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How can the mortgage market grow?

Economist discusses mortgage lending as it is set to hit decade low growth



By Jake Carter

27 Nov 2023


Mortgage loans are expected to rise just 1.5% in 2023 and 2% in 2024, representing the lowest growth in a two-year period for a decade, according to the EY ITEM Club Outlook for Financial Services.


So, how can growth be encouraged in the market, what support is needed and what is the long-term outlook?


How to stimulate growth in the mortgage market?

Alberto Matellán (pictured), chief economist at MAPFRE Inversión, said from a demand point of view, the easiest way to make a credit market grow, and in particular that of mortgages, is to reduce interest rates.


However, Matellán said this is a relatively direct mechanism, so it might lead to unstable situations over the long term, for example driving up excessive demand and incentivising a relaxation of risk controls.


“It also tightens banks’ margins, driving them to engage in other activities to keep up with profit expectations, like reducing risk standards,” he added.


For more solid long-term growth, Matellán said, what is needed is household income growth based on productivity.

“This way, households may be able to afford buying new houses; similarly, house building might become a more profitable business with new projects arising,” he said.


What seems paradoxical, though, Matellán said, is that to regain sustained long-term growth we need positive and stable real rates in order to have a proper distinction of suitable investment projects. Achieving growth thanks only to very low rates, Matellán added, might be deceiving over the long term.


“From the point of view of the supply, such as banks, a suitable way to increase it is to reduce risk/default rates or increase the value of collateral,” he said.


This, Matellán said, improves margins without having to move interest rates; in this sense, he believes the above reasoning holds as well.


“Reducing interest rates induces margin decline, and does not improve long term growth, whereas too high rates reduce demand,” he said.


Thus, Matellán believes, it is better to seek supply growth tools over interest rates. He added that healthy productivity-based growth is the best way to achieve it, since it also reduces risk by increasing income and collateral values.


What support is needed to prop up the market?

Avoiding further regulation as it is already tight around banks, Matellán believes, may help in propping up the market. Further regulation implies more costs than a real reduction of risk, he suggested.


“Of course, systemic risk must be controlled; that is, trying to avoid an excess relaxation of standards, but, in my opinion, that can be achieved by increasing margins enough for credit providers to not need to fight desperately for each loan,” he said.


Moreover, Matellán added that any economic policy that improves solid, stable, long-term growth is best for the mortgage market.


What is the outlook for the mortgage market overall?

Long-term growth, Matellán said, is likely the best determinant of the evolution of credit markets, although in the short term, causality is often the opposite.


“In this sense, there are positive and negative factors; among the former, we can find technological advances like AI, or increases in productivity that are arising in several sectors both in Europe and in the US,” he said.

Meanwhile, the latter, he added, is mainly about a lack of investment nowadays, as well as demographic trends.

“However, on average, I am optimistic, as, historically, technological changes have almost always helped overcome other difficulties,” he said.


A smoother period, Matellán said, looks set to begin shortly, as interest rates have begun to decline, so the market could return to more normal activity in the near term future.


“Beware of lowering interest rates too soon though; although that could foster activity, it might pose some problems for long-term growth,” he added.


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