Austrian Mortgage Market

Introduction

Essentially the Austrian housing market is cooling off. After a considerable increase in housing prices between Q3 2011 and Q3 2012, which has sparked fears of a property bubble, the Austrian Central Bank (Oesterreichische Nationalbank) sees clear signs of easing during the last months.

During the housing boom (2003-2013) in Vienna – Austria’s capital and driving force in its real estate industry – house prices soared by 99.6%. According to experts this significant rise was due to a combination of high demand for property by local and foreign investors and low return rates of alternative investments products in the wake of the GFC. New data however suggests that the changing population structure as a result of consistently low birth rates in Austria more and more leads to a decreasing housing demand in 2015. This development is too reflected by a slower rise in rental prices from almost 5% p.a. between 2008 and 2013 to just 2.4% p.a. in 2014.

The macroeconomic indicators for the Austrian economy are somewhat ambiguous with the lowest unemployment rate in the EU on the one side but a stagnating economy with growth rates of only 0.4% on the other. Amplified by a small mortgage market the difficult economic situation implies that Austria’s home ownership rate of 56.4% - which is significantly below the EU-27’s average of over 70% - will not experience a significant increase. Rental yields vary from relative low levels in Vienna of 1.78% to 2.61% to yields of 4% to 5.5% in smaller cities like Salzburg and Graz, where small and more cost-effective apartments are more predominant.  

Purchasing Property in Austria

Foreigners are not restricted from buying property in Austria. However, purchasing real estate property in Austria is relatively expensive as the property purchase process is bureaucratic and heavily regulated. Transaction costs include legal fees, property transfer tax, value added tax, registration duty, notary fees and real estate agent’s fees.

The real estate agent’s fee is set by law at 3% to 4% and determined on the basis of the property’s price or market value. It is payable by both the buyer and the seller. Legal fees consist of lawyer’s fees to draft the contract (1% to 3% of the purchase price) and notary fees of approximately EUR 120 per person party to the purchase agreement. Austrian tax law differentiates between a property transfer tax and a value added tax with regard to the purchase of real estate. Property transfer tax is a flat rate tax of 3.5% of the property price with a few exemptions for property transfer between relatives. The value added tax of 20% of the price is only payable for newly built properties and may be claimed back by the owner if the property is leased after the purchase.

Financing Options

From a finance point of view Austria’s mortgage market remains smaller than in other European countries. Outstanding mortgage loans made up 35.3% of GDP in 2013, whilst the average mortgage market size within the European Union is 50% of GDP. Like in most Western economies Austrian banks offer different types of mortgages, which can be adjusted to the customer’s needs and financial power. Due to the broad variety of mortgage products the following list is not exhaustive but outlines a short overview on the most common methods for property financing. 

Standard Mortgages

Fixed-rate Mortgage

The most common and secure type of mortgage in Austria is the fixed-rate mortgage. The interest rate is contractually predetermined for the entire term of the loan agreement, usually 15, 20, or 30 years.  With more maturity the proportion of principal payments will increase but the monthly repayment will remain the same throughout the whole contract period. Although this type of mortgage provides for high financial predictability, the home owner will not be able to capitalize on positive market developments and lower central bank interest rates. However, the current recession in Europe and the low interest rate environment have rendered fixed-rate mortgage products a secure option for risk-averse home owners.  

Adjustable-rate Mortgage

The adjustable-rate mortgage (ARM) usually offers a lower initial rate of interest than fixed-rate loans.  Contrary to the fixed-rate mortgage the interest rate follows a base interest rate, typically adjusted every three months. Essentially, the base interest rate is determined by the Euribor (Euro Interbank Offered Rate), which indicates the interest rates European banks offer each other for short-term loans. The long term exposure to the market makes this mortgage a rather risky alternative. 

Building Savings Contract

The mortgage loan may be connected to a building savings contract. The due payments are transferred to the savings account, which is used later to wipe off the mortgage. Due to government subsidization for building savings contracts the advantage of this debt structure lies in the lower interest rates. However, due to additional transactions necessary to facilitate this mortgage option, additional fees might apply. 

Mortgage combination

Many new homeowners choose a combination of these types of mortgage loan contracts. By adjusting mortgages to the individual needs of clients banks ensure that young families may buy their own house even though their initial income would not be sufficient to repay the debt. To register a mortgage every debtor has to pay 1.2% of the property’s value in registration fee. Contrary to the American legal system mortgages under Austrian law may be personally liable for the outstanding loan if the mortgage does not fully cover the underlying debt.

 

 

 

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