"European Central Bank": Sharp Decline in Mortgage Loan Demand Amid Rising Interest Rates

A survey conducted by the European Central Bank (ECB) revealed a sharp decline in demand for mortgage loans in the euro area during the three months ending in September, as interest rates rose and credit conditions tightened. The ECB’s quarterly Bank Lending Survey showed the tangible impact of monetary policy tightening, which began in June, amid a surge in euro area inflation driven by the war, and is expected to persist in the coming months, according to Reuters.

Nineteen percent of the banks surveyed reported a drop in demand for residential loans during the third quarter, a decline larger than expected; banks had anticipated a 12 percent decrease. The drop also exceeded the 15 percent decline recorded in the previous quarter.

In a statement, the ECB said that “higher interest rates were the main factor behind the decline in demand, followed by falling consumer confidence and deteriorating expectations for the housing market.” Banks did not tighten lending standards for mortgages during the third quarter, but they did so for corporate loans and consumer credit. Banks expect to tighten lending standards for all types of loans during the last three months of the year.

France, at the heart of turmoil in bond markets linked to public finance conditions, was the largest European economy to see a noticeable tightening of lending standards. The ECB clarified that “rising concerns about risks and banks’ reduced willingness to bear them remained the main drivers behind the tightening of credit standards, while some banks pointed to increased pressures stemming from geopolitical uncertainty and developments in the energy sector.”

Regarding artificial intelligence, most banks reported that they have not yet adopted quantitative criteria for assessing loans related to AI, while a limited number indicated that such factors are increasingly important within qualitative assessments of credit applications.