Stay informed with free updates
Simply sign up to the Property sector myFT Digest — delivered directly to your inbox.
Demand for loans has increased from households in the Eurozone for the first time in two years as consumers react to falling house prices, lower borrowing costs and rising confidence in the economy.
The European Central Bank said “improving housing market prospects” — particularly in Germany, Europe’s biggest economy — were the main driver of the rebound in demand for mortgages and consumer credit, according to its quarterly survey of banks released on Tuesday.
The rebound in household loan demand gives support to the Eurozone economy’s tentative recovery but a pick-up in borrowing could also help to keep inflation high, increasing policymakers’ caution on interest rate cuts.
The ECB, which is expected to keep rates on hold this week after starting to cut them last month, has identified the extent to which bank lending is restricted by higher borrowing costs as one of the big factors that will determine the pace of monetary policy easing.
“If more evidence of stronger than expected loan demand emerges, the governing council may have to hold policy rates or cut at a much slower pace than markets expect,” said Tomasz Wieladek, economist at investor T Rowe Price.
Swap markets are pricing in two more quarter-percentage point cuts in the ECB’s deposit rate of 3.75 per cent before the end of this year.
Claus Vistesen, economist at consultants Pantheon Macroeconomics, doubted that a pick-up in household borrowing would be enough to deter the ECB from cutting rates in September and again in December. But he added: “A firming credit cycle chimes with our view that the ECB will cut less than markets expect next year.”
The ECB survey showed that loan demand from businesses continued to fall for the seventh consecutive quarter because of reduced investment activity and higher rates on corporate loans.
Banks slightly eased terms and conditions for household loans in the second quarter, while tightening them for businesses — particularly on commercial property loans, it said.
But it found that banks expected loan demand to rise from both household and corporate borrowers in the third quarter.
The increased demand for mortgages was particularly strong in Germany, it said, adding this was “consistent with improvements in housing affordability due to a relatively strong decline in residential real estate prices in recent quarters”.
German house prices fell 8.4 per cent last year, one of the biggest drops in the Eurozone, where prices on average declined 1.1 per cent from the previous year.
There have recently been signs of a stabilisation in parts of the Eurozone housing market. Residential property prices fell at a quarterly rate of 0.1 per cent in the first three months of this year — a slower decline than the 0.8 per cent drop in the previous quarter.
The ECB said the pick-up in demand for mortgages also reflected falling borrowing costs — as banks lowered borrowing rates in anticipation of rate cuts this year — and improved consumer confidence.
A composite indicator of mortgage rates across the Eurozone compiled by the ECB has fallen from 4.05 per cent late last year to 3.75 per cent in May.
