Economic Situation, Property Prices and Financial Stability

Monitoring Indicators from a Macroeconomic ViewpointDoris Ritzberger-Grünwald Director, Economic Analysis and Research DepartmentOctober 16, 2014WPLA Workshop: Real Estate Infrastructure – Fit for Use?

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 estatetransactionsareoften (at least partly) mortgage-financed-> house price developments haveeffects on thedebtsituation and vulnerabilityof private households Housingcoststake a high share in total households‘sexpenditure Wesawquite high increases in housing prices, especially in Vienna Questionwhetheritis a bubbleor not is not easy toanswer due tobaddatasituation Economic Situation, Property Prices and Financial Stability

Monitoring the possible threats to financial stability arising from the real estate sector requires a holistic approach, utilizing indicators from different sectors: Macroeconomic environment Real and nominal macroeconomic developments Residential property market Residential property prices, rents, transaction volumes 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 Financing and indebtedness of the household sector Indebtedness, loan volumes, new loans, share of subsidized loans, lending rates, … Banking perspective Various loan-related indicators (LTV, DTI, DSTI ratios), refinancing structure, … A Holistic Approach to Real Estate Monitoring

1) Macroeconomic Environment • OeNB forecast (June 2014): • 2014: +1.6% • 2015: +1.9% • Sincethen: • Slightlyweakeroutcome 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%)

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

2.) Residential Property Market: Detailed Price Data asPrerequisitefor Analysis

3.) Fundamental Factors: OeNB Fundamental Residential Property Price Indicator Points to Overvaluation in Vienna • Indicatorassesseswhetherpriceincreasesarejustifiedby fundamental factorsorwhethertheyareexaggerated • Indicatorconsistsofsevensubindicatorsaddressingthreeperpectives (householdpersp., investorpersp., systemicpersp.) • Vienna: Overvaluationofresidentialpropertypricesby 23% • Austria: Prices arejustifiedby fundamental factors • Caveats: • High degreeofuncertainty • Results do not implyanyrecommendationtobuyorsellspecificproperties

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

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 SomeReasonsfor theLow RiskArisingfrom the Austrian Real Estate Sector

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 datafor Austria in a systematic way 5.) Banking Perspective

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), lowor negative returns with alternative investments, lowcreditinterestrates • Construction activities could not meet demand • Catching up compared to other countries/comparablelocations in Europe • Some charges were increased in recentyears • OeNB's Real Estate Indicator identifies deviation of prices from fundamental prices of +23% in Vienna and of 0% in Austria • Assessment: Threatfor financial stability isassessedtobelow • Growth of mortgageloansis moderate • Indebtedness of householdsislow in international comparison • Thereisnoinflatedconstructionsector

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

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

Economic Situation, Property Prices and Financial Stability