Is the Austrian Property Market in A Bubble?
- This article is an updated version of the previous one I wrote in September 2019: Vienna calling — An assessment of the Austrian housing market in the form of a scientific essay.
- Disclaimer: This article only represents the personal opinion of the writer and should not be used as financial advice or as basis for an investment in Austrian real estates.
Abstract
Home prices in Austria have experienced a significant increase in the last two decades. Is this a sustainable increase or is the Austrian real estate in a bubble? Will the price of property fall in the future? In order to investigate these questions, we will first look at the definition of ‘bubble’. Then we will look at relevant indicators, price-to-income ratio, price-to-rent ratio, house price vs income, and population growth. After that, we will analyze the economic factors, GDP growth, unemployment rate, and interest rate. Based on this analysis, we conclude that the Austrian property market, in fact, seems to be in a bubble.
1. Introduction
According to the World Population Review, Austria is ranked as one of the top countries with respect to the standard of living (Standard Of Living by Country 2021, n.d.). In the past decades, the population in Austria has increased steadily, rising from 8.1 million in 2000 to 8.9 million in 2020 (Austria Population 2021, n.d.).
The increased demand has had a considerable effect on housing and rental prices. In the recent report from the Austrian National Bank, the housing price in Austria in the 4th quarter of 2020 increased by 10% compared to the same period the previous year (Immobilienpreise Österreich/Wien, n.d.). This increase might give rise to concern among potential property owners who worry that — if prices continue to rise — Austrian real estate buyers will no longer be affordable for them. The objective of this study is to investigate the current state of the Austrian housing market. We will further assess if the strong price increase might result in the formation of a bubble. The methodology applied in this study is based on data collected from multiple sources, such as official institutions and statistical websites.
2. The Concept of Housing Bubble
There are several definitions of a housing bubble. According to Case and Shiller, housing markets form a bubble when an increasing number of buyers have unrealistic expectations of how the prices will develop in the future. Believing that house prices will continue to rise in the future, they feel compelled to buy real estate at inflated prices. At the same time, they expect to be able to sell their high-priced properties to other buyers at an even higher price at a later date. Due to the ever-increasing prices, the number of buyers participating in the market is falling. This means that prices cannot be kept at a consistently high level. After a peak, real estate prices start to fall. Buyers of high-priced properties try to sell them quickly to avoid losses. As a result, prices fall faster, which sets off a chain reaction of more buyers wanting to sell their properties before they make a loss. The bubble bursts and house prices are returning to their original level (Case & Shiller, 2003).
According to Joseph E. Stiglitz (1990), a bubble of an asset exists “if the reason that the price is high today is only because investors believe that the selling price will be high tomorrow — when ‘fundamental’ factors do not seem to justify such a price.” However, Stiglitz’s argument is flawed because no clear definition of the term ‘fundamental’ exists. If we only focus on the price of an asset, we could speak of a bubble when the price experiences a substantial increase followed by a substantial decrease. To be more precise, if the real price of property doubles within five years or increases by 50% within three years, then within one to two years’ time after the peak will start to fall. We, therefore, conclude that there was a bubble (Lind, 2009). In the next section, we will look at the property price development in Austria as well as a number of other factors.
3. Indicators helping to Analyse the State of the Austrian Property Market
3.1 Price-to-income Ratio and Price-to-rent Ratio
House prices usually increase with inflation. Thus, it is not reasonable to calculate the change in nominal prices. The price-to-income ratio and the price-to-rent ratio measure how sustainable house prices are.
3.1.1 Price-to-income Ratio
This ratio measures the affordability of properties. A high price-to-income ratio indicates that it is difficult for a person with an average income to own a home. In the long term, this could create downward pressure on the price.
As figure 1 illustrates, Austria is ranked 8th at 123.4 when compared to the price-to-income ratio of OECD countries. It is significantly higher than most other OECD countries (110.2) and higher than 17 Euro countries combined (111.8). This indicates that real estate in Austria are at an unaffordable level.
3.1.2 Price-to-rent Ratio
Combined with the price-to-income ratio, it is easily deducible, whether it is more economical to buy or rent a property. A high price-to-rent ratio will encourage people to rent rather than buy. When the price-to-income ratio aligns with the price-to-rent ratio, a person with an average income should be indifferent to buying and renting a property.
The price-to-rent ratio is much lower in Austria (115.6) compared to the price-to-income ratio. It is at the same level as other OECD countries and slightly lower than 17 Euro countries combined. This indicates that it is cheaper to rent a piece of property other than buying one in Austria.
3.2 House Price vs. Income Growth
Austria’s high price-to-rent ratio suggests that it is unaffordable for the average working Austrian to buy real estate. This is supported by the comparison of house price and income growth.
We use the year 2000 as the base year. Until the 4th quarter of 2020, the property index shows that the price level is 230 for all of Austria, 217 for the rest of Austria excluding Vienna, and 268 for Vienna. This means that in the 20-year period, the property price in Austria has more than doubled. In Vienna, the price increase is the most significant, 2.68 times.
However, the nominal income did not increase as much as the property price. From 2000 to 2020, nominal income increased by only approximately 1.5 times. Real income for Austrians has hardly changed. The widening gap between property price and income suggests that it is more and more difficult for Austrians to afford to buy a home.
3.3 House Price vs. Population Growth
Usually, an increase in population causes property prices to increase due to higher demand for buying homes.
In the introduction section, we mentioned the population increase from 8.1 to 8.9 million in the last 20 years, a 9.9% increase. This increase alone cannot justify the huge increase in property prices. We will therefore examine economic factors to determine if house price is supported by economic growth.
4. Economic Factors Influencing the Austrian Property Market
4.1 GDP Growth
Austria’s nominal GDP has increased steadily in the last 20 years while experiencing a slight drop during the 2008 great financial crisis. As figure 5 illustrates, the real GDP did not increase as much as the nominal GDP. The COVID19 pandemic has brought a significant decrease in GDP in 2020. If we compare GDP growth to the increase in house prices, we can see that neither the 2008 crisis nor the 2020 pandemic had an impact on house prices in Austria. Property prices have been increasing steadily since 2004.
4.2 Unemployment Rate
Below is a chart of the unemployment rate in Austria from 1995 to 2022. We can see that from 2013 onwards the unemployment rate has remained significantly higher than in the previous years. During 2015 and 2016, the unemployment rate reached its highest point since 1995, then dropped steadily to 7.4% in 2019, which was still higher than any year before 2013.
At the beginning of 2020, COVID19 brought a halt to the world economy. Many countries implemented lockdowns. Millions of people lost their jobs during the pandemic. According to the Labor Market Service, more than 535,000 people in Austria were registered as unemployed or in training courses. Around 470,000 employees were registered for short-time work. The unemployment rate is estimated to be at 11.4%, a 2.8% increase compared to January 2020, which is the highest January unemployment rate since 1950 (AMS, 2021).
More people out of work means that a bigger part of the population is experiencing a financial strain. As a result, fewer people are able to afford their own piece of property. However, higher unemployment rates seem to have little impact on the increasing housing prices in Austria.
4.3 Interest Rate
Low interest rates make it attractive for people to take out loans and mortgages from banks because it is cheaper to borrow money. On the other hand, high interest rates discourage people from borrowing money because the cost of borrowing is high.
As shown in the figure below, both short- and long-term interest rates have been on a downward trend. In recent years, they have reached historically low levels. These cheap borrowing rates made it attractive to buy Austrian real estate, thus pushing the property price.
5. Discussion and Conclusion
During the last 15 years, it seemed to be a risk-free investment to put your money in the Austrian property market. Property prices have increased despite a high unemployment rate, the economic crisis, and an unproportionate slow increase in income and GDP. The COVID19 pandemic, which started in Austria at the beginning of 2020, caused many companies to go bankrupt and increased unemployment. Central banks around the world introduced quantitative easing programs, which include rescue packages to companies, lower interest rates, and generous unemployment payments. However, due to lockdowns and the uncertainty about the future, a large proportion of the money given out by central banks did not stimulate the economy to create real value. Instead, it was invested into the stock market, precious metals, cryptocurrencies, and of course, real estate. The prices of these assets have experienced large increases since the end of 2019.
In the previous sections, we have analyzed several indicators: price-to-income ratio, price-to-rent ratio, and house price vs population growth, as well as economic factors: GDP growth, unemployment rate, and interest rate. In terms of affordability, property prices in Austria are high compared to other European countries. Combined with other ratios and factors, we conclude that the increase in property price is not sustainable. However, referring back to the definition of ‘bubble’ in section 2, the price of properties did not double in the last 5 years nor did it experience a 50% increase in the last 3 years. Currently, the increase in demand for property is due to the low interest rate and the uncertainty caused by the pandemic. These factors will probably continue to push property prices further. We, therefore, believe that it is justified to conclude that the Austrian housing market is still in a bubble. However, prices still seem to have some room to grow before the bubble bursts.
References
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Austria Population 2021. (n.d.). World Population Review. Retrieved March 15, 2021, from https://worldpopulationreview.com/countries/austria-population
Case, K. E., & Shiller, R. J. (2003). Is There a Bubble in the Housing Market? Brookings Papers on Economic Activity, 2003(2), 299–362. https://doi.org/10.1353/eca.2004.0004
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