Last year was another difficult one for the industry as the economic crisis continued to weigh heavily in Europe and beyond.
To recap, the European mortgage industry, which had seen double-digit yearly growth from the mid-1990s until the onset of the crisis, has faced a slowdown from a still very positive 8 per cent in 2007 to -1.2 per cent in 2008, a modest recovery of 0.9 per cent in 2009, 4.8 per cent in 2010, 1.9 per cent in 2011 and 2.8 per cent in the first half of 2012.
Of course, this general downward trend translates very differently across the 27 EU member states. Countries such as Belgium, Germany and Sweden managed to maintain pre-crisis levels of growth. By contrast, others such as France and the Netherlands have seen a significant slowdown, while a few, like Greece and Ireland, have witnessed negative growth figures for several years.
Between the first half of 2007 and the first half of 2012, Ireland saw a fall in gross residential loans of 94 per cent. In Portugal, it was close to 90 per cent for the same period while Spain saw more than 82 per cent, the UK 62 per cent and Hungary over 60 per cent.
In the housing market, after an average increase of more than 9 per cent over the 2002/08 period followed by a contraction of almost 6 per cent in 2009, nominal house prices developed heterogeneously across the EU between 2010 and the first half of 2012, with three broad trends appearing.
First, some markets registered noticeable growth such as Belgium, France and Germany. In Poland, Portugal, Sweden and the UK, nominal house prices stagnated. Finally, nominal house prices registered marked declines in Denmark, Hungary, Ireland, the Netherlands and Spain.
At the same time, the share of mortgage-covered bonds in the funding of EU mortgage credit has grown steadily in parallel with the drying-up of the securitisation market and increasingly difficult access to funding via savings deposits. This has been fuelled by growing acknowledgement within the market and among stakeholders of the instrument’s high level of security and its resilience throughout the crisis. In turn, this has led the covered bond industry to commit to increased transparency and security through the launch, in January 2013, of the covered bond label.
While it is difficult to question the severity of the industry’s present situation, it nonetheless seems that the European institutions do not fully grasp the extent of the potential damage that it could inflict on the European economy in general, as well as on its citizens.
Indeed, although all agree that measures need to be taken in the banking sector to bring increased stability and improved resilience to future economic challenges, and all support the principles behind the proposed new EU regulations, the unintended effects of such proposals must be thoroughly assessed if we are to avoid a worsening of the already difficult circumstances.
The banking union and crisis management initiatives are steps in the right direction towards the building of a true European structure for financial services, as are the Capital Requirements Directive/Capital Requirements Regulation proposals – commonly known as CRD/CRR IV – and the regulation on credit rating agencies. But as always, the devil is in the detail – and in the current case these are sometimes major details to contend with.
The first and perhaps most general concern is that of the preservation of the EU financial sector’s competitiveness vis-à-vis the US in a context whereby it appears ever clearer that the US’ eventual implementation of Basel III will be significantly delayed. And bear in mind that the US never implemented Basel 2.5. Furthermore, if Basel III is implemented in the US it will be limited to around 20 of the biggest US banks.
By contrast, through CRD/CRR IV, Basel III will apply to thousands of European banks, and there is the additional downward pressure of the EU banking model which implies that banks have much more significant balance sheets and therefore much higher exposure to CRD/CRR IV’s capital requirements and leverage ratio.
Indeed, even if Basel III was fully implemented in the US, the EU banking system would still be at a significant disadvantage.
The CRD/CRR IV provisions will have a greater impact in terms of the number of banks having to implement them, the effect of the increased risk weightings applied and the newly established leverage ratio on much bigger balance sheets. This is due both to the fact that mortgages funded through savings deposits and covered bonds remain on balance sheet, as well as to the liquidity requirements.
In summary, as they currently stand in the CRD/CRR IV proposals, the above measures would handicap the existing low-risk, long-term European business models despite their demonstrated efficiency and resilience during the crisis.
They would also lead mortgage lenders to arbitrage in favour of more risky models for the sake of reducing their balance sheets, not precluding widespread moves to deleverage and make severe cuts in their lending policy, evidence of which is already visible.
Against this background, the mortgage credit directive – or to give its full name, the Directive on Credit Agreements Relating to Residential Property – adds yet another layer of legislation which will have a significant impact on lenders’ activities at this difficult time.
To a certain extent, it will result or has already resulted in a disproportionate shift of liability onto lenders and, as a consequence, to a strengthening of lenders’ underwriting criteria and the limitation of EU citizens’ access to mortgage credit and, therefore, homeownership.
As such, it is time for authorities at both national and European levels to clarify their position as they cannot, on the one hand, promote the advantages of homeownership in terms of stability and, on the other, adopt measures that will unquestionably limit access to it.
Some categories of prospective borrowers – such as first-time buyers, the self-employed and lower-income households – have already seen their ability to access mortgage credit greatly reduced and the risk is that this trend will increase in the coming years.
Both CRD/CRR IV and the mortgage credit directive are now in the midst of their respective Trialogue negotiations, which, as always, imply huge uncertainty over the final outcome and compromises between the European Parliament, Council and Commission.