Assessing regional house price developments in Austria

Abstract

Austrian house prices have risen rapidly in recent years and there has been considerable debate on the underlying factors. Much of the debate focuses on increasing trends in real house price indexes and the ratio of house prices to disposable income as a measure of affordability. While it is generally accepted that the low interest rate environment is a key driver of house prices, there is uncertainty as of the sustainability of the level of house prices in some European countries. The OeNB fundamental indicator for residential property prices, launched in January 2014, points to an overvaluation in property prices by 21.7% in Vienna in the first quarter of 2018. For Austria as a whole, the indicator reached 11.2%. Several international studies also point to overvaluation in Austrian housing markets.House prices can fluctuate more than fundamentally justified because agents overreact to current fundamentals as well as past returns and are influenced by their sentiment. Reliable valuation metrics are therefore very important for monitoring residential property markets. While different approaches to identify overvaluation have strengths and weaknesses, theoretical consistency should be a prerequisite of any model of house price behaviour. Furthermore, examining national price indices is an ineffective means of early detection of housing bubbles. Speculative overvaluations arise in individual local and regional markets before spreading to the national market.This paper analyses regional house price developments in Austria. We follow Bourassa et al. (2016) and use an asset pricing approach to compare actual price levels with implied fundamental or equilibrium levels. We model prices for existing condominiums as a function of the present value of expected market rents, allowing for a time-varying risk premium and state dependent rental growth expectations. Model results are then compared with results produced by alternative methods to assess house price developments. We also discuss the theoretical weaknesses of the OeNB fundamental indicator and the critical assumptions underlying our model.