Will new EU mortgage laws put an end to property bubbles?

Will stricter lending across the EU help stabilise the mortgage market?

The cyclical, boom-and-bust nature of Europe’s property market could be about to come to an end with the introduction of EU-wide mortgage laws designed to deflate property bubbles across the continent.

The past few years have been particularly catastrophic for the property markets of a number of Eurozone countries. Spain has had its fair share of woe and suffering of course (even though the signs are that things have begun to stabilise), and countries like Ireland and Cyprus have seen property values devalue by more than 50 per cent in many areas over the past four years…

Although inherently unsustainable, such market conditions have been allowed to flourish for too long, says the European Parliament, which has now set down agreed pan-EU rules on mortgage lending in an effort to avoid future housing bubbles.

These rules are intended to deliver tighter controls across the sector, giving lenders more autonomy to decide whom they should lend to.

Across the EU, the mortgage market is worth some €6.5 trillion. These new rules are intended to bring an additional layer of legislation to a market that has been too unregulated and too profitable for too few for too long.

One of the headline rules effectively bans the issuance of ‘self-certified’ loans – often dubbed ‘liar loans’ – and will press upon lenders the importance of checking the creditworthiness of applicants.

Another rule will also make it illegal for banking staff that carry out credit checks to have their pay linked in line with the number of mortgages they approve. Such a practice has, in the past, encouraged some mortgage advisors to act in an irresponsible, self-interested manner.

Another ruling sees the introduction of European Standardised Information Sheets (ESIS), which will make it easier for potential homebuyers to compare mortgages, while tougher criteria for credit assessment and stricter rules on advertising mortgages have also been mooted.

“We are hoping to conclude talks with the European Parliament soon on these important new rules to protect consumers and mortgage holders,” a spokeswoman for the Irish EU presidency – which will negotiate on behalf of EU governments – has said.

As soon as a deal is struck, the full parliament and all EU governments must ratify the draft rules before they can become binding – something that is unlikely to happen until mid-2015.

Irresponsible lending – particularly the practices in the USA that led to the subprime mortgage crisis – is often cited as one of the catalysts for the current economic crisis. Spain has been hit harder than most countries, so any reforms that seek to avoid further property bubbles are sure to be welcomed with open arms throughout the country and beyond.