Real estate outlook Austria: Divergence & balcony premium in Corona year 2020

The Corona recession has further fuelled the Austrian residential property market. Detailed data show: Already expensive regions posted above-average price growth, so continuity was maintained with respect to the continued (regional) divergence. Moving a level below the federal states, it becomes obvious that “second-tier” districts were able to benefit more than the absolute periphery, whilst the desire for outdoor space caused the “balcony premium” to rise. Prices and housing loans are increasing in unison, the latter partly with increasingly challenging conditions. Regulatory steps can be expected.

Austria: Continued divergence between federal states

Based on the transaction prices published on 31 May (Statistics Austria), the upward price trend in the real estate sector accelerated markedly in 2020. Basically, the trend of the last few years of increasing regional divergence has been confirmed once again, i.e. the more expensive regions have by and large recorded higher price increases than the more affordable parts on Austria's map. This increasing price divergence applies above all to single-family homes, where in some cases even double-digit growth rates have accelerated the existing upward price trend. Tyrol (+14.7%, 3,333 EUR/m2), followed by Vorarlberg (+9.6%, 4,018 EUR/m2) are at the top of the hit list of the most expensive federal states. In contrast, the “cheap” federal states Burgenland (+4.9%, 924 EUR/m2), Carinthia (+4.6%, 1,569 EUR/m2) and Styria (+1.3%, 1,390 EUR/m2) clearly lagged behind in their price development. This significantly widened the price difference per square meter of living space.

In 2020, prices of flats developed even more dynamically, than single-family homes (+6.4% yoy), with an Austria-wide increase of 6.9% yoy. Thus, the average price climbed to 3,508 EUR/m2 in 2020. This reflects, not least, the increased investor interest in this category, as investment considerations are also becoming increasingly important outside of Vienna. Although Vienna recorded growth of around 8.2% yoy (4,399 EUR/m2), it was eclipsed by Vorarlberg (+15.7% yoy, 4,523 EUR/m2) and previously more affordable areas such as Carinthia (+17.4% yoy, 2,667 EUR/m2), Lower Austria (+10% yoy, 2,926 EUR/m2) and Upper Austria (8.5% yoy, 3,011 EUR/m2). The search for investment alternatives has therefore also led to a strong increase in housing prices in these latter — more affordable — federal states. As rents traditionally do not fluctuate as much as property prices, these more affordable areas generally have higher returns, although investors have to accept the risk that finding tenants may prove more time-consuming than in areas characterised by higher population fluctuation. There is, however, a growing rental market for flats outside the largest urban centres, mainly due to the ageing population and the splitting up of households.

Yearly price growth houses 2020
Statistics Austria, RBI/Raiffeisen Research
Yearly price growth apartments 2020
Statistics Austria, RBI/Raiffeisen Research

In contrast, prices for building plots rose only slightly in the previous year, which may also reflect the decline in people constructing their own homes due to rising construction costs. Austria-wide, there was an increase of 2.5% to 82 EUR/m2, with several provinces, including Vienna (-7.3%, 873 EUR/m2) recording a significant decline (Burgenland: -5.5%, Carinthia: -1.6%). In Tyrol, the relative lack of building land in 2020 was again noticeable in the figures. There, land prices rose strongly from 2009 onwards, only to almost stagnate between 2015 and 2019 with a mere +0.7% on average. It was not until 2020 that prices shot up again, with average land prices in Tyrol rising by around 22.6% to EUR 255/m2.

"Urban exodus" due to Corona - was the "second row" able to benefit?

Time and again since the beginning of the pandemic, the thesis has been put forward that the so-called “second-tier” of the suburbs could benefit from the Covid-related lockdowns and the (forced) switch to home office. Now, this statement can be verified with hard data. Some rural areas have benefited more from year of the pandemic than others. Although it should be noted that in some regions the excessive price increase may also have been caused by the fact that there may have been few transactions, the price increase for houses in somewhat (but not entirely) remote districts cannot be denied. In contrast to previous years, however, according to our analysis these price increases correlate neither with affordability nor with accessibility (travel time to the nearest supra-regional centre).

Yearly price growth houses - per district 2020
Statistics Austria, RBI/Raiffeisen Research

All in all, districts with a travel time between 50 and 80 minutes to the next supraregional centre showed, on average, a somewhat higher price increase in the previous year (+12.1% yoy) than peripheral locations (>80 min.: +7.8% yoy) or the (extended) “Speckgürtel” (<50 min.: +10.8% yoy). The “second tier” (but not the third) is thus the crisis winner on the Austrian residential property market. It should be mentioned, however, that many of these districts have shown higher volatility in the past.

Corona trends: Larger living spaces and outside areas in high demand

Already in spring 2020, the beneficiaries of lockdown & home office were quickly identified: given the time spent at home, larger flats and flats with outdoor areas, houses in general and houses with larger properties in particular were considered Corona winners. The available data now allow a test of this hypothesis. On average across all districts and irrespective of the age of the building, the price of a flat with outdoor space (balcony, terrace) rose by around 7.1% yoy from 2,801 to 3,000 EUR/m2. In contrast, flats without outdoor space “only” increased in price by 6.7% yoy from 2,359 to 2,516 EUR/m2. This discrepancy was similar across all flat sizes. This means that flat buyers in 2020 were willing to put EUR 485/m2 more on the table for outdoor space than for flats without balconies, gardens or terraces. The “balcony premium” has thus increased from 18.7% in 2019 to 19.3%. Or, in other words: The premium for outdoor space for otherwise the same flat size and age or build quality (= indoor space) amounted to just under one fifth in 2020. Two different interpretations are possible: Either external areas of the same size have become more expensive or the external areas of apartments sold have become larger overall. However, both can be seen as an expression of an increased need or desire for more “outdoor space”. Unsurprisingly, the “balcony premium” in Vienna, at 24.8% (2019: 23.5%) or EUR 1,032/m2, is significantly higher than in Austria as a whole, as outdoor spaces are more important in urban areas than in rural areas.

Balcony premium* for apartments has risen by around 10% in 2020
Statistics Austria, RBI/Raiffeisen Research
* Premium paid per m2 over apartments without outdoor areas

However, looking at the construction period of the buildings, the effect was much more pronounced for flats built after 1991 and even reversed for old buildings. For flats in old buildings with outdoor space, the price increase was only 5%, while it was 7.4% for those without a balcony or terrace. For relatively new buildings (built after 1991), however, the difference in price development was almost 3 percentage points in favour of those with outdoor facilities (outdoor facilities: +8.3%; without outdoor facilities: +5.4%).

With regard to flat size, the detailed data reveal an increased value of larger flats. In Vienna, for example, the discount per square metre, which results from the decreasing marginal utility, has decreased significantly for flats between 71 and 85 square metres. Flats over 85 square metres have not changed in their relative attractiveness though (according to the price data). In the rest of Austria, the discount on the m2 price of large flats (>85m2) declined more sharply. This shows that here, where prices are less constrained by affordability, there is a trend towards larger flats.

In terms of house prices (irrespective of living space), the premium per square metre for larger lot sizes has declined somewhat. However, the increased demand for larger living spaces has led to higher price growth for larger houses. As a consequence, the prices of houses with more than 170 square metres of living space increased by 9.5%, those with a size between 120-170 square metres increased by 7.3% and those of smaller houses (<120m2) only increased in price by 6.0%.

The predicted price increase of larger flats, houses and flats with outdoor space can thus be confirmed, although the effects are rather small. However, it can still be assumed that the year 2020 will not represent a break in the trend. Rather, it is likely that there will be no lasting and, above all, significant shift in housing preferences.

Real estate market in Q1 2021: Renewed acceleration of price dynamic

After a slowdown at the end of 2020, price momentum accelerated again in the first quarter of 2021. According to the OeNB (Austrian central bank) real estate price index, prices across Austria rose by 3.9% on a quarterly basis (12.3% on an annual basis). Prices outside Vienna benefited in particular. The dynamic price increase in Vienna (3.3% qoq) is still dwarfed by the development outside the federal capital. In the other federal states, the growth of 4.7% on a quarterly basis, as in Vienna, was mainly driven by flats (+5.2%; second-hand flats +5.5%). Here, similarly, we see increased investor interest as a relevant factor.

Like the European Central Bank (ECB) earlier, the OeNB has also expressed concern about price developments in the residential property market on several occasions. Although the ECB's monetary policy is a driver of this development and of the underlying investment motive, the ECB — despite its vigilance with regard to real estate prices — is not expected to change its monetary policy in the next 3-4 years. With negative interest rates on the money market, it has been creating an extremely favourable financing environment for years, which fuels real estate lending. As a result, mortgage rates, both variable and fixed, have fallen to historic lows in Austria (1.18%) in Q1 2021.

In its latest Financial Stability Report, the OeNB has urged greater compliance with sustainable mortgage lending guidelines; like the IMF also called for more sustainable lending standards in the context of the Article 4 consultations. Going forward, the OeNB could tighten lending standards to curb (legally binding) the development of increasing mortgage loans with equity below 20% and monthly mortgage payments above 40% of the borrower's net income. Such national measures could be a useful flanking measure to the ECB's monetary policy, which is less able to align itself with national circumstances and market trends. Such a measure could noticeably dampen demand and thus price growth in the short and medium term, but would increase the stability of the market in the long term and thus prevent an unfavourable development in the form of a pronounced price correction — which we do not expect. In any case, after another dynamic year 2021 with price growth at least as high as in the previous year (7% yoy), lower price increases represent our base scenario. We share the OeNB's assessment that there are signs of fundamental overvaluation in the Austrian real estate market, but in view of the moderate overvaluation and still relatively good affordability, we do not see any correction risks in the short and medium term. Nevertheless, sensible regulatory and price-dampening measures could give the market more long-term stability.

Residential property price index - Quarterly growth rate in %
OeNB, RBI/Raiffeisen Research
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Casper Engelen is a Junior Research Analyst Economics in the Economics, Rates & FX team. Casper has joined Raiffeisen Research as a student support in 2018. After he finished his study in the field of economics at the WU Vienna in 2019 he joined the Economics, Rates & FX team. Professionally, he is particularly interested in the (macroeconomic) developments in the SEE region and real estate markets in Austria and CEE. Casper has gathered experience in international real estate market analysis both in Austria and abroad. In his spare time, he enjoys cycling, football, fitness and gaming and has a passion for technology and computer hardware.

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Matthias REITH

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Matthias Reith is an economist at the Economics and Financial Analysis division (Raiffeisen Research) of Raiffeisen Bank International (RBI) in Vienna and looks back on more than 10 years of analytical experience at RBI. Then as now, he is the responsible analyst for the Austrian economy, and in 2020 he played a key role in setting up the Austrian regional real estate research. Furthermore, Matthias also has an eye on other euro area countries as well as on the monetary union as a whole, focusing on the business cycle and in particular on fiscal policy. Matthias has several years of experience in lecturing and presenting.