European mortgage markets.

• Author: Franscini, Mathilde

Mortgage lending is a growth industry in Europe. The volume of mortgage loans outstanding in the EU and Norway has increased at a remarkable rate, more than doubling (in nominal terms) over the period 1988-1998, and amounting to around EUR 3 tn at the end of 1998, representing 33% of European GDR The external source of funding of mortgage credit is split between retail markets and the wholesale capital markets. In other words, the funding vehicles can either be classified as "specialized" referring to mortgage bonds and MBS, or as "general" referring to deposits (saving deposits and accounts) and other general funding (bank bonds, loans from other MFIs and insurance premiums).

1. THE ASSET SIDE

   1. Overview

      1. Mortgage market growth

         Mortgage lending is a growth industry in Europe. The volume of mortgage loans outstanding in the EU and Norway has increased at a remarkable rate, more than doubling (in nominal terms) over the period 1988-1998, and amounting to around EUR 3 tn at the end of 1998, representing 33% of European GDP.

         This important growth in the mortgage lending industry has been the result of a certain number of factors. Among them stand the technological advances (Internet as a growing distribution channel), the financial sector deregulation and a low interest rate level. The latter resulting from the countries preparing their economy for the introduction of the single currency. The consequent highly competitive environment led to a decrease in house prices and therefore stimulated the demand for new mortgage loans.

      2. Structural diversity

         Although this growth is globally very important, mortgage markets are structurally very different from each others; they retain strong national characteristics and their economic importance varies from one country to another.

         The largest markets in terms of volume outstanding are Germany, the United Kingdom, France and the Netherlands. The markets that have grown most during the period 1988-1998 are Portugal, Spain, Ireland and the Netherlands. In Denmark, the Netherlands, the United Kingdom and Germany, the volume of residential mortgage loans outstanding is equivalent to 50% of GDP or more, in contrast to other countries such as Italy, Greece and Austria, where it is equivalent to less than 10%.

         The large differences in size of the mortgage markets as a proportion of the national economy is mainly due to structural differences between countries: different types of lenders and consequently different types of product granted (e.g. duration of mortgage loans, type of mortgage interest rate and loan-to-value ratios). These structural differences are themselves the consequence of different political, historical and legal frameworks in which mortgage lenders operate. The differences across mortgage markets are also the result of differences in the property markets and in the construction industry. Furthermore, the general economic situation has also an important role to play. Despite economic convergence in Europe, there are still significant differences in the fundamental macroeconomic variables which in turn impact the development of the national mortgage markets.

      3. Residential vs. Non-Residential mortgage loans

         We can distinguish between residential mortgage loans and non-residential mortgage loans. Overall residential mortgage lending is significantly more important than non-residential mortgage lending. However this second type of activity still represents a relatively important segment of the EU mortgage markets and its share is steadily increasing. The volume of non-residential mortgage loans outstanding amounted to more than EUR 430 bn at the end of 1998 which represents 15% of the total volume of mortgage loans outstanding. Here again, this proportion only represents an average. Indeed, the significance of...