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The European mortgage market is poised for its most sluggish expansion in a decade due to diminished economic growth and escalated borrowing expenses, causing a reduced appetite for loans. 

EY’s annual European Bank Lending Forecast report indicates that the mortgage market is forecasted to grow merely by 1.5% this year and by 2.4% in 2024, in contrast to the 4.9% growth observed last year. The downward trend is attributed to multiple factors, including soaring interest rates, which reached a record eurozone high of 4% in September, and continuously elevated inflation, both dampening enthusiasm for mortgages. 

Omar Ali, EY’s financial services managing partner for Europe, the Middle East, India, and Africa, shed light on the prevailing challenges, stating, “The housing market is taking the biggest hit. For households across Europe, high living and borrowing costs mean fewer people are buying houses, which means mortgage lending is falling to the lowest level in a decade”. 

The European Central Bank’s string of 10 successive interest rate hikes, commencing from an all-time low of minus 0.5% in July 2022 to combat rampant inflation, has led to a contraction in eurozone bank lending this year. Despite holding rates at 4% since September, the ECB is anticipated to delay rate cuts until the latter half of the following year, as predicted by investors. 

While the U.K. housing market has begun to rebound after experiencing declines in prices and sales during the summer, the eurozone remains behind in the interest rate cycle. 

EY’s recent European Bank Lending Forecast report, released on Monday, points out the severely impacted housing markets in the eurozone, particularly Germany, and the tightening lending standards imposed by certain banks, contributing to a reduction in both demand for and availability of mortgages. 

Nigel Moden, EY’s banking and capital markets leader for EMEIA, emphasized the strain experienced by Europe’s economy and its supporting banks amidst rising interest rates and geopolitical tensions. He noted that despite these challenges, the capital buffers accumulated by European banks over the past 15 years have significantly enhanced their readiness to withstand a mortgage market slowdown, contrasting the aftermath of the global financial crisis. 

Looking ahead, while anticipating a short-term deceleration in bank lending growth, Moden expressed optimism about a gradual recovery in the future. He indicated a foreseeable slow yet steady economic and lending volume improvement, provided there are no major unforeseen challenges. 

EY’s projections suggest that Europe’s mortgage market is expected to grow by 3.3% in 2025 and 3.2% in 2026. However, in a broader perspective, lending across European banks is forecasted to expand by only 2.1% in 2023, down from the 14-year high of 5% observed in the previous year. 

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