The Unaffordability Crisis: Rising Interest Rates and Real Estate Prices in Austria

The fastest rise in central bank interest rates in Austria’s post-war history, as well as persistently high real estate prices in Austria and rapidly falling real incomes: the relative costs of buying a new home in Austria have literally exploded since last year. Had an average dual-income household to repay a loan for a 90-m²-A new apartment in Vienna spent around 40 percent of monthly income for decades, it would now be almost 70 percent, according to a current analysis by the tariff comparison portal Durchblicker.

According to the comparison portal, a new home in Austria has “de facto become unaffordable” within a year. This is now even true for higher earners. More and more households that have bought their own home with a variable interest loan in recent years are now getting into a skid.

Problems even for higher earners
For the study, see-through prices for a 90-m²-Apartment in Vienna-Landstraße and the associated loan financing rates from 1997 to the present and compared to the monthly net income of an average two-income household. An average household in Vienna would now theoretically have to spend 69 percent of its net monthly income to afford such a new apartment on credit. Even in the upper half of the income it would be 53 percent of the monthly income on average. Because the strict lending guidelines currently allow a maximum debt repayment rate of 40 percent, almost nobody in Austria is currently getting a new home loan.

If you bought the same apartment in 2021, you paid back 1,740 euros for a variable-interest loan in the first month. The repayment rate is now just under EUR 3,000 a month, which is around EUR 1,200 or 70 percent more than when the loan was taken out. Anyone who can no longer afford to bet on falling interest rates for too long should therefore switch to a fixed-interest loan in good time.

“Fixed-interest loans currently cost even less than variable loans. This means immediate relief for the households concerned. You should no longer take any risks, especially when it comes to your own home. If interest rates rise even more sharply in the second half of the year, switching to a fixed-interest loan could become increasingly difficult for many. In the worst case, there is a risk of losing your home,” warns insightful real estate expert Andreas Ederer.

Expert locates “radical market failure”
If you had paid EUR 1,267 in the first month for a variable loan with a 30-year term and 30 percent equity in the first month in 1997, it would be EUR 3,427 for the same apartment today. “In the entire 25 years that we have looked at, the cost of borrowing for households in the upper half has fluctuated between 30 and 40 percent of monthly income. In just one year, the debt service ratio has exploded from 35 to 53 percent on average, even for higher earners. That’s coming equated to a radical market failure,” attests Ederer.

If the current borrowing costs are subtracted from the average household income and the 13th and 14th salaries, which are used to calculate the debt service ratio, are not taken into account, the two-person household was left with less than 500 euros per capita and month for other fixed and living expenses . “In view of this, a revision of the lending guidelines in Austria is urgently needed, but this does not change the fact that the vast majority of Austrian households simply cannot afford to own a home at the moment, even if the households could get a loan,” emphasizes Ederer.

Switch to fixed interest while you can
According to the analysis, all those who took out their variable-interest loan after 2009 are currently paying higher rates than at the start of repayment for existing loans. As early as 2010, the monthly additional costs are already 33 percent of the original installments and are continuously increasing by up to around two-thirds additional costs for loans concluded in 2020 and 2021.

For many of these households, switching to a fixed-rate loan would double or triple the interest rate compared to the starting rate. That puts many off, even if variable rates are currently even higher. “We now urgently recommend these households to cash in and to examine carefully whether they can also afford higher interest rates. If this is not the case, the households concerned should switch to a fixed loan now, as long as they still meet the lending criteria”, advises the real estate financing expert. (gp)