Economic Situation, Property Prices and Financial Stability

Monitoring Indicators from a Macroeconomic Viewpoint

Doris Ritzberger-Grünwald Director, Economic Analysis and Research Department

October 16, 2014

WPLA Workshop: Real Estate Infrastructure – Fit for Use?

www.oenb.at [email protected] 2 -

Economic Situation, Property Prices and Financial Stability

• Real estate is the most important component of household wealth – housing wealth has a share of 50-70% in total wealth of private households

• Property prices affect households’ consumption and savings behavior and the economic activity of the construction sector.

• Real estate loans play a pivotal role in bank portfolios

• Real estate transactions are often (at least partly) mortgage-financed -> house price developments have effects on the debt situation and vulnerability of private households

• Housing costs take a high share in total households‘s expenditure

• We saw quite high increases in housing prices, especially in Vienna

• Question whether it is a bubble or not is not easy to answer due to bad data situation


A Holistic Approach to Real Estate Monitoring

Monitoring the possible threats to financial stability arising from the real estate sector requires a holistic approach, utilizing indicators from different sectors:

1. Macroeconomic environment

• Real and nominal macroeconomic developments

2. Residential property market

• Residential property prices, rents, transaction volumes

3. Fundamental factors

• Supply-side factors: Housing investment, building permits, building costs, …

• Demand-side factors: Population, migration, household income, interest rates, …

• Overall assessment of house prices: Deviation from fundamentally justified prices

4. Financing and indebtedness of the household sector

• Indebtedness, loan volumes, new loans, share of subsidized loans, lending rates, …

5. Banking perspective

• Various loan-related indicators (LTV, DTI, DSTI ratios), refinancing structure, …


1) Macroeconomic Environment

• OeNB forecast (June 2014):

2014: +1.6%

2015: +1.9%

• Since then:

• Slightly weaker outcome in Q1 and Q2;

• Negative impact of conflict Russia/Ukraine on confidence

• Update of OeNB conjunctural assessment in October 2014:

• Slower growth in 2nd half year

• Growth outlook 2014 revised down substantially (+1.6% down to +0.8%)

• Downward revision of GDP growth prospects also for 2015 (+1¼%)

-1.0

3.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2011 2012 2013 2014

Change to previous quarter Forecast Change to previous year

Source: OeNB's Economic Indicator from July 2014, Eurostat..

+2.9

+0.1* +0.2*

+0.7+0.4

Change to previous quarter / year in %

Short-Term Outlook for Austria's Real GDP for the third and fourth Quarter of 2014 (seasonally and working-day adjusted)

*) Forecast

+0.8*


2.) Residential Property Market:Austrian House Price Cycle Differs from Euro Area Average

Source: ECB, OeNB, Vienna University of Technology. Source: StatistikAustria, Eurostat.

80

100

120

140

160

180

200

220

2000 2002 2004 2006 2008 2010 2012 2014

Vienna Austria Euro area

Residential PropertyPrices in Austria and the Euro Area

2000=100

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014

Euro area Austria

Inflation in Austria and the Euro Area

Annual changeof HICP in %


80

100

120

140

160

180

200

220

1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14

Purchases of single family housesBuilding lots for private homesNew apartmentsImmobilienpreisindex

2000=100

Housing market developments in Vienna

80

100

120

140

160

180

200

220

1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14

Standardized apartment rentsNon-standardized apartment rentsRents of single family houses

2000=100

Source: OeNB, Austria Real Estate Exchange, Vienna University of Technology, Institute for Urban and Regional Research.

2.) Residential Property Market: Detailed Price Data as Prerequisite for Analysis


60

70

80

90

100

110

120

130

140

150

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

Property price indexPurchases of single family housesBuilding lots for private homesPurchases of new apartmentsPurchases of apartmentsPurchases of used apartments

2010=100

Housing Market Developments in Austria excl. Vienna

Source: OeNB, Austria Real Estate Exchange, Vienna University of Technology, Institute for Urban and Regional Research.

60

70

80

90

100

110

120

130

140

150

1Q01

4Q01

3Q02

2Q03

1Q04

4Q04

3Q05

2Q06

1Q07

4Q07

3Q08

2Q09

1Q10

4Q10

3Q11

2Q12

1Q13

4Q13

Apartment rents

Rents of single family houses

2010=100

2.) Residential Property Market: Detailed Price Data as Prerequisite for Analysis


• Indicator assesses whether price increases are justified by fundamental factors or whether they are exaggerated

• Indicator consists of seven subindicators addressing three perpectives (household persp., investor persp., systemic persp.)

• Vienna: Overvaluation of residential property prices by 23%

• Austria: Prices are justified by fundamental factors

• Caveats:

• High degree of uncertainty

• Results do not imply any recommendation to buy or sell specific properties

3.) Fundamental Factors: OeNB Fundamental Residential Property Price Indicator Points to Overvaluation in Vienna

-20

-10

0

10

20

30

90 92 94 96 98 00 02 04 06 08 10 12 14

Vienna Austria

Deviation of residential property prices from fundamentals in %


-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014

Austria Euro Area Germany

Mortgage Loansannual change in %

Financing

Source: OeNB, Eurostat.

50

52

54

56

58

60

62

64

66

68

70

2007 2008 2009 2010 2011 2012 2013 2014

Austria Euro area

Debt of private households

in % of GDP, 4 quarter moving average

4.) Financing and Indebtedness of the Household Sector: Low Level of Debt and Moderate Loan Growth


Some Reasons for the Low Risk Arising from the Austrian Real Estate Sector

Structure of the housing market

• A low homeownership rate (58% compared to 71% in EU-27) and well-developed rental market help to stabilize prices

Financing structure

• A large share of Austrian households (80%) finance their real estate (at least partly) by own equity

• Favorable household debt structure (debt is concentrated on wealthy households)

• Lending practices of banks are conservative

Tax system

• Tax system does not provide incentives for indebtedness (no deductibility of mortgage interest expenses)

• High transaction costs disencourage speculation


5.) Banking Perspective

Monitoring is hampered by the lack of data for macroprudential analysis

• Various loan-related indicators (LTV, DTI, DTSI ratios) should ideally be available at a very granular level

• This allows to detect problems before they arise

• Macroprudential policy in most European countries can already build on these data

• It is a key priority to collect data for Austria in a systematic way


Summary for Austria

Price developments• Strong price increases since 2007 • Heterogeneous development in different regions and segments

Factors behind price developments:• Increased demand: Immigration, flight to real assets (crisis), low or negative returns

with alternative investments, low credit interest rates• Construction activities could not meet demand• Catching up compared to other countries/comparable locations in Europe• Some charges were increased in recent years• OeNB's Real Estate Indicator identifies deviation of prices from fundamental prices of

+23% in Vienna and of 0% in Austria

Assessment: Threat for financial stability is assessed to be low • Growth of mortgage loans is moderate• Indebtedness of households is low in international comparison• There is no inflated construction sector


International Developments:Do House Price Developments in Some Euro Area Countries Pose a Threat for Financial Stability?

0

20

40

60

80

100

120

140

160

2000 2003 2006 2009 2012

Ireland Spain

Greece Cyprus

Estonia Slovakia

2007=100Countries with strong corrections

Source: ECB

0

20

40

60

80

100

120

140

160

2000 2003 2006 2009 2012

Portugal Italy

Netherlands Malta

Slovenia France

2007=100Countries with modest corrections

0

20

40

60

80

100

120

140

160

2000 2003 2006 2009 2012

Belgium Germany

Luxembourg Austria

Finland

2007=100Countries without corrections


International Developments: A Number of EU Countries Have Already Taken or are Planning Measures Concerning Real Estate Risks

(as of 20 Sep 2014):• Higher risk weights for mortgage lending: BE, IE

• Stricter criteria for real estate exposures: HR, IE*, UK* (* for commercial property lending)

• Lower Loan-to-Value/Loan-to-Income ratios: NL, HU, NO (LTV), UK (LTI)

• Outside the EU: Switzerland increased the sectoral countercyclical capital buffer for positions secured by residential property

Economic Situation, Property Prices and Financial Stability

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