Austria’s Construction Industry Faces Financial Uncertainty as Cheap Money Becomes a Habit

Gerhard Weinhofer, managing director of Creditreform Austria, believes that bankruptcies in the real estate industry will continue to rise. The industry is facing a toxic mix of rising interest rates, lower real estate prices, and higher construction costs, which may lead to further upheavals and bankruptcies. Weinhofer is convinced that the economic environment is not solely responsible for the industry’s difficulties. It was influenced by the long-standing zero-interest policy, which enabled cheap financing of real estate projects and subsequently triggered a boom in the market and high profits.

The cheap money for two decades acted like a drug and cannot be left abruptly. The long-term upswing in the sector is over, and rising interest rates have made loans expensive, making project financing noticeably more difficult. The situation has also put consumers under increasing pressure and many can no longer afford to own their own home. These developments have impacts on rents and the construction sector, and demand for property has increased while the supply remains more or less the same. The majority of consumers are being pushed into the rental market, which is likely to further increase rental prices, especially for apartments that are not subsidized.

Weinhofer does not expect an acute housing shortage but believes that the situation will get worse, particularly in eastern Austria where the population is growing. The turbulence in the real estate sector is already attributing to a visible increase in the number of bankruptcies for domestic construction companies. According to a current analysis by Acredia, from January to September 2013, 667 domestic construction companies filed for bankruptcy, which is a 16% increase compared to the same period last year.

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