Mortgage lending has created housing problems for many people, primarily young people and city-dwellers, according to a report by the European Central Bank (ECB) on the effects of stricter policies on housing loans in euro area countries. The study examines how mortgage lending tightening has led to rising rents and increased housing market inequality.
According to the conclusions, sudden changes, which led to limited household access to mortgage credit (both macroprudential supervisory measures on borrowers and interest rate increases) affect young people and low-income households. Not only can these shocks close the door entirely to homeownership, but they can also increase the rents that tenants have to pay, according to the ECB report. The recommendation to policymakers is to take into account these negative effects of the measures, which achieve their ultimate goal and ensure financial stability. According to experts, even supervisory measures can be adjusted, and fiscal authorities can correct their instruments to reduce the consequences.
Overall, the results highlight the multifaceted nature of the housing affordability crisis. In the long term, the excess profits that can be realized from the real estate and rental markets should stimulate construction activity and rentals, compensating for short-term fluctuations in credit activity. However, widespread barriers to increasing housing supply in many countries and cities could thwart this. As a result, credit restrictions could have an impact for a longer period – especially for younger or lower-income households, according to ECB analysts.
Specific consequences for vulnerable groups – they are forced to allocate more of their income to housing and move into smaller homes or increase travel time to work. Following the global financial crisis, stricter regulations were imposed on the housing market, and loan conditions were tightened, introducing limits on mortgage debts for banks or borrowers.
In Bulgaria, there was no direct effect from the ECB’s measures, but in October Bulgarian National Bank (BNB) recommended commercial banks to impose lending restrictions. So far, this has not led to significant changes in the real estate market, but statistics show a reduced growth in mortgage lending (see the chart). A few days ago, the The Economist magazine published an analysis of the problems with rising rental prices in developed countries. The publication points out that in some countries, the rental market has gotten out of control. At the same time, people paying off mortgages almost didn’t feel the changes in interest rates.
Central bank data shows that mortgage loans have the lowest share of non-performing loans (NPL) . Only 0.44% of mortgages in Bulgaria are overdue at the end of 2024. On average across the EU, this share is 1.4% and has remained almost unchanged for several quarters.
Although interventions have been successful in improving financial stability, which was their main goal, the ECB points out overlooked potential drawbacks. Wealthier borrowers may choose cheaper properties, but those, which are already seeking affordable, cheap properties, may find themselves completely excluded from the market. As a result, they stay on rent for a longer time, buying property later or not reaching a purchase at all. The final outcome of the changes is a shift from home ownership to renting and concentration of housing ownership among the wealthy. However, this does not affect overall house prices, but rather the distribution of wealth, according to the ECB. While reduced access to credit significantly lowers welfare, higher rents have an even greater negative effect on the welfare of low-income households. In contrast, households that already own their homes are largely unaffected by the reform, while landlords profit.
Interest rate increases lead to higher rental prices, lower house prices, and a reduced ownership rate. However, there are several important differences – higher interest rates make saving in financial assets more attractive than investing in housing. As a result, rents must increase even more to keep small investors in housing on the market. Second, higher interest rates also make saving for a down payment easier, although this effect is minimal. Third, this shock reduces the well-being of current borrowers if their mortgage has a variable interest rate, as well as that of potential borrowers. However, according to the ECB, macroprudential measures have an effect because house prices and rents react less strongly to higher interest rates if credit restrictions are in place.
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