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

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Abstract

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.

Suggested Citation

  • Martin Schneider, 2013. "Are Recent Increases of Residential Property Prices in Vienna and Austria Justified by Fundamentals?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 29-46.
  • Handle: RePEc:onb:oenbmp:y:2013:i:4:b:1
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    Cited by:

    1. Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles?," IMK Studies 43-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Dominik Bernhofer & Octavio Fernández-Amador & Martin Gächter & Friedrich Sindermann, 2014. "Finance, Potential Output and the Business Cycle: Empirical Evidence from Selected Advanced and CESEE Economies," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 52-75.
    3. Dubravko Mihaljek & Agne Subelyte, 2014. "Do we understand what drives house prices?," Chapters,in: Financial Cycles and the Real Economy, chapter 9, pages 147-170 Edward Elgar Publishing.
    4. Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles? A theoretical and empirical inquiry," Competence Centre on Money, Trade, Finance and Development 1501, Hochschule fuer Technik und Wirtschaft, Berlin.
    5. Adrienne Csizmady & József Hegedüs & Christophe André & Elisabeth Beckmann, & Antje Hildebrandt & Krisztina Jäger-Gyovai & Agnieszka Nierodka & Martin Schneider & Karin Wagner & Guenter Karl & Robert , 2016. "Papers presented during the Narodowy Bank Polski Workshop: Recent trends in the real estate market and its analysis - 2015 edition," NBP Conference Publications, Narodowy Bank Polski, Economic Research Department, number 2 edited by Hanna Augustyniak & Jacek Łaszek & Krzysztof Olszewski & Joanna Waszczuk, Octubre-D.
    6. Martin Schneider & Karin Wagner, 2015. "Housing Markets in Austria, Germany and Switzerland," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 42-58.
    7. repec:prg:jnlpep:v:2017:y:2017:i:3:id:613:p:269-285 is not listed on IDEAS

    More about this item

    Keywords

    residential property prices; indicator; Austria; Vienna;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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