Are Recent Increases of Residential Property Prices in Vienna and Austria Justified by Fundamentals?

Residential property prices in Vienna have risen sharply since 2005 and to a lesser degree throughout Austria as well. This paper assesses whether the upward movement is justified by fundamental factors or whether it is exaggerated, using a fundamental residential property price indicator for Vienna and Austria to identify deviations between actual and fundamental real estate prices. The indicator consists of seven subindicators that address a variety of perspectives, including those related to households, investors and systemic factors. For Vienna, the indicator points to an increasing degree of overvaluation in property prices (by 20% in the second quarter of 2013). The primary driver behind this trend, which has recently experienced an especially pronounced surge, is the relative real estate price (compared to rentals, consumer prices and construction costs), which is only weakly mitigated by the increased affordability of home ownership. Of note, the overvaluation evident in the indicator does not suggest that an abrupt price correction will occur in the near future. Rather, such imbalances may subside gradually, as happened in the wake of the price hikes experienced in the early 1990s. For Austria overall, the indicator points to a persistent 6% undervaluation, despite a recent uptick in prices. Diminishing loan growth and declining household indebtedness suggest that a high percentage of equity financing is being used in property investments. At present, therefore, the recent increases of residential property prices in Vienna and Austria do not pose a serious threat to financial stability.