Housing Market Developments and Related Policies
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House prices in Austria rose sharply during most of the past decade, significantly reducing housing affordability. Staff analysis suggests that this reflects a combination of factors. Efforts to ease structural constraints on housing supply could help improve affordability and reduce macro-financial risks related to housing markets and mortgage debt.

Abstract

House prices in Austria rose sharply during most of the past decade, significantly reducing housing affordability. Staff analysis suggests that this reflects a combination of factors. Efforts to ease structural constraints on housing supply could help improve affordability and reduce macro-financial risks related to housing markets and mortgage debt.

Housing Market Developments and Related Policies

House prices in Austria rose sharply during most of the past decade, significantly reducing housing affordability. Staff analysis suggests that this reflects a combination of factors. Efforts to ease structural constraints on housing supply could help improve affordability and reduce macro-financial risks related to housing markets and mortgage debt.

1. House prices in Austria rose sharply during most of the past decade. According to the OECD, real house prices (as measured by nominal prices for the sale of newly built and existing dwellings divided by the consumer expenditure deflator) grew by 74 percent from 2010 to end-2021, compared with 37 percent for the OECD average (Figure 1). More recently, real house prices have fallen amid higher interest rates and inflation (between 2022Q1 and 2023Q3, real house prices declined by 10 percent due to a nominal increase of 1.6 percent and inflation of 13 percent).

2. Standard metrics point to worsening housing affordability over the last decade in Austria compared to regional peers. Both house price-to-income and rent-to-income ratios have increased more than the euro-area average over the last decade. Standardized ratios, defined by the OECD as the current ratios relative to their respective long-term averages, paint a similar picture. The substantial increase in both house prices and rents suggests that these increases at least partly reflect fundamental factors such as supply-demand mismatches and not just effects from low interest rates or a speculative bubble driven by loose credit standards, both of which would mainly tend to increase house prices rather than rents. Indeed, the rise in the house price-to-rent ratio has been more in line with that of regional peers. That said, the house price-to-rent ratio has increased substantially in absolute terms over the last decade, pointing to effects from low interest rates and/or overvaluation that may be broadly shared among regional peers during this period. A standard econometric model of house price valuation also points to some overvaluation (Appendix I).

Figure 1.
Figure 1.
Figure 1.

Austria: Housing Price Indicators

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

3. Housing supply appears to have fallen short of housing demand, to different magnitudes across regions. The gap is measured as the cumulative difference between the annual supply of dwellings and the change in number of households (as a proxy for demand).1 Staff estimate that the housing supply gap for Austria in 2022 was around 6 percent of the total vacancy-adjusted housing stock. The supply gap widened during the past decade and is asymmetric across regions. Vienna has the largest supply gap at 17 percent of Vienna households in 2022, similar to Tyrol, while the gap for Burgenland is only around 1.5 percent of households. Estimates from the Austrian national bank (OeNB) on supply gaps differs slightly from staff’s estimates, primarily due to different assumptions made. The central bank’s estimates suggest that Vienna is the only region experiencing an excess of demand in the recent episodes, while an excess of supply is likely to exist in other regions. However, both estimates suggest heterogeneity across regions regarding housing demand and supply gaps, with the largest shortfall in demand applying to Vienna.2 If similar assumptions are made for estimating supply and demand by both the staff and the authorities, the conclusions converge that Vienna will be the main region subject to housing supply shortages, with other regions less so.

Figure 2.
Figure 2.

Austria: Housing Supply Gap

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

4. The Austrian housing market has a relatively large share of renting as compared to other European countries. About 46 percent of Austrian households rent, compared to the EU average of 30 percent3 Austria’s rental market is characterized as unitary, with competition between the private and social segments.

  • Social housing: This segment is focused both on lower- and middle-income groups in Austria, with rents below the market level, but can compete with the private rental sector. Market power and market volume of this “subsidized housing” sector influences the price level of the private market considerably.

  • Limited Profit Housing Associations (LPHA): LPHA in Austria comprise altogether 190 housing cooperatives and private-limited and public-limited companies, with a total housing stock (rental dwellings and owner-occupied apartments) of 865,000 units, which represents 23 percent of the total housing stock. All LPHA together have a stable housing output of 14,000 to 16,000 units per year. This is more than half of all multi-apartment housing construction in Austria. LPHA contributes to climate targets, and some have high architectural standards. Subsidies are provided to LPHA.

5. Austrian rental markets are subject to strong controls. Austria has relatively strict tenant-landlord relations in favor of the tenant4 Responsibility for ensuring rental quality is shared across levels of government, and minimum size and level of comfort are required. Short-term holiday rentals are also subject to regulations, and landlords are subject to tourism tax. The state not only uses regulatory measures, but also applies price-influencing mechanisms (e.g., rent controls) to subsidized construction (e.g., social housing). Stringent rent controls could have reduced profitability of housing investment and are empirically associated with a weaker response of housing supply to change in demand, as discussed, for example, in Diamond, McQuade, and Qian (2019).

6. Land-use regulations may also contribute to a weaker supply response. Austria is a federal country with 3 levels of government: the national government, the state, and the municipality. Spatial and land-use plans can be enacted by different levels of government. All levels of government in Austria prepare a Spatial Development Concept jointly for the entire country. The decision-making process for land-use is not linear across levels of government, and there is no formally hierarchical planning system, increasing wait times for construction permits. Land-use regulations have been empirically linked to lower housing supply elasticity to changes in demand (e.g., Gyourko and Molloy, 2014).

7. Notable features of Austria’s land-use planning system include the following:

  • The national government has important tools to influence the spatial structure of the country. It plans and finances major infrastructure projects and enacts environmental and heritage protection legislation that restricts and steers the possibilities to develop land.

  • States hold most powers related to planning and pass their own framework legislation to organize spatial and land-use planning.

  • Municipalities hold considerable responsibilities for the strategic spatial planning within their territories as well as for the preparation of land-use plans.

  • Vienna specific: It is difficult to build new houses in the center of Vienna and the supply of new real estate is very limited, as, some areas (e.g., Vienna’s first district, also called the “Inner City”), is a UNESCO World Heritage Site with much protected architecture.

As noted by the OECD (2017), Austria has above-average land consumption and below-average growth in developed land. In urban and intermediate regions, growth in developed land has been below population growth, whereas in rural regions the growth of developed land has been faster than population growth, resulting in increased per capita land consumption in those areas. The core parts of metropolitan areas especially experienced strong population growth without a corresponding increase in developed land. In contrast, commuting zones of metropolitan areas saw smaller increases in population and somewhat higher rates of growth of developed land. This is in line with the housing supply gap observed in Vienna, for example. The urban land area-to-population ratio is the one of the lowest among European countries.

uA004fig01

Urban Land Area

(Per thousand population)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Sources: World Bank and IMF staff calculations.

8. Policies to address affordability need to address the underlying supply gap in housing. Austria provides housing allowances, which were previously only targeted to dwellings constructed with subsidies, but over the previous decade, allowances have also been provided for the commercial rental housing sectors in view of worsening affordability. However, rising housing allowances may end up benefiting landlords over tenants if there is no underlying supply response and hence the increased housing demand simply results in higher pre-subsidy prices and rents. In this regard, avoiding excessive overlap across jurisdictions in land-use regulations could promote greater supply of land for housing. Reviewing rent controls to ensure that they do not discourage investment in private housing would also be beneficial. Finally, increased taxes on undeveloped land zoned for residential housing may also increase housing supply. The authorities announced a construction bill in early 2024 aimed at providing more dwelling units for sale and for rent. The bill includes subsidies for construction, labor costs, and renovation costs. However, less desirable demand-side measures are also set to be introduced, such as temporarily reducing transaction costs and providing interest subsidies for mortgages.

uA004fig02

Share of Variable Rate Loans in Total Loans for House Purchases

(Percentage)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Sources: ECB and IMF staff calculations.

9. Addressing housing affordability by increasing supply would also help bolster financial stability. While housing consumption has been rising in Austria, it remains below the euro-area average, and overall household debt levels appear to remain manageable. Nonetheless, risks to macro-financial stability still arise from housing markets, especially given that Austria has a much higher share of mortgages with variable rates. ECB banking supervision on credit underwriting also indicated that mortgages with high LTV ratios and high LTI ratios increased substantially in Austria in the mid-2010s. Subsequently, in August 2022, Austria issued limits on residential real estate loans that have increased the share of sustainable loans (Box 1). Staff recommends maintaining these measures despite the recent interest-rate-driven downturn in housing markets, as prudential limits are needed as a permanent, structural measure. Moreover, the settings of the limits are not especially tight in international comparison given the substantial exemptions. In contrast, attempts to improve housing affordability by loosening credit standards could be counterproductive as looser credit may increase house prices. Efforts to improve affordability should focus instead on boosting housing supply by easing disincentives and regulatory constraints may hamper new construction (¶6).

uA004fig03

Household Debt

(Percentage of net disposable income)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source: OECD.
uA004fig04

Household Housing Consumption

(Percentage of net disposable income)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source OECD.

Austria: Borrower-Based Measures

Austria introduced a set of legally binding borrower-based macroprudential measures in August 2022 to enhance the sustainability of mortgage loans and mitigate house price growth. These measures include the following:

  • An upper limit of 90 percent for loan-to-value ratios (LTV), with an exemption bucket of 20 percent. 1

  • An upper limit of 40 percent for debt service-to-income ratios, with an exemption bucket of 10 percent.

  • An upper limit of 35 years for the maturity of loans, with an exemption bucket of 5 percent.

In addition to the measure-specific exemption buckets, a bank-level exemption bucket of 20 percent restricts the overall amount of unsustainable new loans (i.e., loans that exceed one of the limits) per bank.

Since the implementation of the measures, the share of sustainable loans has significantly increased, as indicated by the figures below. The share of loans with an LTV smaller than 90 percent has reached 80 percent among all new loans, including those in the exemption basket and small and bridge loans. Similarly, the share of loans with a DSTI less than 40 percent has increased to 90 percent. About half of banks have reported using less than 50 percent of their exemption amount in 2023, which is attributed in part to the flexibility in reporting the period to which the exemption rate is based (either the current period or the last period, with banks choosing the period with higher loan volumes) and the minimum €1 million exemption given to small banks with lower loan volumes as well as weak demand due to high interest rates. In total, around €1 billion of the exemption amount was not used in 2023.

uA004fig05

Share of Sustainable Loans in New Business

(Percent)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source: OeNB.Notes: All loans that have a DSTI of max 40%, LTC of max 90% and max 35 years of maturity are classified as sustainable. Every loan that violates at least one indicator is classified as not sustainable.
uA004fig06

Debt Service to Income Ratio

(Percent)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source: OeNB.Notes: Small loans and bridge loans are included to guarantee comparability. Income is defined as net income plus social transfers.
uA004fig07

Loan to Collateral Ratio

(Percent)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source: OeNB.Notes: Small loans and bridge loans are included to guarantee comparability. The share of n.a. in 2023 Q2 is elevated due to the introduction of bridge loans as a category which are automatically assigned n.a.

The measures are set to expire in mid-2025 if no agreement on extension is reached in the upcoming systemic risk review in 2024. Staff recommends making such prudential limits a permanent feature of the macro-prudential framework, as they help reduce macro-financial risks associated with mortgage markets.

1 For the purposes of the regulation, the real estate value is calculated as the market value minus the value of any prior charges, but this amount cannot exceed the value of the lien entered into the land register. For this reason, the collateral value of real estate used to assess compliance with this regulation may be below the real estate’s actual market value.

References

  • Andrews, D., 2010. “Real House Prices in OECD Countries: The Role of Demand Shocks and Structural and Policy Factors,” OECD Economics Department Working Papers No. 831.

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  • Sanchez, A. C., and A. Johansson, 2011. “The Price Responsiveness of Housing Supply in OECD Countries,” OECD Economics Department Working Papers No. 837.

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  • Diamond, R, T. McQuade, and F. Qian, 2019. “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.” American Economic Review, 109 (9): 336594.

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  • Geng Nan, 2018. “Fundamental Drivers of House Prices in Advanced Economies”, IMF Working Paper, No. 2018/164.

  • Girouard, N., M. Kennedy M., P. van den Noord P. and C. André, 2006. “Recent House Price Developments: The Role of Fundamentals,” OECD Economics Department Working Papers No. 475.

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  • Gyourko, Joseph and R. Molloy, 2015. Regulation and Housing Supply, Handbook of Regional and Urban Economics, Chapter 19, p. 12891337, Elsevier.

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  • Lang, J. H., M. Pirovano, M. Rusnák, and C. Schwarz, 2020. “Trends in Residential Real Estate Lending Standards and Implications for Financial Stability,” Financial Stability Review, European Central Bank, Vol. 1.

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  • Meen, G., 2001. “The Time-Series Behavior of House Prices: A Transatlantic Divide?Journal of Housing Economics 11 (1), pp.123.

  • OECD 2017. The Governance of Land Use in OECD Countries: Policy Analysis and Recommendations, OECD Regional Development Studies, OECD Publishing, Paris.

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Appendix I. A Model of Fundamental House Prices

1. The ECB and OeNB have both evaluated housing prices in Austria and identified housing price overvaluation in the past decade. The OeNB utilized a number of indicators, including real housing prices, household income, price-to-rent ratio, construction costs, loan-bearing capacity, housing investment-to-GDP ratio, and interest-rate risk to construct an indicator for housing overvaluation. This indicator suggests that housing prices started to be overvalued from around 2016 and reached their peak of 40 percent in 2022 but experienced a recent correction during the high-interest rate environment. The ECB utilized four different valuation methods to estimate a range of housing price overvaluation for Austria. The models suggest that overvaluation started in 2014 and reached its maximum level around 2022, ranging from 18 percent to 50 percent.

uA004fig08

ECB Estimates of Over/Undervaluation of Austria Housing Prices

(Percent)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Source: ECB.

2. Staff utilize an empirical model to assess the overvaluation of housing prices for Austria following Geng (2018). The panel data covers EU countries from 1970–2023, depending on data availabilities. The baseline model includes supply factors and demand factors to uncover the underlying housing prices.

RHPi,t = F(Supplyi,t, Demandi,t) + εi,t

article image

3. The table presents the panel regression results. Three models are examined, including different sets of supply and demand variables. Population growth and real wage growth have both shown positive and significant effects on the growth of real house prices.1 Model 2 suggests that the mortgage rate, which theoretically would directly influence the demand of housing, has a negative effect on real housing price growth. Model 3 further includes other financial variables, including a long-term interest rate, equity prices, and credit growth. The long-term interest rate captures the negative impact on housing prices from the mortgage rate, while credit growth contributes significantly and positive to housing prices. However, growth in construction permits for housing is found to be positively correlated to housing prices, which is counterintuitive. This could indicate that housing permits react to housing prices instead of the other way around.

uA004fig09

Model Predicted and Actual Real Housing Price

(LHS: Index; RHS: Percentage)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Sources: OECD and IMF staff calculations.

4. All three models generate similar “fundamental” housing prices for Austria. Compared to the actual housing prices, the average predicted prices from the model suggests that housing prices were undervalued from 2000–2012 and then became overvalued ever since. The model estimates overvaluation in 2022 to be around 30 percent, broadly in line with ECB and OeNB estimates.

Real Housing Prices

article image
Note: * = p-value<0. 10; ** = p-value<0. 05; *** = p-value<0.01

Appendix II. Estimates of Housing Supply Gaps in Austria

1. To estimate housing supply, data on existing housing stocks, annual new construction of housing units, completion rates, and vacancy rates are utilized. Existing housing stock data for Austria and its nine states are available for the years 2011 and 2021 from housing surveys. Annual construction permits are aggregated over the ten-year period and compared to the increase in housing stocks between 2021 and 2011 to calculate the construction completion rate. Annual housing stocks are then extrapolated using the completion rate and annual construction permits. The vacancy rate is calculated by comparing the total housing stocks to the number of vacant houses reported in the 2011 and 2021 housing surveys. The final housing supply is adjusted using the vacancy rate.

2. On the housing demand side, the number of private households is used as a proxy for housing demand. The supply gaps are assumed to accumulate over years. In other words, households that were not able to be matched with a housing unit in year t are assumed to remain in shortage of housing units in year t+1. New households are assumed to join the group with no housing units in year t+ 7 based on the new supply gap. The supply gap will reverse only if aggregate housing supply exceeds aggregate housing demand.

3. The housing supply and demand gap for states with smaller housing supply gaps are shown below:

uA004fig10

Burgenland: Housing Stocks and Households

(LHS: Thousands of households/dwellings; RHS: Percentage of gap)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Sources: Statistics Austria and IMF staff calculations.
uA004fig11

Styria: Housing Stocks and Households

(LHS: Thousands of households/dwellings; RHS: Percentage of gap)

Citation: IMF Staff Country Reports 2024, 108; 10.5089/9798400276101.002.A004

Sources: Statistics Austria and IMF staff calculations.
1

See Appendix II for estimation details.

2

See Schneider 2019 for the OeNB’s methodologies for estimating housing supply and demand gaps.

3

From European Commission data.

4

For details, see the OECD affordable housing survey results for Austria.

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Austria: Selected Issues
Author:
International Monetary Fund. European Dept.