Austria’s real estate market is dazzling observers by its rapid and continues growth while the rest of Europe remains mired in a debt crisis that is slowly consuming entire nations. Speculation on why Austria (and particularly the capital of Vienna) prospers ranges from its picturesque properties and well-kept communities to the capital’s ability to attract big business. Vienna is in a league with Paris and London in its ability to attract foreign investment, while the rest of the country draws nearly as much attention thanks to its location among other nations and natural beauty. For more on this continue reading the following article from Global Property Guide.
Vienna hums with prosperity. There’s a vibrant tourist industry, and the city is beautiful. But none of these factors quite explains what is so strange about Vienna, that over the past eight years while the rest of Europe has seen a property boom and bust, Vienna’s residential property market has just gone up, and up, and up.
The residential property price index in Vienna, the capital, rose by 9.6% (6.9% inflation-adjusted) during the year to end-Q1 2012, more than the year-on-year (y-o-y) price rises during the past three quarters of 6%, 7.9% and 7.8%, respectively, according to Oesterreichische Nationalbank.
During the latest quarter alone (Q1 2012), Vienna’s house prices rose by 4.3% (3.9% inflation-adjusted).
Property prices in the rest of Austria are also rising rapidly. In Austria excluding Vienna, house prices soared by 11% (8.3% inflation-adjusted) during the year to end-Q1 2012. House prices in rose 8.5% (8.2% inflation-adjusted) q-o-q in Q1 2012, after a 1.2% rise in Q4, 4.1% rise in Q3 and a 2.9% drop in Q2 2011. Property price changes in the rest of Austria have been erratic ever since the index was assembled in 2000.
On the other hand, house prices in Vienna have been rising consistently since Q3 2004. In the first district, the heart and historical centre of Vienna, prices have more than doubled within a decade. From Q1 2005 to Q1 2012, house prices in Vienna as a whole rose by 67% (45% inflation-adjusted), compared to a 33% (16% inflation-adjusted) house price increase in the rest of the country.
The divergence between the capital and the rest of Austria may be partly because it is difficult to build in the centre of Vienna. But it is also because Vienna has become a magnet for foreign money, and as new money has flowed out of the world’s emerging nations, in Vienna’s case particularly out of Russia, it has gone into the old core capital cities, like London or Paris – and Vienna. Prime property – in London, New York, Hong Kong, Paris, Monaco and the Caribbean – has boomed. Vienna is part of this bigger trend.
As capital cities go, Vienna is relatively small. It grew as an administrative, imperial capital, and has relatively few disreputable, or ugly neighbourhoods. What one might call its ‘decorative density’ is unusually high. It is easy to justify an apartment in Vienna.
Property prices are expected to continue rising for the remainder of 2012, despite the projected economic slowdown due to the ongoing eurozone debt crisis.
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 2012
Due to the regional, Austria’s economy is expected to slow sharply in 2012, with a projected real GDP growth between 0.4% and 0.7%.
After contracting by 3.8% in 2009, the economy emerged from recession with a real GDP growth rate of 2.3% in 2010. In 2011, Austria grew by a healthy 3.1%.
In an effort to reduce the budget deficit to 3% of GDP in 2011, the Austrian government cut spending and increased taxes. It introduced a banking tax, extra taxes on tobacco, petrol and flight tickets. As a result, the fiscal deficit fell to 2.6% of GDP in 2011, well below the 4.6% deficit registered in 2010.
Consumer prices in the country rose 3.6% in 2011 from a year earlier, a significant increase from 1.7% in 2010, and 0.4% in 2009. But by April 2012, the annual inflation rate had decelerated to 2.3%, the lowest since December 2010.
Austria’s unemployment rate was 4% in March 2012, the lowest in the EU.
This article was republished with permission from Global Property Guide.