Double trigger drives European mortgage default, institutions matter
A new working paper from the Oesterreichische Nationalbank finds that the 'double trigger' of liquidity stress and negative equity is the strongest predictor of mortgage default in Europe. The study, covering 18 countries, also highlights the significant role of debt enforcement institutions.
The double trigger's dominance
The paper, using harmonized household data from 18 European countries, identifies three primary drivers of mortgage default: liquidity stress, negative equity, and the 'double trigger,' where both conditions occur simultaneously.
While all three factors increase default risk, the double trigger emerges as the most potent predictor, raising the probability of non-performing loans by approximately 16 percentage points.
Liquidity problems alone and negative equity alone also contribute to default risk, but their impact is more moderate, each increasing the probability by around 4 to 6 percentage points.
This systematic cross-country evidence challenges earlier single-factor views, emphasizing that mortgage distress is most concentrated when households face both weak liquidity buffers and weak equity positions concurrently.
Enforcement shapes equity risk
The study further reveals that institutional contexts, particularly debt enforcement regimes, significantly influence the relevance of equity-related default incentives.
In countries with weaker debt enforcement, negative equity accounts for a larger share of observed default risk, a pattern consistent with lower expected default costs increasing equity-related default incentives.
Conversely, the role of negative equity is weaker in countries with strong debt enforcement.
Despite these institutional variations, liquidity stress consistently remains an important factor across all enforcement regimes.
These findings underscore that mortgage risk cannot be adequately assessed by considering repayment capacity or collateral values in isolation.
Beyond single-factor thinking
This paper delivers critical insights, moving beyond isolated views of mortgage risk to a more holistic understanding.
Its findings strongly support a dual approach for macroprudential tools, emphasizing the need for national calibration.
While the methodology is robust, the practical implementation of such nuanced policies remains a significant challenge for European supervisors.