The Rise and Caution of Real Estate Loans in Austria

Rising interest rates, a difficult economic situation and stricter lending criteria have recently led to a decline in real estate loans at domestic banks, but also in corporate loans – especially towards the end of 2022. But: “Real estate loans grew again in Austria in the first quarter,” said a spokesman for Erste Group when asked. No “anomalies” were seen in terms of loan defaults either. This means that loan defaults have not increased so far. Raiffeisen NÖ-Wien is also Demand for credit for residential real estate has fallen by almost a fifth.

Nevertheless, the Financial Market Authority (FMA) urges caution and restraint in the presentation of its annual report. Real estate loans have risen sharply in the last decade because of the very low interest rates and with them the prices and demand for “concrete gold” as a financial investment. This is one of the reasons why the FMA has repeatedly warned of the market overheating in recent years.

Real estate prices in Austria have more than doubled since 2010. By way of comparison: in the euro area, they rose by 48 percent over the same period. Disposable income, on the other hand – not adjusted for inflation – has risen by almost half. “If real estate prices rise twice as fast as incomes, then that’s an alarm signal,” FMA board member Eduard Müller told journalists on Tuesday. He is thus defending the tightening of the lending criteria implemented last year. As a reminder: Since August last year, a new regulation has stipulated that borrowers must submit 20 percent of the loan amount as equity, the loan term must not exceed 35 years and the monthly loan installment must not account for more than 40 percent of income.

“Many measures are not popular, but necessary,” says Müller. The FMA must ensure the stability of the financial market and protect consumers from over-indebtedness. The supervision had recently been strongly criticized politically and by the banks because of the so-called KIM regulation. The institutes – with the support of some provincial governors – called for the criteria for property purchases to be relaxed. In fact, according to the National Bank, the granting of real estate loans has fallen by almost 60 percent in the past 12 months. However, this is not only due to the new FMA regulation. Demand for credit plummeted across the entire euro area after the European Central Bank (ECB) raised interest rates due to high inflation.