The Impact of Negative Rates on Housing Markets in the Euro Area

According to information compiled by the European Mortgage Federation, the total amount of mortgage debt outstanding across the 19 countries in the Euro Area, those that have adopted the common euro currency, reached €4.46 trillion in 2014, an increase of €30 billion, 0.7%, from its level in 2013, €4.43 trillion. Despite a financial crisis that was global in impact, total mortgage debt has expanded at least since 2004.

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However, the chart also shows that the growth in the euro value of mortgage debt has slowed significantly. Between 2004 and 2006, annual growth in mortgage debt averaged 9.9%, exceeding 10% in each of 2005 and 2006. However, beginning in 2007, the annual growth rate trended downward and by 2013, growth in mortgage debt reached 0.1%. In 2014, mortgage debt ticked up to 0.7% but remains below the rates recorded over the 2004-2006 period.

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Various countries, over different periods of time, have contributed to the slow growth in mortgage debt. For example, Figure 2 above illustrates that mortgage debt in Germany remained relatively flat until 2011, when it began to record stronger increases. Mortgage debt in Italy and Ireland have been generally flat since 2011. Meanwhile, mortgage debt in France has been rising over the entire period. However, mortgage debt in Spain, which nearly equaled the euro value of mortgage debt in France between 2004 and 2009, remained generally flat between 2008 and 2010 before recording a sustained decline.

In response to moribund economic activity, including the slowdown in the growth of mortgage debt, the European Central Bank (ECB) lowered its deposit facility rate to below 0% in 2014. Recent ECB survey results indicate that the slightly negative policy rate has had a positive impact on mortgage lending volumes, in particular to household loans for a house purchase. Survey results indicate that the negative deposit facility rate has decreased lending rates for the purpose of a house purchase and increased lending volume. However, non-interest rate charges have also increased.

According to the ECB, the central bank of the 19 European countries that have adopted the euro, the deposit facility rate is one of the three interest rates the ECB sets every six weeks as part of its monetary policy. The rate defines the interest banks receive for depositing money with the ECB overnight. In theory, a negative interest on bank deposits with the ECB should force banks to instead lend the money to households and businesses and receive a positive rate of return.

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The results are obtained from the April 2016 iteration of the ECB’s Euro Area Bank Lending Survey, the ECB’s version of the Federal Reserve Board’s Senior Loan Officer Opinion Survey. Like the Federal Reserve Board’s Senior Loan Officer Opinion Survey, the ECB’s Euro Area Bank Lending Survey asks banks about their view of recent developments in credit standards, terms and conditions, and net demand for loans, but their geographic focus is the Euro Area. In addition to the standard set of questions posed every quarter, the Survey may also include ad hoc questions meant to obtain additional information about specific financial circumstances or situations. In the April 2016 iteration of the ECB’s Euro Area Lending Survey, covering the first three months of 2016, banks were asked for the first time about the impact of the ECB’s negative deposit facility rate on a menu of bank products and operations, including bank loans to households over the past six months for a house purchase.

The results are shown in Figure 3 above. As illustrated by the chart, 48% of banks on net reported that the ECB’s negative deposit facility rate has decreased mortgage lending rates as 2% reported a decrease but half reported an increase. Similarly, 32% of banks on net reported that the negative deposit facility rate led to a decline in loan margins, the spread of the bank’s lending rates over a relevant market reference rate, and 16% of banks on net reported that the volume of lending for household purchase had increased because of the negative deposit facility rate. However, these gains in mortgage lending were partially offset by the 9% of banks on net reporting that the negative deposit facility rate led to an increase in non-interest rate charges.

The analysis above sheds light on one potential impact of a negative policy rate on the housing market. In the case of the Euro Area, the balance of evidence to date suggests that a slightly negative policy rate has supported mortgage lending and, all else constant, incoming data from the European Mortgage Federation on the amount of mortgage debt in 2015 and 2016 should confirm the positive impact of a negative interest rate policy. However, country-analysis should ensure that countries with flat or contracting amount of mortgage debt should also benefit from the ECB’s policy position.

In recent quarters, the United States has registered subpar economic growth. However, despite slower than expected economic growth, a negative interest rate policy in the United States is not imminent. Chair Yellen, while not ruling out the use of a negative policy rate absolutely, has been clear that if used, negative interest rates would be adopted as a last resort.



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