Her reduced demand for mortgages, which was further burdened by the ECB’s aggressive interest rate hike policy, highlights the Financial Stability Report of the Bank of Greece. At the same time, the Central Bank points out that the biggest increase in interest rates occurred in long-term housing loans.
In more detail, the data of the central bank show that its annual rate of change of household financing by domestic Monetary and Financial Institutions (MFIs) remained negative both in 2022 and throughout 2023 (September 2023: -2.3%).
More specifically, the annual rate of change of mortgage loans remained negative (September 2023: -3.7%), while from March 2022 the annual rate of change for consumer loans became positive (September 2023: 2.6%).
At the same time, financing to households from domestic MFIs as a percentage of their gross disposable income rose to 27% in March 2023, from 28.1% in December 2022.
According to her results of Bank Grants Researchfor housing loans a temporary increase in demand was reported in the second quarter of 2023 and a decrease in demand in the third quarter of 2023. At the same time, credit institutions reported that the demand for consumer and other loans remained almost unchanged during 2023.
On the loan supply side, it is observed that the overall terms and conditions of granting new loans remained almost unchanged in 2023. Also, the rejection rate of consumer and other loans showed a slight decrease in the first quarter with stabilization in the second and third quarters of 2023, while the corresponding rate for housing loans as a whole did not show a noticeable change.
2.2% explosion in mortgage rates over five years
THE increase in key ECB interest rates from July 2022 onwards, it gradually affected domestic bank rates. The average interest rate on outstanding balances of loans to households increased by 207 basis points (September 2023: 6.1%, July 2022: 4.0%), reflecting the tightening of monetary policy in the euro area.
This increase was more noticeable in long-term mortgages. In particular, the average interest rate on existing mortgage loan balances with a duration of more than five years increased by 226 basis points (September 2023: 4.4%, July 2022: 2.2%), while on mortgage loans with a duration of between one and five years increased by only 127 basis points (September 2023: 5.2%, July 2022: 3.9%).
Correspondingly, the increase in the average interest rate on the existing balances of consumer and other loans to households was structured according to the duration of the loan (69 basis points for loans with a duration of up to one year, 118 basis points for loans with a duration of more than one year and up to five years, and 170 basis points for loans with a duration of more than five years old).
The interest expenditure as a percentage of average gross disposable income of households showed a significant increase for housing loans in 2023 due to the increase in interest rates on existing loans, while they remained almost unchanged for consumer and other loans. However, the average annual balance of loans to households as a percentage of their average gross disposable income decreased further thanks to the decrease in the average balance of loans to households and the increase in the average gross disposable income of households.
Reduction of bad loans
However, maintaining inflation at an even higher levelcombined with increased key interest rates and a slowdown in economic growth, is testing the resilience of households and businesses and may contribute to the creation of new non-performing loans (NPLs).
The banks’ NPL ratio in total loans decreased marginally (June 2023: 8.6%, December 2022: 8.7%). It is noted that all four major banks have now achieved their operational target of a single-digit NPL ratio, with one of them being below 5%. However, actions aimed at consolidating the remaining NPL stock and achieving convergence with the European average (June 2023: 1.8%) should continue.
Increase in income
The evolution of households’ disposable income is a key determining factor for the ability to service their loan obligations. According to the most recent data of the quarterly non-financial accounts of the institutional sectors prepared by the Hellenic Statistical Authority (ELSTAT), the nominal disposable income of households increased by 11.3% in the first quarter of 2023 on an annual basis, while the real disposable income income increased by 5.8% as a consequence of inflation. The increase in the nominal disposable income of households in the period in question is mainly attributed to the positive contribution of self-employed income, the significant rise of which can be attributed to the recovery of economic activity and possibly to the pass-through of high inflation to the prices of self-employed services. The contribution of dependent labor income was also positive, the rise of which is attributed primarily to the increase in employment and secondarily to the rise in dependent labor wages per employee.
Alongside, the labor market continued to improve with the unemployment rate falling to 10.0% in September 2023. Also, a positive development is the reduction in the unemployment rate of young people aged up to 24 to 19.4%