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EXPLAINED: Why Austria’s rising property prices are causing alarm

As property prices in Austria soar and people take on more debt to buy homes, the country's national bank has raised the alarm.

EXPLAINED: Why Austria's rising property prices are causing alarm

Over recent years, residential property prices in Austria have soared,

But there are increasing signs that prices are growing at an unsustainable rate and that’s causing concern for Austria’s National Bank (ÖNB), according to the lender’s latest Financial Stability Report.

In the first three months of 2022, prices were up by 12.3 percent compared to the same period in 2021, and the trend continues upward both in Vienna and the rest of the country. At the same time, low-interest rates drive up loan volume and encourage investment opportunities in the market.

READ ALSO: EXPLAINED: How Austria’s new finance measures could benefit you

The lingering question, especially since the 2008 financial crisis, is whether or not Austria is creating a housing bubble – and will it burst?

“The systemic risks emanating from these dynamics in the residential real estate market have increased steadily over the past few years and now need to be addressed through supervisory action,” ÖNB Vice Governor Gottfried Haber explained.

What are the risks?

Real estate prices have risen much faster than household incomes for around ten years. Nonetheless, more and more people are taking out mortgages, particularly over the past year.

Austria’s National Bank also mentioned that a large sum of mortgage loans was offered with conditions that leave little room for manoeuvre in case of unforeseen adverse developments, such as increasing cost of living or unemployment or interest rate increases.

READ ALSO: How has the coronavirus pandemic impacted Vienna’s property market?

According to the bank, half of the new recent loans in the country were granted with down payments of less than 20 percent – which they assess as a risk. Another risk factor is the high share of variable rate loans – meaning loans with fees that depend on changeable interest rates. If rates go up in Austria (for example, to counter rising inflation), it could leave borrowers vulnerable.

How much in trouble are we in then?

Several factors mitigate risks in Austria and make the situation less comparable to the housing bubble in the United States in the early 2000s.

The main thing is that Austria has a well-developed rental market with a high share of nonprofit providers. This means that many people, especially low and average income, are renters in the country.

Additionally, the high share of nonprofit providers (such as the state, in the case of a Gemeindebaum, or cooperatives, in a Genossenschaft) helps keep rental prices from soaring, maintaining people in rental properties for longer.

READ ALSO: Reader question: How does Vienna’s rent control system work?

“Moreover, Austrian borrowers tend to have high incomes and wealth by international standards”, adds the ÖBN report, stating another significant difference between the US housing bubble crisis and the current situation in the alpine country.

Finally, Austrian banks are better capitalised, with high sums of provisions against bad loans to cushion possible default losses. This basically means that Austria’s banks have enough cash and have saved up money to prevent significant impacts in case of people not paying back their loans.

Still, ÖNB says that, especially in times of crisis, the country’s real estate market poses systemic risks that can jeopardise Austria’s financial stability and should be addressed.

How will Austria address its problem?

The Austrian government is expected to unveil new mortgage rules next month, Der Standard reported.

Among the expected changes, borrowers will need to pay 20 percent of the loan amount from their own funds. In addition, the loan instalment must not exceed 40 percent of the net household income, and the loan term is to be limited to a maximum of 35 years.

READ ALSO: Property in Austria: Real estate in high demand in Tyrol

Austria’s Financial Market Stability Board (FMSB) issued a recommendation for the implementation of such measures, calling them “borrower-based instruments”.

The goal is to prevent potential losses in the banking sector and protect the economy, but also protect borrowers from taking on excessive debt.

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Is now a good time to buy property in Austria?

With reports that demand for property is falling in Austria, could now be a good time to buy? We take a closer look at the data to find out.

Is now a good time to buy property in Austria?

Anyone planning to buy a home in Austria will be aware that prices and demand have been rising over the past couple of years. 

But Austrian broker association Remax is now saying that demand is falling with signs that “the market is starting to turn”.

In the first half of this year, 74,258 newly purchased properties were registered in the Austrian land register (Grundbuch). This is three percent less than during the same period in 2021, according to data from Remax.

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However, this figure is still 15.7 percent more than in the first half of 2019, which reflects the boom in the Austrian property market since 2020.

Also, despite the number of transactions going down this year, the value is actually up by 10.8 percent to €21.73 billion, which shows property prices are not yet coming down.

Bernhard Reikersdorfer, Managing Director of Remax Austria, said: “The growth was primarily supported by Vienna and Styria, but also by Upper and Lower Austria. 

“This means that real estate trading turnover has increased by a third in the first half of the year since 2019 and 2020, and more than doubled when compared to 2015 and before that.”

‘Inflation is driving up costs’

The Remax report says property market trends in Austria are being influenced by the Covid-19 pandemic, the war in Ukraine, inflation and the energy crisis. 

This has led to a change in prospects for some people, which is being seen as a drop in demand in the property market and a reduction of new construction projects on privately owned land.

READ ALSO: READER QUESTION: When should I turn on my heating in Austria this year?

Anton Nenning, Remax Austria expert, said: “Inflation is driving up the new construction costs – first through the material and now through the staff – and is now gnawing away at the equity capital saved for new acquisitions. 

“This means that many financing transactions that could be processed easily and cheaply a year ago are suddenly a case for selected experts who can still find a way even in tricky situations. For many, however, this simply means a project stop.”

As a result, the market for single family homes in Austria is heating up as they are sometimes cheaper than building a new property on private land. 

What is happening in Vienna?

Austria’s capital city remains the second best performing property region in Austria (behind Lower Austria). The value of all property sales in Vienna increased by one billion in the first six months of 2022, bringing the total to €6.68 billion.

Donaustadt is the best performing property market in Vienna with 1,903 properties sold, followed by Favoriten with 1,096. Donaustadt even overtook Graz and Kitzbühel to record the highest value in property sales.

The five largest real estate transactions in Austria also took place in Vienna during the first six months of the year. 

A plot of land (258,269 m²) in the 22nd district became the country’s most expensive property when it was sold for €86 million.

READ NEXT: Living in Austria: Is Vienna a family-friendly city?

What are the property trends outside of Vienna?

Vienna might be Austria’s capital city, but it doesn’t have the hottest property market in Austria right now. Instead, that title belongs to Salzburg and Styria.

Property sales in Styria are up by 9.2 percent and the overall transaction value has increased by 18.5 percent. In Salzburg, both sales and transaction values increased by 3.6 percent.

In the Alps though, the opposite is taking place with sales down by 10.7 percent in Vorarlberg and by 6.4 percent in Tyrol.

However, Tyrol is still recording some high prices (despite the overall decrease in sales) with the state’s most expensive property selling for €19.6 million in Kitzbühel earlier this year.

Lower Austria is currently the country’s best performing state for the number of sales, although the province recorded a decrease for the first time since 2013. 

The Remax report named Mödling as the most popular district for property in Lower Austria.

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