With nearly three fourths of residential real estate owned by institutional investors, banks and companies, Vienna’s housing prices continued to rise in 2010, posting its highest year-over-year gain in the third quarter of this year. High unemployment and lower GDP growth have impacted Austria’s overall housing market, with housing prices fluctuating from quarter to quarter and resulting in weak rental yields. See the following article from Global Property Guide for more on this.
The residential real estate price index for Vienna rose 9.9% y-o-y to Q3 2010, the highest annual price increase since 1992. Compared to the previous quarter, the price index for Austria’s capital was up 3.7%, according to the National Bank of Austria (OeNB).
Property prices in the rest of Austria stalled. The price index for Austria (excluding Vienna) was up 3.7% during the year to Q3 2010, but slid 0.6% and 0.9% in Q2 and Q3, after a 6.1% q-o-q rise in Q1 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 since Q3 2004.
The divergence between the capital and the rest of Austria may be partly because almost 70% of residential real estate in Vienna is owned by institutional investors, banks and companies.
The strong price increases in Vienna may also reflect the shift to more secure investment options in the capital as Austria’s growth weakens. Economic stability is threatened by the huge deficits and crises in several EU member countries including Greece and Ireland.
GDP growth in Austria weakened to 0.9% seasonally-adjusted q-o-q increase to Q3 2010, down from the 1.2% growth in Q2. Growth is expected to slow further in Q4.
Overall economic growth is expected to be around 1.9% for 2010 and 1.7% in 2011. Slightly slower growth in 2011 is expected due to the effort to reduce the deficit from the projected 4.3% in 2010 to 3.1% of GDP in 2011. The EU economies are expected to reduce their deficits to 3% of GDP by 2012.
The unemployment rate is falling, but not fast enough. From an average of 7.2% in 2009, seasonally-adjusted unemployment rate (national definition) only slightly eased to 6.8% in September 2010 where it is expected to remain for the rest of the year. In 2011, unemployment is expected to remain high at 6.7%.
The resilience of Vienna compared with the rest of the country is partly due to the unusual ownership pattern in the city center. Institutional investors, banks and companies own around 70% of residential real estate in Vienna’s city center.
In the first district, the heart and historical center of Vienna, prices have more than doubled within a decade.
These strong price rises were due to a combination of strong demand, and little or no new supply. There has been strong growth in demand for larger units (100 sq. m. and up) in the city center. With the limited supply of large units, prices of such apartments rose faster than smaller-sized units.
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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. Recent figures are not available, due to technical issues and legislative delays. Nevertheless, the dwelling stock microcensus suggests a drop in dwelling completions.
There were 3,536,900 primary residences in 2007, up from 3,315,347 in 2001. So during these six years, the stock of primary residences rose by only 221,553, or 36,925 units a year.
In Vienna, the stock rose by 8,760 units a year (2001 to 2007), from 770,955 in 2001 to 823,500 in 2007. This is a reduction in dwelling completions, from an average 10,800 annually 1995-2001.
A similar drop in dwelling completions took place in Austria’s three other most populous states: Lower Austria (which surrounds Vienna), Upper Austria, and Styria.
Variable rate loans
Most loans to households in Austria are variable rates, not fixed, though the ratio changes as interest rates fluctuate.
For instance, 70% of new loans in 2000 were variable rates, while the remaining 30% were fixed. The percentage of variable rate new consumer loans rose to 90% in Q3 2006, before falling back to 54% as of Q4 2008.
Most housing loans also tend to be a variable rate, though again the proportions fluctuate. A 2008 central bank survey suggest that around 67.1% of households with housing loans have variable rate loans, while only 38.5% have fixed rate loans. The remaining 6.4% pay no interest, i.e., have borrowed from family members or friends.
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. Since then, rates have moved up, and then slightly down again, to 5.63% in December 2008.
Small mortgage market
Austria’s mortgage market is small compared to other EU countries. Outstanding housing loans rose from €29 billion in 2001, to €71.35 billion in 2008; or from 14% of GDP in 2001 to 25% of GDP in 2008. The average mortgage market size in the EU is 50% of GDP.
Mortgage growth was accompanied by an increase in foreign-currency denominated loans from around 27% of total housing loans in 2002, to 38% in 2006 and 2008 (the ratio dipped to 34% in 2007). Most foreign currency loans are Swiss franc-denominated (95.3% of all forex loans in 2008). Most have variable interest rates.
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%. Around half of the rental stock in Vienna and Austria is privately owned.
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.
No rent increases took place in Vienna in 2007 and none can be expected in the near future, according to a recent Colliers report. Monthly rents for the most luxurious apartments in the city center were a generous €22 per sq. m. in 2008, but the report adds that most apartments earned monthly rents of only between €7 and €12 per sq. m., due to legal restrictions.
The result is weak yields. Top city centre apartments produced net rental returns of no more than 1%, according to Colliers, while net rental yields for the rest of the city were around 2% to 4%. This estimate contrasts with Global Property Guide’s own research, which suggested gross rental yields of 4.3% to 6%. However there is a significant difference in methodology, in that the Colliers figures are net, while the Global Property Guide figures are gross, and therefore inevitably higher.
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.
Austria economic growth strengthened between 2004 and 2007 (average annual growth of 2.96%), after a weak start to the century (Austria experienced average annual growth of 0.99% from 2001 to 2003).
The stronger economy was mainly due to one sector, exports, to one country, Germany. More than 75% of Austria’s exports go to Europe, 30% to Germany. Exports of goods and industry grew by 7.3% in 2006 and 8.4% in 2007. Germany, in turn, exports mainly to France, US, UK and other EU member countries.
Austria’s economy has suffered from the economic recessions in its export markets, but with a lag. After marginal economic growth in the first two quarters of 2008 (0.5% and 0.2%, respectively), GDP stagnated in Q3 and shrunk 0.2% in Q4.
The economy is expected to enter recession in 2009 and contract as much as 2%, entirely wiping out 2008’s GDP growth of 1.6%.
Nevertheless, the unemployment rate (Eurostat definition) has continued to move down, from 5.2% in 2005 to 3.8% in 2008, the second lowest among 27 EU-member countries. The recession is expected to push unemployment to 4.5% by the end of 2009.
Aside from shoring up financial market liquidity, the government aims to launch a bank stability initiative for those countries in central and eastern Europe where Austrian banks have significant exposure. Austrian banks have outstanding loans equivalent to about 70% of GDP.
The government is now implementing two stimulus packages to boost consumer spending. However, the packages have no specific provisions aimed at homebuyers or the housing sector.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.