Increase in residential property prices slows down in Vienna, price growth in the rest of Austria accelerates

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1 OeNB property market monitor of October 7: Increase in residential property prices slows down in, price growth in the rest of accelerates Martin Schneider, Karin Wagner, Walter Waschiczek Residential property prices in rose by.% year on year in the second quarter of 7. Compared with as a whole (+7.%), prices increased at a slower pace, but, at +.9%, quarter-on-quarter growth was still substantial. While prices in continued to stabilize, the rest of experienced accelerated price growth. Against the previous quarter, prices in remained almost unchanged (+.%) in the second quarter of 7; in excluding, however, a strong price hike of +.% was observed. Residential construction in finally overcame its long period of weak growth in the first half of 7. Residential construction investment, construction output and hours worked all increased markedly. At +.%, the number of property transactions rose only slightly against the first half of. The OeNB fundamentals indicator for residential property prices in remained high against the previous quarter, amounting to.% in the quarter ending in June 7. For as a whole, the indicator reached 9.%, signaling that also residential property prices throughout are increasingly diverging from prices justified by fundamentals. The growth of housing loans to households started to accelerate slightly in mid- 7, and borrowing conditions remained favorable also in August. The share of foreign currency loans in outstanding housing loans, while continuing its downtrend, still remained large in August. Similarly, the percentage of variable rate loans, which is very high by international standards despite having considerably contracted recently, still implies substantial interest rate risk. Increase in residential property prices slows down in, price growth in the rest of accelerates Price growth accelerates outside of and stabilizes in The results of the residential property price index published by the OeNB in cooperation with the University of Technology show a year-on-year plus of.% in for the second quarter of 7. Prices in rose by.% year on year, but almost stagnated quarter on quarter both in the first and the second quarter of 7. By contrast, in excluding, an opposite development was observed in the first six months of 7, with price growth accelerating after having decreased in the third and fourth quarter of Oesterreichische Nationalbank, Economic Analysis Division, martin.schneider@oenb.at, karin.wagner@oenb.at and walter.waschiczek@oenb.at. The results presented here do not relate to the appraisal of individual properties and should not be interpreted as recommendations for either property purchase or sale.

2 (against the previous quarter, respectively). At +.%, year-on-year price growth was likewise pronounced in the second quarter of this year (following +.% in the first quarter). Residential property prices in Q 7 Q 7 Q Q H 7 H H excl Quarterly change in % x x x x x x x x x x x excl x x x x x x x x x x x x x x x x x x x x x x Index (=) excl Source: University of Technology, OeNB. - Residential property prices in excluding - 7 Trend Quarterly change in % Source: University of Technology, OeNB Trend Price growth in continued to stabilize in the first half of 7, while accelerating in the rest of : resale condominium prices increase slightly amid overall stable price development experienced moderate price increases in all market segments in the second quarter of 7. Condominiums recorded a year-on-year price growth of.%. This increase was driven by resale condominiums the major market segment in, which saw a price hike of.7%. Following a.% increase in, prices of new condominiums have shown signs of stabilization so far in 7. In the second quarter of this year, prices for new condominiums only rose by +.%. Single family house prices are highly volatile, given their small market size. Based on a four-quarter average, prices rose by.% year on year.

3 - Total Used condominiums New condominiums Condominiums, total Single-family houses - 7 Source: University of Technology, OeNB. Residential property prices in by market segments - 7 Trend - 7 Trend - - Jan- Jan- Jan- Jan- 7 Residential building plots owner-occupied housing excluding : price growth accelerates, after price pressures abated in the previous quarters In excluding, price growth slowed down steadily to.% in the first quarter of 7, after having peaked at.% in the second quarter of. However, in the second quarter of 7, prices again advanced at a faster pace (+.%) year on year. Compared with the previous quarter (+.%), growth was even more dynamic in the second quarter. While condominium price growth decelerated only slightly (+.% in the second quarter after +.% in the first quarter), the downward trend in single family house prices came to an end (+.% in the second quarter after.% in the first quarter). - Residential property prices in excluding by market segments Total Used condominiums New condominiums Condominiums, total Single-family houses Jan- Jan- Jan- Jan- 7 Residential building plots owner-occupied housing Source: University of Technology, OeNB Quarterly change in % Quarterly change in % Residential construction gained momentum Residential construction investment is picking up Investment in residential construction increased considerably in the first half of 7, after sluggish growth in previous years and various indicators sending contradictory signals. In fact, real residential construction investment stagnated from to (+.% per annum). In the fourth quarter of

4 posts highest number of building permits per capita within the EU, investments for the first time recorded a noteworthy plus of.7% (against the previous quarter, seasonally and working-day adjusted), a development that continued into the first half of 7. The housing construction output index and the number of hours worked in construction also increased strongly in the first half of 7, clearly reflecting the pickup in residential construction investment. With the latter accounting for a GDP share of.% (EU average:.7%), only ranks eleventh in the European Union, however. The number of building permits rose by % in (: +%). Data available up to the first quarter of 7 suggest a weakening of momentum. At 7. permits per, inhabitants, took the top spot in the respective European Union ranking in. For lack of data, a comparison with the EU average is only possible for. Back then, at 7., s number of permits was more than twice as high as the EU average of.. Under the residential housing initiative launched by the n government in, a residential construction investment bank (Wohnbauinvestitionsbank WBIB) was established in September to fund the construction of, affordable apartments. The WBIB has not yet commenced its work, as the European Commission, at present, examines whether state guarantees are permissible under competition law Index (Q=) Housing investment (real, saisonally adjusted) 9 7 Q (Mai ) Q (August ) Q (November ) Q Flash (Februar 7) Q (Mai 7) 7Q (September 7) Source: WIFO. Change to previous year (smoothed) Residential construction in - 7 Residential investment (real, left axis) Production index residential construction (left axis) Hours worked residential construction (left axis) Building completions (right axis) Source: Statistics, WIFO, OeNB's calculations. Change to previous year (smoothed) Building permits - Number of dwellings in new buildings - - (Trend) Source: Statistics. (Trend) number 7,,,,,,, Residential property transactions in 9 Number Source: ReMAX / ImmoUnited. volume (bn EUR) Volume (bn EUR)

5 Property transactions increased slightly in the first half of 7 Data extracted by IMMOunited from the land register and published by RE/MAX show that, property transactions took place in the first half of 7. The number of transactions hardly rose (+.%) against the first half of. After three years of exceptionally strong growth of 9% in total, the number of property transactions thus stagnated at a high level in the first six months of 7. The numbers for as a whole, however, mask substantial differences among the individual provinces. In the first half of 7, growth was driven by (+.%), Styria (+.7%) and Salzburg (+.%), while Vorarlberg experienced a sharp decline (.%). The value of properties sold and purchased in rose by.% to EUR.9 billion. OeNB fundamentals indicator for residential property prices: further increase in the second quarter In the second quarter of 7, the OeNB fundamentals indicator for residential property prices for remained unchanged against the previous quarter at.%. By contrast, as whole showed a further increase. With the indicator reaching 9.%, residential property prices are increas- ingly moving away from prices justified by fundamentals. Growth of housing loans to households has slightly accelerated Long-term loans drive expansion of housing loans to households Financing conditions remain favorable Having stabilized in the first half of 7, growth of housing loans to households has gained momentum in recent months. In August 7, the nominal annual growth rate of housing loans extended by n monetary financial institutions came to.7% (adjusted for reclassifications, valuation changes and exchange rate effects), up from.% in February 7. Housing loan growth was still driven primarily by long-term loans (with a maturity of more than years), which were up.% year on year in August 7. By contrast, short-term housing loans (with a maturity of up to year) were down.% year on year. The conditions for taking out housing loans remained favorable. According to the results of the bank lending survey, banks credit standards for housing loans to households tightened slightly in the second quarter of 7, after hav- Schneider, M.. Are Recent Increases of Residential Property Prices Justified by Fundamentals? In: Monetary Policy and the Economy Q/. OeNB.

6 ing remained stable in the previous two quarters. Overall, there has been little change in lending standards in this segment over the past years. Credit terms have also remained favorable. At.%, average interest on euro-denominated housing loans to households had fallen by basis points in August 7 year on year. While interest on variable rate loans (with a rate fixation period of up to year) decreased by basis points to.7%, interest on loans with longer periods of interest rate fixation (over years) increased by basis points to.%. The effective annual rate of interest on housing loans, which reflects total borrowing costs (interest rate component and related charges), dropped by 7 basis points year on year to.% in August 7. Housing loans Annual change in in % To households To households To domestic nonbanks Risk factors To domestic nonbanks Share of total loans in % Foreign currency loans (left-hand New variable-rate loans (right-hand Mortgage lending rates %, 7,,,, 9,, 7, Interest lock-in period of up to year Interest lock-in period of > years Debt burden of households % of disposable household income Housing loans (left-hand Interest expense (right-hand Source: OeNB, WIFO. Loan demand edges up slightly Share of foreign currency loans in housing loans continues to decline Households demand for housing loans increased somewhat in the first two quarters of 7 according to the results of the bank lending survey. This was attributed, among other things, to slightly improved consumer confidence and the impact of the low interest rate level. Though the share of foreign currency loans in households housing loans has decline further in recent months, these loans still imply sizeable exchange rate risks. In August 7, the share of foreign currency loans in households housing loans came to.%, down. percentage points year on year. Almost all foreign currency-denominated housing loans outstanding are denominated in Swiss francs (close to 97%). The interest rate risk of (new) housing loans likewise decreased over the past months. The share of variable rate loans (with a rate fixation period of up to year) in new loans dropped to.% in the months to August 7, down from 9.% in the preceding -month period.

7 Expansion of housing loans to nonbanks slows down With credit expansion slightly outpacing income growth, the ratio of housing loans to households disposable income contracted by. percentage points year on year, to reach 7.% in the second quarter of 7. Loans for home purchase and improvement granted by n banks to domestic nonbanks increased by.% in the second quarter of 7 year on year. Loans denominated in euro continued to rise (+.%), while foreign currency loans declined markedly (.%). Subsidized housing loans contracted by.7% year on year in the second quarter of 7. 7

8 Factsheet on s residential property market October 7 Residential property prices and rents (Q=) (Q=) excluding (Q=) Rents (Q=) excluding Single-family houses New condominums Used condominiums Single-family houses New condominiums Used condominiums total excluding - condominiums excl. - single-family houses OeNB fundamentals indicator for residential property prices (including subindicators) OeNB fundamentals indicator for residential property prices (Deviation from fundamentals in %) Real residential property prices (Average since 99=) Affordability (Average since 99=) House price-to-rental ratio (Average since99=) Price-to-building costs ratio (Average since 99=) Ability to repay loans (Average since 99=) Housing investment-to-gdp ratio (Average since 99=) Interest rate risk (Average since 99=) Additional fundamentals Real housing investment () Building permits () - - Real disposable household income () Population () Number of dwelling units Gross floor space Smoothed Original series Financing Housing loans () Datenreihen Datenreihen Housing loans to households (Transactions in EUR million, SA trend) New loans for housing purposes (lefthand Net transactions (right-hand Lending rates for housing loans to households 7 % Basis points Noninterest rate charges (right-hand Nominal interest rate (left-hand Credit standards and loan demand (bank lending survey) (Cumulated diffusion index: increase = easing) Demand for housing loans Credit standards for housing loans Risk indicators Terms and conditions for housing loans (bank lending survey) (Cumulated diffusion index: increase = easing) Collateral requirements Loan-to-value ratio Indebtedness of households (% of GDP) Housing loan pattern (% of total loans) Foreign currency loans (left-hand Variable rate loans (new loans) (righthand 9 7 Debt burden of households (% of disposable income) Housing loans (left-hand Interest expenses on MFI loans (right-hand

9 Factsheet on s residential property market October 7 A Residential property market Residential property prices Source Unit Level Sep.7 Aug.7 Juli7 Q7 Q7 Q Q. Single-family houses and condominiums (e) = (e) = excluding (e) = Condominiums total (e) = used condominiums (e) = new condominiums (e) = excluding total (e) = excluding used condominiums (e) = excluding new condominiums (e) = Single-familiy houses (e) = excluding (e) = Residential building plots (e) = excluding (e) = House Price Index (HPI) of Statistics Overall index (d) = New dwelling (d) = Existing dwelling (d) = Existing houses (d) = Existing condominiums (d) = Rents total (e) = excluding condominiums (e) = excluding single-family houses (e) = Rents excluding operating costs (as measured in the CPI) (d) = Residential and commercial property market transactions Volume of transactions (b) EUR billion Number of transactions (b) B Fundamentals OeNB fundamentals indicator for residential property prices Deviation of residential property prices from fundamentals in %. (g) % Contributions of subindicators Contribution to total deviation in percentage points Real residential property prices (g) % points Affordability (g) % points House price-to-rental value ratio (g) % points Price-to-building costs ratio (g) % points Ability to repay loans (g) % points Housing investment-to-gdp ratio (g) % points Interest rate risk (g) % points Deviation of residential property prices from fundamentals in %. (g) % Contributions of subindicators Contribution to total deviation in percentage points Real residential property prices (g) % points Affordability (g) % points House price-to-rental value ratio (g) % points Price-to-building costs ratio (g) % points Ability to repay loans (g) % points Housing investment-to-gdp ratio (g) % points Interest rate risk (g) % points Additional fundamentals. Supply-side factors Real housing investment (f) EUR billion Building permits dwelling units in new residential buildings (d) Building permits gross floor space of new residential buildings(d) Million m Building prices residential buildings (d) = Building costs residential buildings (d) = Demand-side factors Annual change in, persons Population (d) Population (d) Real disposable household income (d) EUR billion C Financing and indebtedness of households Financing. Housing loans to households Loan volume (c) 999M= New loans to households for housing purposes (c) EUR billion Housing loans to private nonbanks or share in % Loan volume (c) EUR billion Share of subsidized loans (c) % Share of housing loans in banks' total assets (c) % Lending rates for housing loans to households % Total (c) % Variable rate loans (lock-in period of up to year) (c) % Effective annual rate of interest (c) % Housing-related aspects of bank funding Housing bonds (c) EUR billion Risk indicators (for households) Share in % Indebtedness (% of GDP) (d) % Housing loans (% of disposable income) (c, f) % Interest expenses on MFI loans (% of disposable income) (c, f) % Variable rate loans (% of total new loans) (c) % Foreign currency loans (% of total loans) (c) %