Rent or Buy. Due to the enormous increase in interest rates since mid-2022, it is currently better to rent than to buy in Austria’s largest cities.
The first interest rate cut by the European Central Bank (ECB) in eight years is finally expected on Thursday. Previously, after a long period of zero interest rates from mid-2022, things had gone in the other direction within a very short space of time. This turnaround in interest rates has not only caught many large real estate developers off guard. Unsurprisingly, the rapid increases in the key interest rate have also made buying a property significantly more difficult for ordinary consume
Enormous increase in interest charges
The international company Price Hubble, which offers real estate valuations for the financial and real estate industry and has around 100 clients from these segments in Austria, took a look at just how much.
Price Hubble compared the purchase of an average property in the five largest Austrian cities (Vienna, Graz, Linz, Salzburg, Innsbruck) with the renting of a property of the same average size, whereby the monthly interest payments on the purchase (excluding repayments) or the net cold rent were compared with the average income in each case.
Graz and Linz comparatively affordable
Property is still comparatively affordable in Graz and Linz. Here, only 23.6 and 25.5 percent of average income has to be spent on interest, but in 2021 it was only 6.6 and 8.2 percent respectively. In terms of rents, the two cities are currently at 15.9 and 17.3 percent respectively.
Much more moderate declines than in Germany
Crain explains why only the interest costs were used for the comparison by saying that it would otherwise have been an unfair comparison. After all, the repayment of the loan “pays into” the property value, which normally remains with the owner.
What also surprises Crain is that property prices in Austria have fallen far less than in Germany, where they have fallen by up to a quarter. In Austria, newly built residential properties have hardly become cheaper at all, at least in some federal states. Only the prices of second-hand properties have fallen somewhat more sharply since the previous year.
Crain explains that the calculations were not based on an average apartment size, but on the median of the available supply. In addition to the land register, Price Hubble also obtains data from its clients, which include numerous large real estate portfolio holders as well as financial institutions.
Price declines at a “walking pace”
The latter was also the case in the first quarter of 2024, but again only “at a walking pace”, namely by 0.6%, as Raiffeisen Research writes in a current analysis of the OeNB property price index figures. Nevertheless, the decline recorded between January and March is already the sixth in a row. However, the downward trend has slowed again. “The price slide in the fourth quarter was not the start of an accelerated price correction, as this only took place at a gradual pace for most of 2023,” summarizes Raiffeisen analyst Matthias Reith.
The big slump is unlikely to continue, and new-build apartments in particular are unlikely to become cheaper in the foreseeable future. However, the “slow-motion price correction” should continue, Reith believes. Overall, the market is still in a “discovery phase”; the price expectations of buyers and sellers are still diverging, which is why there are relatively few transactions.
Speaking of which: according to Reith, the “remarkable” slump in real estate transactions in Austria, even in a European comparison, is also one of the reasons why prices have only fallen slightly so far. “Potential sellers are unable or unwilling to adjust their asking prices to the changed conditions. While potential buyers are unable to pay the prices they paid before the interest rate turnaround due to higher interest rates.! Supply and demand must and will come together again, according to the analyst. “However, this presupposes that prices once again match the fundamental framework conditions such as interest rates and income. And that is not yet the case.”
Further decline in lending
Because so few people are buying, the granting of home loans has also plummeted. According to the credit platform Infina, 2023 was already a crisis year in terms of new lending, as only 10.4 billion euros in new loans were granted. In 2022, the figure was still 23.2 billion euros.
According to the National Bank, the market recorded a further decline of 13.4% in the first quarter of 2024. There is still a lack of positive momentum in the market for financing private homes, says Infina CEO Christoph Kirchmair. “Initial positive developments can be forecast for 2024, but a turnaround is not yet in sight.” The chances of a first key interest rate cut by the European Central Bank on June 6 are good (and have since come true, note). But he believes that a reduction of just 0.25 percentage points will not be enough to significantly stimulate the market.
For Raiffeisen analyst Reith, however, the scope for relief is “less than often thought”. The interest rate headwinds will remain considerable in 2024, with variable loan interest rates unlikely to be lower on average than in the previous year. Although many households are likely to speculate on rapid interest rate cuts, these are unlikely to materialize. In his opinion, inflation will be the main reason why real estate will slowly become more affordable again in the near future. This is because incomes are largely linked to the consumer price index; if property prices do not (or no longer) rise in line with inflation, it will become cheaper to buy.
St. Pölten and Eisenstadt most affordable
Under the current conditions, which of course include the strict lending rules (KIM-VO) that have been in force since August 2022, it is still very difficult to finance a property. Infina has analyzed how many square meters of (second-hand) property can currently be financed in the Austrian provincial capitals. St. Pölten and Eisenstadt fared best, where it is possible to finance a used condominium with a theoretical size of up to 139 and 136 square meters respectively with the respective local purchasing power and a 20-year fixed-interest loan. In the areas surrounding these two provincial capitals, the figures were as high as 171 and 167 square meters respectively.
In Vienna’s first district, the figure is only 40 square meters, while the average for districts two to nineteen is 68 square meters, based on the same purchasing power per capita of EUR 27,328. In Salzburg, Innsbruck and Bregenz, Infina calculated sizes of 63 to 89 square meters, with over 100 square meters in Graz (110), Linz (111) and Klagenfurt (123).
(Martin Putschögl, 6.6.2024)
Translated from the German Source: Der Standard
Image- Pixabay.com