Austria’s housing market is now losing steam

Austria’s housing market is now cooling rapidly, amidst weakening demand, falling residential construction activity, coupled with slowing economy.

During the year to Q2 2023, the residential property price index in Austria fell by 2.27% (-10.18% in real terms), in stark contrast to the strong y-o-y increase of 13.13% in the previous year and the first price decline since Q2 2008, according to figures from the country’s central bank Oesterreichische Nationalbank (OeNB).

Austria’s house price annual change

During the latest quarter, nationwide property prices dropped 0.22% q-o-q (-1.84% in real terms).

Though the national figure conceals the wide disparity of house price movements between Vienna and the rest of the country.

• In Vienna, Austria’s capital, house prices were down by 3.06% (-10.91% in real terms) in Q2 2023 as compared to a year earlier, its worst showing since Q4 2001. During the latest quarter, Vienna’s residential property price index declined 0.64% q-o-q (-2.25% in real terms).
• In the rest of Austria, in contrast, the residential property price index rose strongly by 13.7o% (4.50% in real terms) in Q2 2023 from a year earlier, at par with the prior year’s 13.84% growth. House prices in the rest of the country have been increasing by double-digit figures since the second half of 2020. On a quarterly basis, house prices were up by 3.11% (1.44% in real terms) in Q2.

The housing market slowdown in the country was supported by figures from Statistics Austria, which showed that the overall house price index rose by a modest 2.65% during the year to Q1 2023 (and declined by 7.01% in real terms), following y-o-y rises of 7.2% in Q4 2022, 11.94% in Q3, 12.27% in Q2 and 14.68% in Q1.

By property type:

• For new dwellings, the average price rose by 9.75% (but actually declined slightly by 0.57% in real terms) during the year to Q1 2023, a slowdown from the previous year’s 15.62% increase.
• For existing dwellings, the average price fell by 0.49% (-9.85% in real terms) in Q1 2023 from a year earlier, in sharp contrast to the y-o-y increase of 14.31% in Q1 2022 and the first decline since Q1 2015.
• For existing houses, the average price was down by 2.17% y-o-y (-11.37% in real terms) in Q1 2023, a sharp turnaround from the strong growth of 14.34% seen in Q1 2022.
• For existing flats, the average price rose by a minuscule 0.76% (and declined by 8.71% in real terms) in Q1 2023 from a year earlier, a sharp deceleration from a y-o-y increase of 14.27%.

Demand has been falling sharply in recent months, mainly due to rising interest rates and stricter lending criteria in banks. In June 2023, the total amount of housing loans outstanding fell slightly by 0.3% to EUR 139.9 billion (US$ 154.3 billion) from a year earlier, according to figures from the OeNB.

Construction activity continues to fall. During 2022, the total number of dwellings approved for construction in Austria fell sharply by 18.8% y-o-y to 58,924 units, following annual declines of 5.8% in 2021 and 9.3% in 2020, based on figures released by Statistics Austria. The weakness of the construction sector continued this year, with the number of dwelling permits plummeting by 36.2% y-o-y to 10,348 units in Q1 2023.

The housing market is expected to remain weak during the remainder of the year, amidst rising interest rates, high inflation, and a sharp economic slowdown.

In Q2 2023, the Austrian economy declined by 0.3% from a year earlier, in contrast to y-o-y growth of 1.8% in Q1 2023, 2.9% in Q4 2022, 2.1% in Q3 2022, 6.3% in Q2 2022 and 8.7% in Q1 2022, amidst a decrease in private household consumption and gross fixed capital formation.

As a result, the European Commission expects the Austrian economy to grow by a meager 0.4% this year, before slightly picking up to 1.6% in 2024. OeNB’s forecast is slightly more optimistic, projecting a real GDP growth rate of 0.4% in 2023 and 1.7% in 2024. This is a sharp slowdown from strong growth of 4.6% in 2021 and 4.9% in 2022.

Differences in local house prices

Vienna is ranked as the world’s best city to live in, in terms of quality of life, according to the 21st Mercer Quality of Life study. In fact, the Austrian capital has had the world’s highest quality of living for a decade now. The study examined social and economic conditions, health, education, housing, and the environment.

“Globally, Vienna tops the ranking for the 10th year running,” said Mercer. “Vienna remains the highest ranking city in Europe and globally, providing residents and expatriates with high security, well-structured public transportation, and a variety of cultural and recreation facilities,” Mercer added. It is a no-brainer that these qualities have attracted a lot of foreign investors into purchasing homes.

Wealthy Eastern Europeans are attracted to Austria due to cultural similarities and see Vienna as a very safe environment and a safe haven for their investments. There are no restrictions on foreigners buying properties in Austria.

In the high-end residential market, Austrians represent about 60% of property buyers while the remaining 40% are foreigners, mainly from Eastern European countries like Russia and Ukraine.

Vienna’s “super-prime” area, on the other hand, attracts a more diverse set of foreign buyers. Some of these come from Switzerland, the United States, the Middle East, and Hong Kong, according to Otto Immobilien Gruppe’s head of residential marketing, Richard Buxbaum.

The First District, also called “Innere Stadt”, which means “Inner City”, is a UNESCO heritage site blessed with baroque architecture as well as the Imperial Palace. The First District is the center of Vienna’s luxury and secondary home market. In July 2023, Innere Stadt apartments cost on average around EUR 19,826 (US$21,861) per square meter (sqm), down by 7.4% from a year earlier, according to the Immopreise.at. Though prices can reach as high as EUR 30,000 (US$ 33,080) per sqm in exceptional cases. Slightly lower prices are seen in surrounding areas such as the 2nd to the 9th districts. Prices of condos or villas in the 19th, 18th, and 13th districts range from EUR 8,000 (US$8,821) to EUR 9,500 (US$10,475) per sqm.

In Graz, houses cost, on average, EUR 4,165 (US$4,593) per sqm in July 2023, according to the Immopreise.at. In Linz, houses cost slightly higher, at around EUR 4,473 (US$4,932) per sqm. On the other hand, Salzburg houses are currently offered for an average price of EUR 10,894 (US$12,012) per sqm.

Housing cycle

House prices in Vienna have been rising consistently since Q3 2004. During the first decade of the housing boom (2003-2014), house prices in the capital soared by 114% (70% in real terms). Property prices in the rest of Austria rose much less, by just 37% (9% in real terms) from 2003 to 2014.

Why did Vienna’s house prices rise faster than the rest of Austria from 2004 to 2014? It is puzzling, but it may be partly because it is difficult to build in the center of Vienna, so the new supply is very limited. It may also be because, in an era of low-interest rates, people are putting money into rental properties, and Vienna offers relatively easy renting (though returns are quite moderate). Another possible factor is that the majority (about 70%) of residential real estate in Vienna is owned by institutional investors, i.e., banks and companies.

In the following years, this trend was reversed, as the capital city had become expensive. Moreover from 2020 to 2021 during the Covid-19 pandemic, work-from-home setup became popular, resulting in a decline in property demand in the city center and an increase in demand for larger residences in less crowded, more quiet residential locations. Vienna’s house prices rose by almost 41% (24.6% in real terms) from 2015 to 2021, while the rest of Austria registered stronger growth of more than 56% (38.4% in real terms).

Though in 2022, house price growth moderated, with Vienna’s house prices rising by 4.76% (and actually declining by 5.29% when adjusted for inflation). Though the rest of Austria remained strong, registering an average house price increase of 14.71% (3.71% in real terms) last year.

Housing permits continue to fall

Housing permits have been falling in the past three years, since the onset of the coronavirus pandemic. During 2022, the total number of dwellings approved for construction in Austria fell sharply by 18.8% y-o-y to 58,924 units, following annual declines of 5.8% in 2021 and 9.3% in 2020, based on figures released by Statistics Austria.

The weakness of the construction sector continued this year, with the number of dwelling permits plummeting by 36.2% y-o-y to 10,348 units in Q1 2023.

• New residential buildings with 1 or 2 dwellings: 3,078 units in Q1 2023, down by 34.9% from a year earlier
• New residential buildings with 3 or more dwellings: 4,360 units, sharply down by 47.9% from a year ago
• New other buildings: 37 units, down by 40.3% from Q1 2022
• Attachment, construction, and conversion work: 2,873 units, down 6.3% from a year earlier

Housing permits grew by an average of 9% annually from 2013 to 2017. After declining by 14% in 2018, permits rose again by 11.4% in 2019. The number of dwellings approved for construction has been falling since the onset of the pandemic.

The number of new dwellings built in Austria was around 66,000 units yearly in the 1990s, but the number fell to about 40,000 units a year during 2001-2004. In 2021 (the latest figures available at Statistics Austria), dwelling completions increased by 5% y-o-y to 71,163 units, an improvement from the prior year’s 1% decline.

During 2022, the total dwelling stock as main residences in Austria reached 4,067,000 units, up by 1.2% from a year earlier and by more than 10% from a decade ago. Vienna accounted for 23.1% of the stock, followed by Lower Austria (18.5%), Upper Austria (16.2%), and Styria (13.9%).

Currently, about two-thirds of Viennese citizens live in municipal or publicly subsidized housing. About 80% of flats built in Vienna are financed by the city’s housing subsidy scheme. Vienna’s local government plans a 30% boost in housing construction implying that about 13,000 new homes will be built in Vienna every year, up from the current 10,000.

Low rental yields, increasing rents

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 (though even the “free” sector is substantially controlled, with maximum rents clearly specified by the authorities). Global Property Guide’s figures cover the “free” market sector only.

Property prices in Vienna continued to increase in recent years, despite the Covid-19 pandemic. Therefore, you can expect that gross rental yields - the return on investment on a property before all expenses - are weak. But you can generate higher yields in less expensive districts. It all depends on where you buy it.

In Vienna’s Innere Stadt (Old Town), gross rental yields are poor, ranging from only 1.14% to 1.82%, roughly the lowest rental yields in Vienna, according to a Global Property Guide research conducted in November 2022. With this kind of rental return, no one is buying a property to be purely rented out. Innere Stadt is considered the most expensive district of Vienna by price per square meter.

But moderate yields can be generated in Vienna’s other luxurious areas, such as Floridsdorf, Penzing, Favoriten, Liesing, and Landstraße. Gross rental yields in these districts range from 2.5% to 4%. 

Outside Vienna, Salzburg apartments offer gross rental yields ranging from 1.84% to 4.27%. Gross rental yields in Graz are slightly better than in Salzburg - ranging from 3.4% to 4.12%. The smallest apartments return the highest rental yields.

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. Rents have been continuously rising since, albeit at a moderate pace of about 4% annually. Moreover, the continued increase in home prices in Austria, especially in Vienna, has resulted in a fall in rental yields.

Though, rent increases have been accelerating in recent months, amidst heightened inflationary pressures. In Q1 2023, the average rent (excluding running costs) per dwelling in the country rose by 8.5% y-o-y to EUR 457.8 (US$501) per month, a sharp increase from a modest growth of 2.1% in Q1 2022, according to Statistics Austria.

If measured per square meter, the increase in average rent is slightly lower at 7.9% to EUR 6.8 (US$7.4) over the same period, but still far higher than the 1.6% y-o-y rise in Q1 2022.

Large rental market

Vienna has one of the highest percentages of renter households in the world, with about 75% of homes rented. In Austria as a whole, households own 56.4% of primary residences, while 41.2% are rented, according to a recent Austrian micro census. 

Austria’s homeownership rate declined to 51.4% in 2022, down from 54.2% in the prior year and way below the EU-27’s average rate of more than 70%, based on figures from Eurostat.

The high percentage of rented residential properties is due to the large proportion of subsidized low-rent apartments in the general rental market, according to Martin Schneider of the OeNB. Limited tax incentives for home ownership also contribute to the high proportion of renters.

There were about 1,758,200 rented dwellings in Austria in Q1 2023, up by 3.8% from the same period last year, according to Statistics Austria.

Interest rates for housing loans are rising sharply

In May 2023, the average interest rate for new housing loans rose sharply to 3.93%, from just 1.5% a year earlier and 1.2% two years ago, according to the Oesterreichische Nationalbank (OeNB).

By initial rate fixation (IRF), the average interest rates for new housing loans in May 2023 were:

• IRF under 1 year: 4.2%, far higher than 1.05% in May 2022 and 0.99% in May 2021.
• IRF over 1 and up to 5 years: 4.14%, sharply up from 1.72% last year and 1.31% two years ago.
• IRF over 5 years and up to 10 years: 3.79%, up from 1.64% in the same period last year and 1.34% two years earlier.
• IRF over 10 years: 3.39%, up from 1.72% a year earlier and 1.34% two years ago.