According to the latest EU Bank Lending Survey of the ECB, demand for housing loans in 2023 will experience a similar drop as it experienced during the 2020 COVID outbreak and the 2008 financial crisis.

The general level of interest rates, lower consumer confidence, and deteriorating housing market prospects are driving the net decrease in housing loan demand.

Table 1 - Demand for house loans (net % of banks reporting an increase in demand)

Source: Bank Lending Survey

Learning from the past: a smooth and quick recovery on the way?

The market drop of 2022 and -forecasted- for 2023 resemble those of 2008 and 2020 (Covid), where we’ve seen a 50% cut in mortgage volumes. A steady recovery followed both those crises. Just over a few quarters, demand was back to pre-crisis levels.

Can we predict the future by looking at the past? Can we expect a similarly quick and smooth recovery in late 2023?

Our answer is no. Why? Because there is a big difference between the 2008/2020 crises and today: the inflationary and interest climate. In 2008, the monetary lever came into wide application to stabilize the economic contraction. Interest rates plunged. The Euribor alone dropped by almost 500 bps in just a year (from 5.1% in October 2008 to 0.4% on Oct. 2009). As consumer confidence built back, the low cost of borrowing drove a quick loan market recovery.

Similarly, the low-interest climate was an important factor behind a smooth recovery after the COVID outbreak. According to the ECB’s Lending Survey,  the level of interest rate was in fact the most important factor behind quick recovery (see Table 2).

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Table 2: Focus 2020 - demand for house loans and contributing factors (net % of banks reporting an increase in demand/ )

Source: Bank Lending Survey

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Today, we have a very different outlook… Yes, consumer confidence is (again) shaken. Yes, the housing market prospects are (again) negative - house price growth has been slowing down. But interests aren’t low anymore. Interests are record high - the highest since 2008. As reported by the Lending Survey, interest rates are now the single most important factor behind house loan drop (see Table 3).

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Table 3: Focus 2022 - demand for house loans and contributing factors (net % of banks reporting an increase in demand/ )

Source: Bank Lending Survey

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What would it take to enjoy the quick recovery we have had in the past?

Recovered consumer confidence and a better house market outlook - possible with a stabilized inflation and growing (albeit slow) economy. But also near-zero to negative interest rates. Something that, with the current inflation climate and ECB policies, we can hardly expect for the next one to two years.

What kind of recovery can we expect? A consistent but slow one. Where more confident consumers will demand house loans again. But they will do it in a more “cautious” way. House loans won’t be anymore the “almost free” cash they were in 2009 or 2020. They will be a costly commitment for the borrower.

Essential initiatives for a resilient European mortgage business

Will 2023 be a “lost year” then? Should lenders endure and wait?

Our answer is no. European lenders have the opportunity to build a resilient business model by taking advantage of the current market dynamics… Resilient businesses prepare in difficult climates to thrive in flourishing ones.  

How? We see five initiatives behind a genuinely resilient business:

• Develop economies of scale: spread your fixed operational costs over more volume. First, we expect in the coming years to see more consolidation and M&A activity in the mortgage business. Especially on the (mortgage) broker side, where there are still smaller structures, cost advantages will be created.
• Work on partnerships: spread investments across the industry
  In times of crisis, each mortgage business should decide its competitive advantage and what’s not. Partnering on non-core activities can drive cost down. This foundation can have many outcomes, from cross-channel platforms to affordability assessment technologies.
• Make your cost structure variable: Reduce total costs by transforming from fixed to variable cost structure. Again, there can be a multitude of outcomes. For example, lenders can assess their distribution costs and transform from a fixed cost distribution (through a branch-based network, …) to a more variable cost distribution model (brokers, technology platforms, lead generators, …).
• Optimize your processes: reduce your fixed costs by building better more efficient processes. Loan origination and assessment processes have high margins for improvement. For example, first-time-right applications are only 65% in Europe. In other words, for every 10 applications received, your mortgage expert will have to assess 3 dossiers at least twice. Applying the right technologies can reduce this number to 1 dossier.
• Omnichannel PoS models: Expand your touch points to make the “pie” bigger. Allows a mortgage business to have access to a steady flow of demand using a mix of Lead Generators, Service Centers, Direct Online and Brokers, … Targeting the niches that provide competitive advantage allowing you to switch channels quickly when new learnings come in.

Digitize to build a resilient mortgage business

Digital transformation is the ultimate enabler of the “resilience initiative”. Mortgage businesses that have invested in digital transformation will have the upper hand in this climate. The ones that haven’t will be forced to do so now.

• Pay per use: In a downturn, Cloud and SaaS infrastructure can make your cost structure variable and significantly improve performance. Early analysis has shown that pay-per-use models can increase margins by 30%.
• Cross-channel communication: a flexible distribution model, where brokers, branches, and digital DTC coexist requires digitalized applications and instant two-way communications for effective deployment.
• Digital affordability check: Data provided through open banking and open finance can help you assess credit affordability better and more efficiently. For example, integrating digital smart pre-approval in the application phase can greatly increase the quality of your files.
• Develop ecosystems and standards: During an economic downturn, it is essential to develop alliances that allow the sharing of costs. By implementing shared standards on data exchange and ecosystems for Know-Your-Customer and Property Data exchange, development costs can be lowered and adoption can be increased. This is especially important for topics that will become a commodity over time. By doing so, you can maintain margins and focus on competitive advantages.

Never waste a good crisis. The current climate can be extremely welcoming to develop better ways of running your mortgage business. Leading to sustainable effects for the future when markets go up again.

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Authors: 
‍Geert Van Kerckhoven, CEO at Oper

Andrea Brusoni, Strategic Projects Lead at Oper

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