Austrian housing prices are on the rise in the capital of Vienna and beyond, but reports show that things may finally be slowing for one of most resilient and robust housing markets in the European Union. House prices increased more than 10% in Vienna in 2012, even when adjusted for inflation, and the national average outside the capital rose above 8% according to reports from Oesterreichische Nationalbank. Even so, it’s not all good news as rental yields remain weak in the country and economic forecasts indicate only marginal growth in the GDP. For more on this continue reading the following article from Global Property Guide.
After almost nine years of continuous house price rises, the Viennese housing market remains buoyant. However, house price rises are now slowing.
The residential property price index in Vienna, the capital, rose by 13.09% (10.02% inflation-adjusted) during 2012, its ninth consecutive year of continuous house price rises, according to Oesterreichische Nationalbank. However on a quarterly basis, house prices in Vienna actually dropped 0.65% (-1.61% inflation-adjusted) in Q4 2012, its first quarterly drop since Q2 2011.
Property prices in the rest of Austria have also been rising rapidly. In Austria excluding Vienna, house prices rose by 8.46% (5.52% inflation-adjusted) in 2012 from a year earlier.
In Vienna, property prices range from €2,500 per square meter (sq. m.) to €3,298 per sq. m., according to the Chamber of Commerce of Austria. On the other hand in Kitzbühel, a famous ski resort in Tyrol, apartment prices start at around €360,000 while luxurious three- to five-bedroom chalets are usually sold at €2 million to €4 million.
House prices in Vienna have been rising consistently since Q3 2004. During the housing boom (2003-2012), house prices in the capital soared by 89.5% (55.4% inflation-adjusted). On the other hand, property price changes in the rest of Austria have been erratic ever since the index was assembled in 2000. House prices rose by just 31.8% (8.1% inflation-adjusted) from 2003 to 2012.
The divergence between the capital and the rest of Austria may be partly because it is difficult to build in the centre of Vienna.
In the third quarter of 2012, there were 9,689 dwellings authorized in new residential buildings, according to Statistics Austria. Dwellings authorized rose by 9.4% to 43,150 in 2011 from a year earlier. The gross floor area of authorized new buildings was about 2.9 million sq. m. in Q3 2012.
The housing market is expected to remain strong in 2013, albeit on a slower trajectory, according to the Austrian Property Association. Demand is expected to remain high and property prices are projected to continue rising in 2013, according to most local property experts.
The resilience of Vienna compared with the rest of the country is partly due to the unusual ownership pattern in the city centre. Institutional investors, banks and companies own around 70% of residential real estate in Vienna’s city centre.
The strong price rises in the capital were also due to a combination of strong demand, and little or no new supply. There has been strong growth in demand for larger units (100 square metres (sq. m.) and up) in the city centre. With the limited supply of large units, prices of such apartments rose faster than smaller-sized units.
Low rental yields
Vienna has one of the highest percentages of renter households in the world, at 77.2% in 2007, while the figure for Austria as a whole is around 58%. However, rising purchase prices and static rents have led to very low rental yields in Vienna.
An oversupply of rental units during the 1990s led to a fall in rents. The rent decline stopped in 2000 and rents even rose briefly until 2001, but fell once more in 2002. Almost no rent increases have taken place since then and none can be expected in the near future, according to a recent Colliers report.
Rental yields in Vienna (Global Property Guide research, August 2011):
- Yields on 50 sq m. apartments in Vienna average 4.76%
- Yields on 85 sq. m. apartments average 3.54%
- Yields on 120 sq. m. apartments average 3.67%
- Yields on 175 sq. m. apartments average 2.59%
Top city centre apartments produce net rental returns of no more than 1%, according to Colliers, while net rental yields for the rest of the city are around 2% to 4%. Colliers’ estimate is for net yields, i.e., after costs, but is otherwise in line with Global Property Guide’s own research, which suggests gross rental yields of 2.6% to 4.8%.
Austria’s rental market is segmented via tenure, regulation and market forces into a hierarchy of low rents for municipal, other social tenants and long-term incumbents in the private sector, but higher free market rents for recent entrants into the private rental sector. Our figures cover the free market sector only.
The number of new dwellings built in Austria fell to about 40,000 units a year during 2001-2004, from around 66,000 units yearly in the 1990s. Construction still has not recovered, though total dwellings authorized rose 9.4% to 43,150 dwellings in 2011 from 39,450 dwellings the previous year, according to Statistics Austria.
The gross floor area of new buildings authorized also rose 12.3% to about 12.8 million sq. m..
Variable interest rates
Most new housing loans in Austria are on variable rates, not fixed. The total amount of new housing loans with variable interest rates rose from 53% of all new housing loans in 2004 to 75% in 2011.
The Austrian housing market is therefore quite sensitive to interest rate changes.
Following the drop in European Central Bank key rates, the variable housing loan interest rate dropped to around 4% – 4.5% from 2003 to 2006. After an uptick, variable rates further dropped to 2.56% in December 2010, amidst the global financial meltdown. In March 2012, the average variable interest rate was 2.89%.
The ECB key rate was currently at an all-time low of 1%. The key rate is expected to remain at that level in the foreseeable future.
Small mortgage market
The Austrian mortgage market is small relative to other European countries. The size of the mortgage market grew from 19.7% of GDP in 2000 to about 34.4% of GDP in 2011. The average mortgage market size in the EU is 50% of GDP.
Total outstanding housing loans were up by 6.7% to €104.7 billion in the first quarter of 2012 from the same period last year, according to the Oesterreichische Nationalbank.
Mortgage growth was accompanied by an increase in foreign-currency denominated loans from around 7% of total housing loans in 2000, to about 28% in 2011.
Weak economic growth in 2013
The Austrian economy is projected to expand by 1% in 2013 and 1.8% in 2014, according to the Austrian Institute of Economic Research (WIFO). Exports are expected to increase by 3.8% this year, while private consumption should increase by 0.6%.
“The domestic economy is still poised for a long and broad-based recovery”, said WIFO. “There are still risks, however in the external environment.”
In 2012, Austria’s budget deficit stood at about 2.5% of GDP (€7.7 billion), beating the government forecast of 3.1% of GDP, and keeping it below the EU’s target. This was mainly a result of the government efforts to cut spending and increased taxes. It introduced a banking tax, extra taxes on tobacco, petrol and flight tickets in 2011.
In January 2013, Austria’s unemployment rate was at 4.9% (Eurostat definition), the lowest in the EU.
However, the sovereign debt climbed to a new high of €227.4 billion or about 73.4% of GDP in 2012, well over the 60% target. In February 2013, the annual inflation rate slowed to 2.5%, according to Statistics Austria. The inflation rate is expected to be 2.2% in 2013 and 2% in 2014, according to WIFO.
The prime driver of the Austrian economy is exports to its main trading partner, Germany. More than 75% of Austria’s exports go to Europe, 30% to Germany. Austria experienced relatively strong economic growth from 2004 to 2007 with an average annual GDP growth of 3.1%. After contracting by 3.8% in 2009, the economy emerged from recession with growth rates of 2.31% in 2010 and 2.7% in 2011. However due to the on-going debt crisis, the Austrian economy slowed sharply in 2012, with a real GDP growth of just 0.8%.
The country was annexed by Germany during the Second World War amongst popular acclaim. After World War 11, the Allies occupied Austria until 1955. The country then became a fully independent republic, under the condition that it would remain neutral. Austria joined the European Union (EU) in 1955 and the Euro Monetary System in 1999, and is a founder-member of the OECD. It signed the Schengen Agreement in 1995 and adopted the Euro in 1999.
Austria’s capital, Vienna, is home to key international organizations. These include the International Atomic Energy Agency (IAEA), the Organization for Security and Cooperation in Europe (OSCE), and the Organization of Petroleum Exporting Countries (OPEC).
This article was republished with permission from Global Property Guide.