Austria’s Construction Industry Braces for More Bankruptcies as Cheap Money Leads to Addiction

Gerhard Weinhofer, managing director of the creditor protection association 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. According to Weinhofer, while the economic environment is responsible for the difficulties in the industry, it was also influenced by the long-standing zero-interest policy that 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. This has made project financing noticeably more difficult. These developments have put consumers under increasing pressure and many can no longer afford to own their own home.

The situation has impacts on rents and the construction sector, with demand for property increasing while supply remains more or less constant. 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 population growth is taking place. He predicts an increase in bankruptcies among domestic construction companies as a result of these challenges. According to a current analysis by credit insurer Acredia from January to September 2013, 667 domestic construction companies filed for bankruptcy which represents an increase of 16% compared to the same period last year.

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