Boom amid pall of gloom
House prices have risen in less than half the countries surveyed in the first half of the year, according to the latest Global Property Guide research. Russia and Austria are two of the 'lucky 10'; in 26 other countries, values have declined - by as much as 17.16 per cent year-on-year in Ireland and 9.89 per cent in the Greek capital, Athens, based on data for the first quarter.
Indeed, the guide's publisher, Matthew Montagu-Pollock, cites Austria and Estonia (up 9.13 per cent) as two of the few strong markets relieving the housing gloom shrouding much of Europe. 'In fact, the upsurge in these two countries' housing markets was so strong as to propel them into third and fourth place in the worldwide league table,' he notes. Russia is noted as a 'gainer' on the global scale as its housing market is recovering.
Montagu-Pollock says of Austria's consistent performance: 'Austria hums with prosperity; Vienna is beautiful; there's a vibrant tourist industry and highly profitable companies. But these things don't quite explain why over the past eight years, while the rest of Europe has seen a property boom and bust, Vienna's residential property market has gone up, and up.
'Yet the reason is not hard to find. The whole of Vienna has become a magnet for foreign money and, as new money has flowed out of the world's emerging nations [in Vienna's case particularly out of Russia], it has gone into the old core capital cities, like London or Paris - and Vienna.' The boom in emerging markets of the past five years has been good to the old world's capital cities, he points out - and so has the rise in income inequality. 'Prime property in London, New York, Hong Kong, Paris, Monaco and the Caribbean has boomed. Vienna is part of this bigger trend. In the first district, the heart and historical centre of Vienna, prices have more than doubled within a decade.'
A recent post by Austrian firm I&P Real Estate, citing academic research, claims prices for secondhand flats in Vienna increased by almost 50 per cent on average over the past five years. The report quotes the latest biannual real estate index report by Professor Wolfgang Feilmayr, of the Technical University in Vienna, based on a median price level for used flats in the capital.
The report also quotes Franz Schwarz, a realtor representing the real estate agency association AIB, speaking of a 'dramatic development in the real estate sector', while adding that this price surge was evident only in Vienna, on the outskirts of the capital, in provincial capitals and in tourist resorts like ski resorts.
Montagu-Pollock is not surprised that certain pockets stand out. 'As capital cities go, Vienna is relatively small. It has few ugly neighbourhoods. It is easy to justify an apartment in Vienna. The city is convenient, at the heart of Europe, has a vast 'Museumsquartier', a good cafe life, easy communications - and visitors can quickly get to the ski slopes.' There has also been strong growth in demand for larger flats in the city centre, he adds.
'These strong price rises are due to a combination of strong demand, and little or no new supply. Though the rest of Austria has not shared in these price rises, during [the first quarter of] 2012 there was a significant jump in the wider Austrian market.'
But rising prices and static rents have led to low rental yields in Vienna, the guide notes. 'Almost no rent increases have taken place since then and none can be expected in the near future, according to a recent Colliers report.'
As for Russia, a 'gainer' in the latest guide, residential housing markets have experienced a recovery since last year, 'one of the very few European markets where this has occurred'.
Prices rose 7.88 per cent in the first quarter of 2012 (3.86 per cent after inflation), according to the data used. Montagu-Pollock qualifies that, last year, prices were also up 3 per cent, 'but this hid the harsher reality that inflation had eaten away the gains, and the more realistic picture was an after-inflation price decline of 5.94 per cent.'
In economic terms, Russia has been doing well, with gross domestic product (GDP) expanding by 4.9 per cent during the second quarter of 2012, he says. 'Though not as stellar as Russia's previous average annual GDP growth rate of 7 per cent during Vladimir Putin's first presidency (2000 to 2008), a key point is that Russia's swift recovery from the crisis [a GDP decline of 7.8 per cent in 2009], with GDP growth of 4 per cent in 2010 and 4.2 per cent last year, has enabled it to achieve a near-record low 5.8 per cent unemployment rate [April 2012], with inflation of 3.6 per cent [May].'
He further notes that Russia's higher-than-expected economic growth is strengthening the central bank's incentive to extend the pause in monetary easing, and increases the probability that interest rates will remain unchanged for three or four months. The benchmark refinancing interest rate is now 8 per cent. Foreign nationals and corporations are entitled to buy real estate in Moscow, and rising rental prices might make flats in the city seem a lucrative investment. St Petersburg, in particular, is attractive in terms of yields. But Montagu-Pollock cautions that for foreign buyers there are extra factors to consider. 'Russia has very high transaction costs, especially for foreign buyers. There are also high income and capital gains taxes. So recouping the costs of your investment could take a long time.'