European banks set for slowest mortgage lending growth in decade

Stay informed with free updates

Simply sign up to the European banks myFT Digest — delivered directly to your inbox.

European banks are on course to record zero growth in mortgage lending for the first time in a decade this year because of high interest rates, but a recovery is expected from 2025.

Borrowers have been put off taking out new mortgages in the Eurozone over the past couple of years as the European Central Bank raised interest rates to record levels after an extended period of negative rates.

Mortgage lending in the Eurozone is expected to show no growth at all this year, down from 4.9 per cent growth in 2022, according to an EY analysis of data from the European Banking Authority and national banks in Germany, France, Spain and Italy.

The previous lowest growth rate was 0.2 per cent in 2014.

“The housing market continues to be the most impacted, with flat growth this year, but as living and borrowing costs come down, homebuying, as well as the demand for credit from both consumers and businesses should pick up again,” said Omar Ali, global financial services leader at EY. 

The consultancy expects mortgage lending to recover from 2025, with 3.1 per cent growth, and rise to 4.2 per cent the year after as borrowing costs fall and inflation slows, easing some of the pressures on the housing market.

The ECB raised its main interest rate from 0 per cent in 2022 to a record high of 4 per cent in September last year, following similar moves by the Bank of England and Federal Reserve to try to address rising inflation.

In June, the ECB cut its main rate to 3.75 per cent and is expected to make further cuts in the months ahead as inflation eases.

Mortgages account for almost half of total lending in the Eurozone, although other forms of credit have also been affected in recent years.

Business lending shrank 0.1 per cent last year and is expected to be up just 0.5 per cent this year. But EY has forecast growth will reach 4.2 per cent in 2026, with strong growth in France and Germany.

Consumer credit growth is expected to rise from 0.9 per cent this year to 4.2 per cent in 2026.

EY forecasts that while banks will make slightly bigger losses from unpaid loans, they do not present a serious risk to the lenders. Non-performing loans are expected to rise from 2 per cent of all loans this year to 2.3 per cent in 2025 and 2026, but still way below their peak during the Eurozone debt crisis in 2013 of 8.4 per cent.

“As the economic environment improves, banks will be able to shift their focus more heavily to their growth and transformation agendas, to support longer-term success,” Ali said.