The moderate recovery observed in 2010, during 2011 mortgage and housing markets across the EU recorded mixed performances. Several adverse factors impacted quite severely upon mortgage and housing demand: subdued macroeconomic environment; depressing housing demand; tightened lending criteria; ongoing sovereign debt crisis in some euro area countries; and drought in funding markets and inter-bank lending. These formed the background for mortgage lending activity throughout 2011. The macroeconomic context proved rather unsupportive of mortgage demand in 2011, resulting in feeble GDP growth and rising unemployment rates, partly offset by a very low-interest rate environment. Real GDP growth in the EU27 in 2011 was 1.5%, lower than in 2010 (2%), ending the year with slowing growth in Q3 2011 (0.3%), which then turned negative in Q4 2011 (-0.3%); the annual average unemployment rate in the EU27 was 9.7%, i.e. the same level as in 2010, showing significant country heterogeneity (ranging from 22.9% at year-end in Spain to 4.9% in the Netherlands). As a response to their sovereign debt crises, over the course of 2011, some euro area economies also adopted severe austerity packages in order to adjust their budget deficits.

These tight fiscal measures further depressed domestic demand and economic growth in these countries, contributing to a gloomy economic outlook for 2012. According to the latest European Commission forecast, in 2012 real GDP will stagnate in the EU27 and plunge by 0.3% in the euro area. In a nutshell, in the EU27 the aggregate volume of residential mortgage lending outstanding1 recorded a lower annual growth rate in 2011 than in 2010 (1.8% after 4.9% in 2010 – revised, formerly 5.1%) and went from EUR 6.4 trillion in 2010 to EUR 6.5 trillion in 2011 (equating to 51.7% of the EU27 GDP). Once this positive performance is put in a historical context (Figure 1), it can be clearly seen that it was much lower compared to the growth rates recorded in the previous years, particularly during the 20022007 boom cycle when mortgage lending increased by 7.8% on a compound annual average, with a peak of 11.6% in 2006. In 2007, the annual growth rate slowed to 8%, and the year 2008 marked a real turnaround: mortgage lending in the EU27 recorded its first year-on-year recession on record (by 1.2%), as a result of negative developments in Q3 and Q4 and the start of the financial crisis. In 2009, a moderate recovery in most markets resulted in an increase of 0.9% in outstanding mortgage lending compared to 2008, and suggested that the worst effects of the housing and mortgage recession in the EU were already over.