demand for housing, whereas, on the supply front, a competitive structure in the banking industry, lower risk and higher-margin on part of banks led to the growth of the supply side as well
• In the Eurozone, the housing finance market prospered due to 3 primary factors – a lower interest rate regime, a higher disposable income, and the gradual liberalization of financial markets

EUROPE HOUSING FINANCE MARKET SIZE 

The latest ECB survey shows that despite the initial struggles originating out of the COVID induced lockdown, major banks are bullish of recovery in household credit in the subsequent months, as Eurozone mortgage lending bounced back in May after shrugging off the March and April blues. Most economists and experts believe that most property transactions have begun to rejuvenate and that the present problems are actually due to past deals.

• According to ECB’s Eurozone mortgage lending data, the lending had dropped sharply, but its showing signs of recovery and the most positive sign is that the drop neither came close to the lows experienced during the 2008 subprime crisis nor did it match the levels seen during the Eurozone debt crisis.
• Spain has seen the worst of the lot, with housing prices crashing. As per Fitch Ratings, house prices in Spain is estimated to fall between 8-12% this year — a sharp contrast against the rise of 0-4 % in Germany. Deutsche Bank reports that housing prices in Germany have risen by 123.7% (average) from 2009 to 2019. Despite the economic struggles of COVID, Germany has fared quite well in the housing market primarily due to the well management of the coronavirus situation, an overall better appeal, and an ever-present demand-supply gap in the housing market. It is not surprising to many experts to see that housing prices have been at the same level they were 3 months ago.
•  Housing Investment contracts (measured in terms of gross fixed capital formation, dwellings (%)), only Germany and Portugal recorded positive growth in the first quarter of 2020 (Q1, 2020): Germany even managed to better its previous quarter result (4% in Q1, 2020 against 2.5% in Q4, 2019). But all the other major countries  – France, Spain, Italy, and the rest of the Eurozone languish in negative growth territory indicative of tougher times ahead, with France recording the poorest growth at negative 10%, followed by Italy and Spain.
• The ECB Bank Lending survey is almost certain of a contraction in housing demand across major European countries, with the Spanish market contracting the most from – 10% in Q1, 2019 to -40% in Q1, 2020. Germany, with its robust infrastructure and system, boasts of a meagre expansion from 18% (Q1, 2019) to 20% (Q1, 2020).

THIS REPORT WILL ANSWER THE FOLLOWING QUESTIONS

• Which European countries experienced the highest and the least growth in housing finance?
• The various trends across and within Europe in terms of housing finance,
• What are the factors which drive the differences in the financing capacity of each country?
• The present scenario of the European housing finance industries, the magnitude of and differences in the ways the several industries has been affected due to Covid19 imposed economic difficulties.