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Switching underpins UK's dominance of European mortgage market

5th June 2006
By BBR Staff Writer

The UK accounted for a third of new lending in the western European residential mortgage market in 2005, way ahead of the rest of Europe. Indeed, France, the next biggest market, is only a third the size of the UK. Very high switching rates in the UK and further advances have been major factors behind this market's surging growth.

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European mortgage markets have performed exceptionally well in recent years, and this solid performance continued in 2005. Rapid house price growth, high demand for housing and increased competition have pushed mortgage markets onwards. Indeed, as a whole, residential mortgage lending has grown by 13.6% per year on average over the past five years. Best performers include Turkey (+240% CAGR), albeit from a very small base, followed by Finland (+32.3% CAGR), Ireland (+28.0% CAGR), and Belgium (+27.2% CAGR), which has benefited from strong growth in remortgaging activity. In contrast, the gross lending in the German mortgage market has fluctuated in recent years. In 2005 it is estimated that new lending fell to just E89.6 billion, from E113.9 billion in 2004.

Growth rate in the UK is slightly below European average, at 12.3% per year on average over the last five years, but still accounts for a third of new lending in the western European residential mortgage market. Remortgaging and further advances have been major factors behind the growth of the UK mortgage market.

Indeed, intensive price competition and increased tendency for savvy mortgage customers to shop around have boosted remortgaging activities. Moreover, homeowners have seen a substantial increase in their home equity and many have been encouraged to withdraw equity to finance various projects such as home improvement activities, debt consolidation, paying for holidays or buying a car. In 2005, remortgaging accounted for 41% of new lending. Remortgaging also accounts for a notable share of new lending in Netherlands, France and Ireland, at an estimated 43%, 40% and 20% respectively.

Mortgage gross advances in Germany are considerably below expectations given the size of the market. German consumers tend to take out mortgages much later than consumers in other markets and remortgaging is rare. In terms of outstanding balances, however, only Germany has a mortgage market to rival the UK.

In the last five years, home prices have risen in all countries reviewed, and especially in Spain, the UK, France and Luxembourg. Demographic pressures on demand, such as a reduction in average household size, growth in single households, higher divorce rates and people getting married later in life and limited housing supply in some countries have driven European house prices upwards. In addition, growth in owner-occupancy as a result of cultural trends and, in some countries, generous government initiatives and regulations have encouraged home ownership.

The underlying drivers of the housing market were still very much present in 2005, suggesting that house price inflation will continue in most European countries, but Datamonitor expects a slowdown in most markets over the next five years, while the focus of future house price growth will move to newest members of the EU.

Some markets will not fare so well. House prices have already stalled in a few markets, most notably in the UK and Greece and there are mounting fears that house prices are overheated in others. The greatest concerns are for the future stability of the French, Spanish, Dutch and Irish housing markets. All four have seen rapid house price growth in recent years and there are fears that this could be speculative.
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