Contents:

Chapter 1 Executive Summary 3 Underlying drivers of European Mortgage Markets 3 Interest rates are low across Europe 3 Marriage has become less common while the prevalence of divorce has increased 5 Key issues in European mortgage markets 7 The importance of owner occupation differs greatly within Europe 7 European mortgage market gross advances amounted to EUR 773.4 billion at the end of 2002 9 Developments in the mortgage bond market 10 Country specific chapters 11 The amendment of the Mortgage Bank Act, 2002 11 Accounting for the Spanish house price boom 12 Competitor profile: Rabobank 13 A brief history of Rabobank 13 Rabobank has a 24 per cent share of the Dutch mortgage market 17 A SWOT analysis of Rabobank 18 Forecast of gross advances in the Swedish mortgage market, 2003-2007 20 The Future of European Mortgage Markets 22 Chapter 2 INTRODUCTION 48 What is this report about? 48 Who is the target reader? 48 How to use this report 49 Scope 50 Related reports 50 Chapter 3 UNDERLYING DRIVERS OF EUROPEAN MORTGAGE MARKETS 52 Macroeconomic conditions 52 With a few exceptions unemployment has fallen in Europe over the last decade 52 Interest rates are low across Europe 56 Real GDP growth has slowed in the majority of European economies 59 Demographic factors 60 Population size and structure 61 Households are decreasing in size across Europe 64 Marriage has become less common while the prevalence of divorce has increased 66 There is wide variation in the age at which people leave the parental home within Europe 70 Conclusion 73 Chapter 4 KEY ISSUES IN EUROPEAN MORTGAGE MARKETS 74 The size and composition of European housing stock 74 The number of dwellings per 1,000 inhabitants has increased across the European Union 75 The importance of owner occupation differs greatly within Europe 77 Ireland can boast the youngest dwelling stock in the European Union 81 House prices, 1998-2002 83 Ireland, the UK, Spain and the Netherlands have seen house prices rocket 83 Mortgage lending, 1998-2002 88 European mortgage market gross advances amounted to EUR 773.4 billion during 2002 88 European mortgage market balances outstanding stood at EUR 3,702 billion at the end of 2002 90 Mortgage balances outstanding as a percentage of GDP vary widely within Europe 93 The number of residential mortgage loans advanced in Europe surpassed 3.1 million in 2002 96 Mortgage product trends within Europe 98 Variable and fixed rate mortgage products vary in popularity within Europe 98 The changing face of mortgage funding in Europe 104 Explaining the ways that mortgage lending is funded 104 Developments in the mortgage bond market 108 Regulation of European mortgage markets 109 Basel II: big changes on the horizon in 2006 109 European Code of Conduct on Home Loans 113 Mortgage distribution channels 115 Branches remain the most important mortgage distribution channel 115 Conclusion 119 Chapter 5 THE FRENCH MORTGAGE MARKET 121 Summary of key issues 121 State involvement is significant in the French property market 124 Competitor profile: Crédit Agricole 125 A brief history of Crédit Agricole 125 A leader in the French mortgage market 128 La Poste: a new competitive threat to Crédit Agricole 132 A SWOT analysis of Crédit Agricole 133 Forecast of gross advances in the French mortgage market, 2003-2007 135 Economic difficulties will harm the mortgage market 135 Chapter 6 THE GERMAN MORTGAGE MARKET 138 Summary of key issues 138 The low level of homeownership: a restriction on the German mortgage market 141 Regulation 143 The amendment of the Mortgage Bank Act, 2002 144 Competitive profile: BHW 145 The Bauspar system explained 145 A brief history of BHW 149 Although Bauspar is still its primary product, BHW has undertaken a major shift in focus over the last few years 152 A SWOT analysis of BHW 154 Forecast of gross advances in the German mortgage market, 2003-2007 156 A higher level of homeownership will boost the mortgage market but only over the long-term 156 Chapter 7 THE IRISH MORTGAGE MARKET 159 Summary of key issues 159 Irish house prices have rocketed 162 Regulation 165 The introduction of the Pfandbrief concept into Ireland 165 Recent developments in Irish housing policy 165 Competitor profile: First Active 167 A brief history of First Active 167 First Active is the fourth largest mortgage lender in Ireland 171 First Active brings the current account mortgage comes to Ireland 174 A SWOT analysis of First Active 176 Forecast of gross advances in the Irish mortgage market, 2003-2007 178 Affordability constraints will hinder the market’s growth 178 Chapter 8 THE ITALIAN MORTGAGE MARKET 181 Summary of key issues 181 The ever-growing Italian owner occupied sector 184 Regulation 186 The Banking Law 186 Competitor profile: Banca Woolwich 186 A brief history of Banca Woolwich 186 Banca Woolwich has become a significant force in the Italian mortgage market 187 A SWOT analysis of Banca Woolwich 193 Forecast of gross advances in the Italian mortgage market, 2003-2007 195 The increasing propensity for Italians to borrow will fuel a growing mortgage market 195 Chapter 9 THE DUTCH MORTGAGE MARKET 198 Summary of key issues 198 Following several ‘hot’ years Dutch price increases have now slowed 201 Creating a favorable environment for Dutch home buyers 203 Regulation 204 The 2001 income tax reforms: affecting second home owners 205 Competitor profile: Rabobank 205 A brief history of Rabobank 205 Rabobank has a 24 per cent share of the Dutch mortgage market 209 A SWOT analysis of Rabobank 211 Forecast of gross advances in the Dutch mortgage market, 2003-2007 213 The increasing level of owner occupation and steadily increasing house prices will account for rising gross advances 213 Chapter 10 THE SPANISH MORTGAGE MARKET 216 Summary of key issues 216 Accounting for the Spanish house price boom 219 Regulation 222 Improving the position of the cajas 222 Competitor profile: Banco Popular 224 A brief history of Banco Popular 224 Banco Popular has increased its presence in Spain 224 Banco Popular is relatively well positioned across its product portfolio 226 Banco Popular’s expansion into Portugal: examining the motives and the likely outcomes 230 A SWOT analysis of Banco Popular 232 Forecast of gross advances in the Spanish mortgage market, 2003-2007 233 Growth will remain strong in the Spanish market 233 Chapter 11 THE SWEDISH MORTGAGE MARKET 236 Summary of key issues 236 A low level of construction is constraining the Swedish mortgage market 239 Regulation 241 Bringing the Swedish covered bond market into line with those elsewhere in Europe 241 Competitor profile: Spintab 242 A brief history of Spintab 242 Maintaining operating profits despite falling staff numbers 244 A diversified distribution network 245 Taking top spot in the mortgage market 246 A SWOT analysis of Spintab 249 Forecast of gross advances in the Swedish mortgage market, 2003-2007 251 The economy’s reaction to the rejection of the euro is key 251 Chapter 12 THE UK MORTGAGE MARKET 254 Summary of key issues 254 UK house prices have exploded 258 Regulation 264 The FSA has a new regulatory remit 264 Competitor profile: Northern Rock 266 A brief history of Northern Rock 266 Northern Rock: a small but successful mortgage lender 268 Accounting for Northern Rock’s success 272 A SWOT analysis of Northern Rock 277 Forecast of gross advances in the UK mortgage market, 2003-2007 279 Higher interest rates will make it a different environment over the next five years 279 Chapter 13 THE FUTURE OF EUROPEAN MORTGAGE MARKETS 282 Conclusions from the market forecasts 282 The changing dynamics of the forecast markets 282 Slower growth will result in a new business environment over the next five years 286 Newly emerging European mortgage markets 287 Market conditions are now improving 288 Mortgage markets have benefited as countries have prepared for EU membership 290 Chapter 14 APPENDIX 294 Supplementary data 294 Underlying drivers of European Mortgage Markets 294 Key Issues in European Mortgage Markets 297 Country specific chapters 298 Definitions 302 Research methodology 305 Forecasting methodology 305 Bibliography 306 Reports 306 Briefings 307 Relevant links 308 Europe wide associations and organizations 309 Country specific associations and organizations 309 Lenders 311 How to contact experts in your industry 317 LIST OF TABLES Table 1: Eurozone interest rates since the introduction of the single currency on January 1st 1999 4 Table 2: Countries and competitors covered in chapters four to eleven 11 Table 3: Countries and competitors covered in chapters four to eleven 50 Table 4: Unemployment as a percentage of the economically active population in Europe, 1993-1997 55 Table 5: Unemployment as a percentage of the economically active population in Europe, 1998-2002 56 Table 6: Eurozone interest rates since the introduction of the single currency on January 1st 1999 57 Table 7: Real GDP growth rate in European countries, 2000-2002 59 Table 8: Population change in European Union countries by source of change, 1980 and 2002 63 Table 9: Life expectancy at birth in European Union countries, 1980 and 2002 64 Table 10: Average household size in European Union countries, 1980-2001 65 Table 11: Marriages per 1,000 of the population in the European Union, 1980 and 2002 68 Table 12: Rate of divorce per 1,000 people in European Union countries, 1980 and 2002 70 Table 13: Age upon which 50 per cent of young people are living away from home in European Union member states, 2001 73 Table 14: Dwellings per 1,000 inhabitants in the European Union, 1980-2001 76 Table 15: Percentage of dwelling stock that is in owner occupation within Europe 79 Table 16: Age of dwelling stock in the European Union 83 Table 17: Indexed European house price trends, 1998-2002 86 Table 18: Indexed European house price trends, Q1 2001- Q1 2003 88 Table 19: European mortgage market gross advances, 1998-2002 90 Table 20: European mortgage market balances outstanding, 1998-2002 93 Table 21: Residential mortgage balances outstanding as a percentage of GDP in Europe 96 Table 22: The number of mortgage loans advanced against residential property, 1998-2002 98 Table 23: The varying popularity of variable, short-term fixed and long-term fixed rate mortgage products within selected countries in Europe 101 Table 24: The timescale for the introduction of Basel II within the European Union 111 Table 25: Countries that had achieved 100 per cent implementation of the European Code of Conduct on Home Loans by the end of 2002 114 Table 26: Number of branches in Europe, 2002-2005f 119 Table 27: French mortgage market fact sheet 123 Table 28: French mortgage market fact sheet continued 124 Table 29: Balances outstanding for the five largest lenders in the French mortgage market, 2002 130 Table 30: Forecast gross advances in the French mortgage market, 2003e-2007f 137 Table 31: German mortgage market fact sheet 140 Table 32: German mortgage market fact sheet continued 141 Table 33: Private Bausparkassen in Germany 147 Table 34: Public Bausparkassen in Germany 148 Table 35: Value of new Bauspar savings deposits by private Bausparkasse, 2002 151 Table 37: Forecast of gross advances in the German mortgage market, 2003e-2007f 158 Table 38: Irish mortgage market fact sheet 161 Table 39: Irish mortgage market fact sheet continued 162 Table 40: The percentage of houses priced at more than EUR 200,000 in Dublin and Ireland 164 Table 41: The demutualization of First National Building Society in 1998 was one of a number of demutualizations that have occurred in Ireland since the early 1990s 168 Table 42: Balances outstanding for the five largest lenders in the Irish mortgage market, 2002 173 Table 43: Forecast of gross advances in the Irish mortgage market, 2003e-2007f 180 Table 44: Italian mortgage market fact sheet 183 Table 45: Italian mortgage market fact sheet continued 184 Table 46: Balances outstanding for the six largest lenders in the Italian mortgage market, 2002 191 Table 47: Forecast of gross advances in the Italian mortgage market, 2003e-2007f 197 Table 48: Dutch mortgage market fact sheet 200 Table 49: Dutch mortgage market fact sheet continued 201 Table 50: Average property prices in the Netherlands, 1998-2002 202 Table 51: Key measures of Rabobank’s membership and branch infrastructure, 1998- 2003 H1 208 Table 52: Balances outstanding for the largest five lenders in the Dutch mortgage market, 2002 209 Table 53: Forecast of gross advances in the Dutch mortgage market, 2003e-2007f 215 Table 54: Spanish mortgage market fact sheet 218 Table 55: Spanish mortgage market fact sheet continued 219 Table 56: Nominal and real mortgage rates in Europe, Q3 2002 222 Table 57: The five largest lenders in the Spanish mortgage market, 2002 228 Table 58: Forecast gross advances in the Spanish mortgage market, 2003e-2007f 235 Table 59: Swedish mortgage market fact sheet 238 Table 60: Swedish mortgage market fact sheet 239 Table 61: FöreningsSparbanken, Spintab’s parent, is one of the major banking groups in Sweden 243 Table 62: Mortgage credit institutions in Sweden and their ownership 244 Table 63: Spintab’s distribution network 246 Table 64: Balances outstanding for the five largest mortgage credit institutions in Sweden, 2002 248 Table 65: Forecast of gross advances in the Swedish mortgage market, 2003e-2007f 253 Table 66: UK mortgage market fact sheet 257 Table 67: UK mortgage market fact sheet continued 258 Table 68: UK monthly house price increases according to Halifax, 2000-2003 261 Table 69: Housing transactions and the transaction costs associated with moving home in Europe 264 Table 70: Northern Rock’s branch network, 1998-2002 268 Table 71: Balances outstanding for the seven largest lenders in the UK mortgage market, 2002 270 Table 72: Market share of Northern Rock and the five largest UK mortgage lenders, 1998-2002 271 Table 73: Forecast of gross advances in the UK mortgage market, 2003e-2007f 281 Table 74: Forecasts of gross advances in eight European mortgage markets, 2003e-2007f 285 Table 75: Share of gross advances in the eight forecast mortgage markets, 2003e-2007f 285 Table 76: New member states and applicant countries to join the European Union 291 Table 77: Changes in the Swedish base rate since January 1999 294 Table 78: Changes in the Danish base rate since January 1999 295 Table 79: Changes in the UK base rate since January 1999 296 Table 80: Percentage share of total European gross advances by country, 1998-2002 297 Table 81: Percentage share of total European balances outstanding by country, 1998-2002 298 Table 82: Exchange rates applied in the UK and Sweden country specific chapters 298 Table 83: Balances outstanding and market share for the 30 largest lenders in the UK mortgage market, 2002 299 Table 84: Indexed mortgage balances outstanding by competitor in the UK mortgage market, 1998-2002 300 Table 85: Additional competitor balances outstanding data not presented in chapter eight and eleven 300 Table 86: Competitor information for markets not covered in chapters four to eleven 301 LIST OF FIGURES Figure 1: The eurozone rate and the Bank of England base rate remain low. However, at times since 1999 there has been a large differential between them 5 Figure 2: Marriage trends in Sweden, and particularly in Denmark, have bucked those in the rest of Europe over the last two decades 7 Figure 3: Three countries in Europe have 80 per cent or more of their dwelling stock in owner occupation while a further five have less than 60 per cent of dwellings in this form of tenure 8 Figure 4: In 2002 mortgage market gross advances in the UK accounted for more than 40 per cent of the European total 10 Figure 5: At the end of the first half of 2003 Rabobank’s total assets stood at more than EUR 400 billion 15 Figure 6: Rabobank has decreased its number of member banks despite a more than 100 per cent increase in its number of members 16 Figure 7: A SWOT analysis of Rabobank 20 Figure 8: Gross advances in the Swedish mortgage market will increase at a compound annual growth of 3.3 per cent between 2003 and 2007 and amount to EUR 28.1 billion by the end of the period 22 Figure 9: Over the next five years the UK will remain the largest mortgage market in Europe judged in terms of gross advances. However, it will no longer be the fastest growing 23 Figure 10: With the exception of Germany, unemployment as a percentage of the economically active population in the five major European economies has fallen over the last decade 54 Figure 11: The eurozone rate and the Bank of England base rate remain low. However, at times since 1999 there has been a large differential between them 58 Figure 12: In 2002 Ireland had the fastest growing population in the European Union 62 Figure 13: Marriage trends in Sweden, and particularly in Denmark, have bucked those in the rest of Europe over the last two decades 67 Figure 14: The UK is the only EU member state in which divorce has become less common over the last two decades 69 Figure 15: Young people in southern Europe live with their parents for longer than do young people in northern Europe 72 Figure 16: Austria is the only country in the European Union to experience a decrease in the number of dwellings per 1,000 inhabitants over the last two decades 75 Figure 17: Three countries in Europe have 80 per cent or more of their dwelling stock in owner occupation while a further five have less than 60 per cent of dwellings in this form of tenure 78 Figure 18: Ireland has the youngest dwelling stock in the European Union 82 Figure 19: The European house price ‘hot spots’ in recent years have been the Netherlands, Ireland, Spain and the UK 85 Figure 20: In the year to Q1 2003 house prices in Spain and the UK continued to increase rapidly 87 Figure 21: In 2002 mortgage market gross advances in the UK accounted for more than 40 per cent of the European total 89 Figure 22: Balances outstanding in Germany at the end of 2002 were EUR 1068.7 billion, 28.9 per cent of total balances outstanding in Europe 92 Figure 23: In more than ten European countries mortgage balances outstanding are equivalent to less than 50 per cent of GDP 95 Figure 24: In the seven EU counties for which data is available more than 3.1 million mortgage loans were advanced in 2002 97 Figure 25: Variable rate mortgage products are more popular in the UK than anywhere else in Europe. In contrast, in Germany long-term fixed rate products are the most common type of mortgage product 100 Figure 26: In contrast to most other economies in Europe, the UK has both a high penetration of variable rate mortgage loans and high mortgage balances outstanding relative to GDP 104 Figure 27: Using retail deposits is the most common way to fund mortgage lending in Europe 106 Figure 28: Explanation of the risk associated with the use of retail deposits to fund fixed rate mortgage lending 107 Figure 29: Germany accounts for more than 40 per cent of balances outstanding on mortgage bonds in Europe 108 Figure 30: According to the CML’s Annual Housing Finance Survey 2002, 79 per cent of mortgage holders in the UK arranged their current mortgage in a branch 117 Figure 31: Bank branch networks will continue to contract in the years to 2005 albeit not by as much as previously thought 118 Figure 32: Retail banking in France accounts for only 13 per cent of Crédit Agricole’s total number of employees 127 Figure 33: Crédit Agricole and the other four largest lenders in France hold more than 77 per cent of the French mortgage market 129 Figure 34: Mortgage lending is by far the most important type of lending engaged in by Crédit Agricole 131 Figure 35: A SWOT analysis of Crédit Agricole 135 Figure 36: Gross advances in the French mortgage market will increase at a compound annual growth rate of 2.9 per cent between 2003 and 2007 and amount to EUR 52.9 billion by the end of the period 137 Figure 37: BHW is the second largest Bausparkasse in Germany in 2002 based on new Bauspar savings deposits. However, it is some way behind BSH 150 Figure 38: Almost half of BHW’s residential lending book is now in the form of mortgage loans rather than in Bauspar loans 154 Figure 39: A SWOT analysis of BHW 156 Figure 40: Gross advances in the German mortgage market will increase at a compound annual growth rate of 1.1 per cent between 2003 and 2007 and amount to EUR 76.0 billion by the end of the period 158 Figure 41: The rapid increase in Irish house prices is reflected in the increasing percentage of Irish housing that is valued at more than EUR 200,000 163 Figure 42: The history of First Active in Ireland and the UK 170 Figure 43: First Active and the other four largest mortgage lenders in Ireland have a combined 77.1 per cent share of the Irish mortgage market 172 Figure 44: The contribution of residential lending to First Active’s loan book increased slightly between 2001 and 2002 174 Figure 45: A SWOT analysis of First Active 178 Figure 46: Gross advances in the Irish mortgage market will increase at a compound annual growth rate of 8.1 per cent between 2003 and 2007 and amount to EUR 18.2 billion by the end of the period 180 Figure 47: The size of the Italian owner occupied sector has increased by six per cent in under ten years to account for 80 per cent of dwellings in 2002 185 Figure 48: Banca Woolwich’s branch network is dwarfed by networks belonging to its larger competitors 187 Figure 49: With the exception of a slight dip in new business in 2002, Banca Woolwich has grown impressively over the last five years, 1998-2002 188 Figure 50: The top five lenders have a combined 42.7 per cent share of the Italian mortgage market. Banca Woolwich holds an additional 3.1 per cent share 190 Figure 51: 80 per cent of Banca Woolwich’s mortgage customers are introduced by its partners and intermediaries. Of these, Gabetti is by far the most significant 193 Figure 52: A SWOT analysis of Banca Woolwich 195 Figure 53: Gross advances in the Italian mortgage market will increase at a compound annual growth rate of 8.3 per cent between 2003 and 2007 and amount to EUR 78.6 billion by the end of the period 197 Figure 54: Dutch property price increases have slowed over the last two years 202 Figure 55: At the end of the first half of 2003 Rabobank’s total assets stood at more than EUR 400 billion 206 Figure 56: Rabobank has decreased its number of member banks despite a more than 100 per cent increase in its number of members 208 Figure 57: A SWOT analysis of Rabobank 213 Figure 58: Gross advances in the Dutch mortgage market will increase at a compound annual growth rate of 5.0 per cent between 2003 and 2007 and amount to EUR 127.9 billion by the end of the period 215 Figure 59: A low nominal mortgage rate and a relatively high rate of inflation combine to produce a low real mortgage rate in Spain 221 Figure 60: Banco Popular has grown its distribution network and increased its headcount over the last five years 225 Figure 61: Banco Popular and the other four largest lenders in Spain hold a combined 32.9 per cent share of the Spanish mortgage market 227 Figure 62: Boosted by the acquisition of the remaining share of Banco Popular Hipotecario (BPH), Banco Popular’s total loans and discounts during 2002 surpassed EUR 34 billion 229 Figure 63: Banco Popular has spread its lending across Spain thus minimizing its vulnerability to any regional fluctuation in the property market 230 Figure 64: A SWOT analysis of Banco Popular 233 Figure 65: Gross advances in the Spanish mortgage market will increase at a compound annual growth rate of 9.6 per cent between 2003 and 2007 and amount to EUR 112.1 billion by the end of the period 235 Figure 66: Though increasing the number of dwellings built per year in Sweden remains low 240 Figure 67: Significantly decreased staffing costs have contributed to stronger operating profit at Spintab 245 Figure 68: Spintab has a 30.1 per cent share of total lending by mortgage credit institutions in 2002 247 Figure 69: A SWOT analysis of Spintab 250 Figure 70: Gross advances in the Swedish mortgage market will increase at a compound annual growth of 3.3 per cent between 2003 and 2007 and amount to EUR 28.1 billion by the end of the period 253 Figure 71: UK house price increases have stabilized in 2003 although they remain fairly strong 260 Figure 72: Northern Rock is a great deal smaller than the big UK high street banks in terms of consolidated total assets, 2002 267 Figure 73: The top five lenders in the UK mortgage market have a combined 60.4 per cent market share. Northern Rock has a 4.5 per cent share 269 Figure 74: Northern Rock has grown faster than larger lenders in the UK mortgage market 271 Figure 75: Compared to the top five competitors in the UK mortgage market, Northern Rock’s cost to income ratio is exceptionally low, 2001-2002 275 Figure 76: In 2003 Northern Rock is fifth most commonly recommended mortgage lender by intermediaries having been third most commonly recommended in 2002 276 Figure 77: A SWOT analysis of Northern Rock 279 Figure 78: Gross advances in the UK mortgage market will increase at a compound annual growth rate of 6.9 per cent between 2003 and 2007 and will amount to EUR 520.5 billion in 2007 281 Figure 79: Over the next five years the UK will remain the largest mortgage market in Europe judged in terms of gross advances. However, it will no longer be the fastest growing 284 Figure 80: The research methodology used to produce European Mortgages 2003 305