Banks Tighten Conditions and Anticipate Greater Restrictions in 2023

Author: Editorial Team

Source: El Economista

Household demand for home loans in the Eurozone saw its largest contraction in history in the last quarter of 2022 in response to rising interest rates, increased consumer pessimism, and deteriorating housing market prospects, according to the European Central Bank (ECB).

“The decline in net demand for home loans was the strongest recorded, while net demand for consumer credit and other household loans also fell sharply, though to a lesser extent than home loans,” the central bank notes in the latest edition of its bank lending survey reported by Europa Press.

In this context, the institution notes that the historic contraction in mortgage demand was driven by higher interest rates, reduced consumer confidence, and the evolving housing market outlook.

“These reflect the current environment of lower consumer confidence and economic slowdown,” along with rising interest rates in response to high inflation, it adds, warning that for the second consecutive quarter, housing market prospects contributed negatively to demand—a situation not seen since 2013, consistent with the recent slowdown in house price increases in the Eurozone.

Country Differences

Banks in the four largest Eurozone economies reported a net decrease in housing loan demand, which was particularly pronounced in Germany and France, where the net percentage of banks reporting a decrease was 93% and 90%, respectively, compared to the Eurozone average of 74%. In contrast, Spain and Italy had percentages of 20% and 45%, respectively.

The decline in consumer confidence and the general level of interest rates had a significant downward impact in all four countries, explains the ECB, specifying that housing market prospects had a notable negative effect on mortgage demand in France and Germany, a lesser negative impact in Italy, and no impact in Spain.

Additionally, the central bank warns that, in the first quarter of 2023, banks expect another sharp net decline in housing loan demand, with an estimated percentage of 49%, lower than the figure for the fourth quarter of 2022. On the credit supply side, Eurozone banks reported a strong net tightening of credit standards applied to home loans and consumer credit.

The institutions attributed this development to increased risk perception combined with lower risk tolerance, higher cost of funds, and balance sheet constraints. This marks the fourth consecutive quarter in which both risk perception and risk tolerance have had a stricter impact.