The real estate boom is over. What does this mean for loans that were secured with a potentially inflated property value?
There are increasing signs of falling or at least stagnating prices on the Austrian property market. This has to do with rising interest rates, stricter lending rules that have been in effect since the summer of last year. Also due to a sharp drop in the affordability of real estate in recent years. It should be noted that no one currently believes that prices throughout the country will plummet.
If property prices were to actually fall sharply – i.e. over a longer period of time and by more than ten percent – this could well become a problem for people with current loans. With the mortgage loan commonly used in Austria, the property itself is used as collateral. The bank estimates the value of the property and uses this to calculate the loan amount.
Insurance or security deposits
So if prices fall sharply in a region, it could theoretically be that the loan amount exceeds the value of the property – and the bank demands additional collateral. The bank can also demand the same if the borrower loses their job. In both cases, the bank would seek discussion and, if necessary, demand further collateral. This could be, for example, insurance or securities deposits that could be pledged.
There are different ways of bridging a difficult situation. A distinction would be made here on a case-by-case basis. However, Austria is a long way from demanding additional collateral in view of potentially falling prices. In view of the recent sharp rise in real estate values, this will probably only apply to recently concluded loans, if at all.
Bursting bubble in the USA
Also with the association for consumer information (VKI) and with the chamber of labour (AK) one registers at present no enquiries. In the case of foreign currency loans, it has happened in the past that banks have demanded additional collateral, according to the VKI. The AK generally reports inquiries from borrowers who have difficulties with the rising interest rates.
Elsewhere, collateralization due to falling prices has been an issue in the past: in the USA, 16 years ago, in the face of rising interest rates, loans that had previously been granted on a large scale and without sufficient collateral burst because the houses were suddenly no longer worth their money. So even if the properties were sold, the loans could by no means be serviced. The consequences are well known: The real estate bubble is considered to have triggered the global financial crisis.
Different scenarios
Experts admittedly do not see a bubble in Austria at present. But it’s always good to think about different scenarios as a borrower, “namely about what you would have in your hand”. In the case of a house, it would be possible to change the building project, for example by postponing the planned swimming pool or conservatory until later.
In the case of existing buildings, on the other hand, “you could spend a little extra money” to bring the house up to scratch in terms of energy technology. That, in turn, would increase the value of the house and could satisfy the bank.
Change in sight
When it comes to lending, as reported, relief is now on the horizon. Indeed, the new and much stricter guidelines that have been in effect since August of last year, and which have caused a slump in lending, are likely to be partially relaxed.
A meeting of the Financial Market Stability Board (FSMG) will be held on February 13. Any changes could then come into force as early as April 1. However, the only relatively fixed change is for interim financing, which has been made much more difficult by the new rules.
Calls for such a relaxation came again from the real estate industry: Particularly for young families, which would like to sell their small dwelling, in order to buy themselves a larger dwelling, the regulation is an insurmountable hurdle, is called it in a dispatch of the real estate and fortune trustees in the chamber of economics.
Rental apartment as an interim solution
Intermediate financing is subject since the previous year namely to the same test steps as all mortgage financing, although these are repaid as a rule, as soon as the dwelling is sold, immediately. The family is thus theoretically forced to temporarily rent an apartment as an interim solution, which is “completely out of practice,” according to the statement.
Also worth discussing for the real estate industry is the prescribed maximum debt service ratio of 40 percent. The repayments may not exceed thus 40 per cent of the monthly household income. According to the Chamber of Commerce, this ratio should not be rigid, but should also take into account, for example, the low costs of energy-efficient buildings.
However, it is unlikely that there will be any changes to the debt service ratio. The 20 percent equity requirement is also likely to remain unchanged. For many people, property will therefore remain unaffordable.
(Franziska Zoidl, 10.2.2023)
Translated from the German
Source: Der Standard – Photo: Pixabay