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      Party over for European homeowners
      TUESDAY, 09/05/2023 - Scope Ratings GmbH
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      Party over for European homeowners

      The uncertain economic environment continues to push European house prices lower. But challenges are also crystallising in net residential mortgage lending, which nosedived to almost zero in the half year to February 2023, only slowly reverting in March.

      By Mathias Pleissner, Deputy Head, Covered Bonds

      The magnitude and duration of the lending pullback is stunning and brings back memories to 2008 when housing markets went into shock as the Global Financial Crisis erupted. Most of the negative net flows have been seen in countries that suffered most during the GFC. Relative to the total stock of outstanding housing loans to households, Greece lost 1.5% in the year to March 2023 followed by Ireland (-0.9%) and Spain (-0.7%).

      Monthly flows of housing loans to European households

      Source: euro area statistics, Scope Ratings

       

      We do not see a swift recovery in the European housing market for most countries because affordability remains under pressure from rising interest rates, high inflation and general economic uncertainties. These factors are making house purchases unattainable for most European households.

      Spoiled by years of growth, the party is over for homeowners, borrowers and lenders alike. Average prices across Europe fell 0.9% q-on-q in Q4 2022, the first time that had happened in eight years. Around 60% of European countries saw home values decline in the fourth quarter of 2022; although not all ended the year in negative territory.

      In fact, only four countries saw full-year declines: the most severe in Denmark, followed by Germany, Norway and Sweden. While Nordic households are the most exposed to value corrections (see Structural mortgage risks expose European households to value corrections) because they are vulnerable to mortgage risks arising from affordability shocks and value declines, Germany’s position as the second worst performer was more of a surprise.

      This may have been partially driven by high uncertainties around utilities costs ahead of the heating season and in the face of the country’s dependency on Russian gas. Fears around escalating utilities costs impacted even more on households, which were already hesitant, to invest in property. Italy and the Netherlands also observed above-average declines in house prices, for the same reason.

      Covered bonds tested following CBD

      The situation exposes mortgage covered bonds to several risks. First and most obviously, from weakening credit quality resulting from higher defaults and decreasing property values. Lower property values may reduce recovery and by definition increase expected loss. Lower property values can also affect the over-collateralisation (OC) of covered bond programmes.

      In most legislation, mortgages are only eligible to provide cover to mortgage covered bond issuance up to a loan-to-value of 80%. If the LTV rises about the cap, that portion of the mortgage securing the covered bond becomes ineligible. Issuers may have to provide additional cover in the form of new mortgages or substitute assets if they want to maintain a constant OC level.

      Further OC constraints may be driven by lagging supply of eligible mortgages. After nine years of increasing mortgage stocks, declining new business is reducing the stock covered bond managers can dispose of.

      Access all Scope rating & research reports on ScopeOne, Scope’s digital marketplace, which includes API solutions for Scope’s credit rating feed, providing institutional clients access to Scope’s growing number of corporate, bank, sovereign and public sector ratings.

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