Euro zone mortgage demand drops as ECB tightening raises borrowing costs
Higher borrowing costs and tougher credit conditions are weighing on euro zone home lending as the European Central Bank's policy tightening feeds through to banks and households. Demand for mortgages falls sharply in the three months to September, while lenders expect standards for all major loan categories to tighten further in the final quarter of the year.
Highlights
- A net 27% of euro zone banks reported declining housing loan demand in Q3, sharply worse than the expected minus 12% and previous minus 15%.
- ECB attributes the drop in mortgage demand to rising interest rates and notes French banks face the most pronounced tightening amid bond market turmoil.
- Banks kept mortgage lending standards flat in Q3 but plan to tighten all lending criteria in Q4, citing geopolitical risk and energy concerns.
Bank survey shows deeper housing loan slowdown
As reported by Reuters, citing the European Central Bank, a net 27% of banks report a decrease in demand for housing loans in the third quarter, a steeper drop than lenders had expected at minus 12% and worse than the minus 15% reported in the previous three months.The ECB says rising interest rates are the main driver of the decline, followed by weaker consumer confidence and worsening housing market prospects. Its quarterly Bank Lending Survey shows the tangible effect of the central bank's tightening cycle, which starts in June and is expected to continue for months in response to a war-driven surge in euro zone inflation.
Banks do not tighten standards for granting mortgages during the quarter, although they do raise the bar for corporate loans and consumer credit. Lenders say they expect to tighten standards for all types of lending in the last three months of the year.
Credit conditions tighten across major markets
France is the large European country where the tightening is most pronounced, as its public finances remain at the centre of bond market turmoil.The ECB says heightened risk perceptions and reduced risk tolerance remain the main drivers of tighter credit standards, with some banks also reporting increasing pressure from geopolitical uncertainty and energy developments.
On artificial intelligence, most banks say they have not yet introduced quantitative criteria for assessing AI-related lending. Only a small number say AI is increasingly featuring in their qualitative assessment.
In our earlier article on Europe’s uneven growth outlook and credit conditions, we noted that the IMF’s latest forecasts pointed to a fragmented recovery—stronger momentum in Germany, the UK, and Spain, but continued weakness in France. We also highlighted how persistent inflation, tight fiscal room, and shifting trade patterns were shaping risk sentiment and borrowing conditions across the region.
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