From the beginning of the global financial downturn, the observation of residential mortgage market drivers has been focused on their role in triggering the world crisis. Today, we want to analyze how the residential mortgage market could support the upturn and, consequently, how it could help to solve the present situation.

What is the impact of the global financial crisis on European residential mortgage markets? What differences between European countries come to light from investigating support and restraint factors of the development of European residential mortgage markets?

This study is part of the wide international debate about the global financial downturn and, as a first step, aims to provide in-depth analysis of residential mortgage market trends in some European countries. As a second step, the study will investigate the key variables of the residential mortgage supply with the goal of highlighting analogies and differences at cross-border level and pointing out some trends.

The survey draws on data on mortgage stocks from Quarterly Review - European Mortgage Federation (EMF) The countries observed are Great Britain, Germany, France, Spain, Italy and Poland. Analysis of the five main European markets was accompanied by the study of the Polish market, one of the most dynamic in recent years, as an example of the trends in developing mortgage markets.

The aim was to assess whether mortgage market trends can be explained by a model using as independent variables some of the main macro-economic variables: – Gross Domestic Product (GDP); – Population; – Unemployment rate; – Inflation rate; – Gross disposable income; – Household spending.

 The methodology applied consists of a non-linear stepwise forward regression model.  First, we analysed the period , and then the period , in order to isolate the effects of the economic crisis in the year 2008.

Great Britain GermanyFranceSpainItalyPoland N. of cases11 R²0, , , , , , adjusted R²0, , , , , , df2,84,62,84,63,75,5 F130,947813, , , ,883223,0240 P0, , , , Selected variables (BETA) GDP0,561-2,8001,100000,638 Population0-0,46002,1400,403-0,130 Unemployment rate000-0,1800-0,220 Inflation rate0-0,760-0,1600,097-0,0700 Disposable income000-1,3000-0,950 Household spending0,4544,480000,6391,040

 First of all, the analysis confirms that there are big differences between countries in terms of the relationships between the macro-economic variables and mortgage stocks.  We can also assess the degree of significance of each independent variable.

 We identified for each independent variable, the number of countries where the variable was “ very significant ” and “ significant ”;  We also identified the countries where the variable shows a different sign compared to that commonly found in the literature.

Very significant SignificantOpposite sign GDP 311 Population 222 Unemployment rate 200 Inflation rate 131 Disposable income 110 Household spending 310

Every macro-economic variable proved significant or very significant in explaining the mortgage market trends in at least two countries. However, none of the variables was significant in more than four countries. So, we find varying degrees of intensity of the relationship between variables and mortage stocks among the six countries. Finally, three variables show in at least one country a significant relationship, but with an opposite sign compared to what would be predicted.

Has the financial crisis affected the trends of these relationships? In order to assess the impact of the global crisis on these relationships the analysis was repeated without the figures of 2008, the first year the crisis hit the financial retail markets.

Great BritainGermanyFranceSpainItalyPoland N. of cases10 R²0, , , , , , adjusted R²0, , , , , , Df4,5 6,35,43,62,7 F1399,98711, ,615782, ,06594,6948 P0, , , , , , Selected variables (BETA) GDP 0,346-2,20,788002,02 Population 0,523-0,47-1,31,890,4710 Unemployment rate 0,06300,13-0,270,1290 Inflation rate 0-0,59-0,090,08500 Disposable income 0,17700,104-1,250-1,1 Household spending 03,881,561,290,6730

 Even in the period we found that the relationships between some macro- economic variables and the mortgage market trends were anomalous in that the sign was different compared to what would be expected : › GDP and population in Germany; › Population in France; › Unemployment rate and disposable income in Spain.  The reason for anomalous results does not have anything to do with the crisis.

Very significant variables Very significant variables Great Britain Disposable incomeGDP Germany Household spendingGDP, household spending France Population, unemployment rate, inflation rate, household spending GDP Spain Population, unemployment rate, disposable income Italy Population, household spending Population, inflation rate, household spending Polond GDP, disposable incomeUnemployment rate, household spending

The comparison of the significant variables in the two periods shows small differences for most countries. These variables are confirmed as significant in both periods : – Household spending in Germany; – Population, unemployment rate and disposable income in Spain; – Population and household spending in Italy.

 We sought confirmation of these results through comparison of the total figures for the six countries : › for the year 2007 and › for the year 2008.

N. of cases66 R²0, , adjusted R²0, , Df4,1 F464, ,8253 P0, , Selected variables (BETA) GDP3,9302,640 Population00 Unemployment rate0,4040,390 Inflation rate0,0900 Disposable income-11,000-9,900 Household spending8,3008,420

 The analysis of the total figures confirms that some macro-economic variables are very significant independently of the historical period (economic stability or beginning of the crisis).  GDP, unemployment rate, disposable income and household spending are confirmed as significant variables to explain mortgage trends in both 2007 and 2008, the beginning of the crisis.

 Legislation needs to take account of the very strong and stable links between macro-economic variables and mortgage markets.  However, as the study has shown, the relationships show different degrees of significance and sometimes even opposite signs in the different countries.

 So, incentives (or disincentives) for the household credit market, and thus house purchase, require a differentiated approach for each country.  European wide policies are necessary, but they must be based on robust empirical evidence and models adapted to the country of application.