European Mortgage Markets Face First Growth Halter in a Decade

European banks are facing the challenge this year of recording no growth in mortgage lending for the first time in a decade. Rising interest rates, elevated to a record level by the European Central Bank (ECB) after a prolonged period of negative rates, have discouraged borrowers in the Eurozone from taking out new mortgages in recent years. According to an analysis by EY, based on data from the European Banking Authority and national banks from Germany, France, Spain, and Italy, mortgage lending growth in the Eurozone will be zero percent this year – a significant decline compared to a growth of 4.9 percent in 2022. This marks the lowest growth since 2014, when it was 0.2 percent. “The real estate market remains the most affected, with stagnant growth this year. However, once living and credit costs decrease, both housing construction and demand for loans from consumers and businesses should rebound,” said Omar Ali, Global Head of Financial Services at EY. EY forecasts a recovery in mortgage lending starting in 2025, with a growth of 3.1 percent, which is expected to rise to 4.2 percent the following year. This is attributed to declining credit costs and easing inflationary pressures, which would reduce burdens on the housing market. The ECB had raised its main refinancing rate from 0 percent in 2022 to a record high of 4 percent in September of the previous year, mirroring similar actions by the Bank of England and the Federal Reserve to combat rising inflation. In June, the ECB lowered the main rate to 3.75 percent, and further cuts are expected as inflation subsides. Almost half of all credit issuance in the Eurozone is attributable to mortgages, but other forms of credit have also been affected in recent years. Corporate financing shrank by 0.1 percent last year and is expected to grow by only 0.5 percent this year. However, strong growth of 4.2 percent is forecast for 2026, especially in countries like France and Germany. Growth in consumer loans is expected to rise from 0.9 percent this year to 4.2 percent in 2026. EY anticipates that banks will have to absorb slightly higher losses from non-performing loans, though these will not pose a serious risk to the institutions. The rate of non-performing loans is expected to rise from 2 percent this year to 2.3 percent in 2025 and 2026, but this remains well below the peak of 8.4 percent during the Eurozone debt crisis in 2013. “With the improvement of the economic environment, banks will be able to focus more resources on their growth and transformation goals to support long-term success,” added Ali.