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Nov 10, 2017

Property boom in Hungary continues in 2017


 

Hungary house pricesHungary is in the fourth year of a continuous house price boom. The national house price index went up by 11.6% y-o-y (8.6% inflation-adjusted) y-o-y to the 1st quarter of 2017, based on the Hungarian National Bank's (MNB) house price index. Budapest's house prices surged by 16.9% (13.8% inflation-adjusted) y-o-y.

While by 2015 property prices had already matched pre-crisis levels in nominal terms - a year when property prices rose 14.69% across Hungary (or 14.1% after inflation) and rose a nominal 24.44% in Budapest - in real terms property prices are still below pre-crisis levels, according to the Ministry for National Economy.

Housing transactions were up almost 10% in 2016, with strong increases during the first half of the year. From around 86,000 in 2012, transactions rose to around 131,000 in 2016.  Prices of existing dwellings rose by 10.23% (9.8% inflation-adjusted) in 2016, while prices of new dwellings increased by 8.63% (8.2% inflation-adjusted), according to the Hungarian Central Statistical Office (KSH).

Higher demand for both new and existing dwellings was reflected in a surge of housing credit, with credit for second-hand homes rising by 34.6% and for new homes by 63% y-o-y in 2016.

Dwelling permits issued rose by 10.61% during the first half of 2017.

"Rising real income and favourable labour market conditions contributed jointly to the improvement in long term income expectations which are of key importance in terms of housing investments," said the MNB's Housing Market Report in May 2017. "In 2016, lending processes also continued to support the recovery of housing market demand."

The recovery has been partly caused by a series of government steps.  First, at the beginning of 2013, the government increased the amount of 5-year loan subsidies, the maximum value of subsidized loans, and the loan house price threshold, causing significantly stronger credit demand in the second half of 2013.

From July 1, 2015 a non-refundable subsidy, the family housing allowance (CSOK) became available.  It can be used for buying new- and used homes, for apartment expansions, and for home construction.

On December 15, 2015, the National Assembly lowered the VAT rate for new dwelling units to 5% from the previous 27%, in a further attempt to boost the property market. The new VAT rate will be effective from 2016 to 2019. The amendment also contained other measures to improve construction sector's performance and reduce red tape, according to the Ministry for National Economy. 

Purchases of real estate in Hungary by foreigners

Hungarian law requires that real estate purchases shall be concluded through private contract (purchase agreement) countersigned by a lawyer. Non-Hungarian citizens are further obliged to gain the approval of the relevant Administrative Office in order to purchase property as a private person. According to regulations most foreigners should receive a permit within 2-3 months.

Most lawyers advise foreign nationals to set up a company registered in Hungary in order to purchase property. In this case, no permit is needed. This is a fairly swift and easy procedure (taking 1-2 days), and all expenses can be written off.

Property market history

During Hungary’s housing boom (1998-2007), house prices soared by 264% (102% inflation-adjusted).  However, the market started to fall in 2008, mainly due to the global financial meltdown. Real house prices started to rise again in 2014.

Hungarian Central Statistical Office (KSH) figures for house prices in Budapest:

  • In 2008, dwelling prices rose by 2.51% y-o-y (-1.66% inflation-adjusted)
  • In 2009, dwelling prices fell by 11.12% y-o-y (-15.52% inflation-adjusted)
  • In 2010, welling prices rose by 2.19% y-o-y (-2.04% inflation-adjusted)
  • In 2011, dwelling prices fell by 2.38% y-o-y (-6.22% inflation-adjusted)
  • In 2012, dwelling prices fell by 5.86% y-o-y (-10.68% inflation-adjusted)
  • In 2013, dwelling prices fell by 2.61% y-o-y (-3.33% inflation-adjusted)
  • In 2014, dwelling prices rose by 10.71% y-o-y (11.48% inflation-adjusted)
  • In 2015, dwelling prices rose by 25.09% y-o-y (24.44% inflation-adjusted)
  • In 2016, dwelling prices rose by 20.27% y-o-y (18.80% inflation-adjusted)

Good rental yields in Budapest

Gross rental yields in Budapest are quite good. Apartments in Buda, Budapest's greener side, have relatively higher yields ranging from 6.89% for a larger apartment of 120 sq. m. to 7.21% for a smaller sized apartment of 80 sq. m., according to Global Property Guide research in July 2016. In Pest, Budapest’s business and commercial centre, rental yields are slightly lower ranging from 5.82% to 6.42%.

Monthly rents in Buda range from about EUR 11 (US$ 13.16) to EUR 11.60 (US$ 13.87) per sq. m. In Pest, apartments can be rented from EUR 11.20 (US$ 13.39) to EUR 12.70 (US$ 15.19) per sq. m. per month.

During the first nine months of 2016, rents in Budapest rose significantly, by 10% to 30%, as compared to the average level of rent in Q1-Q3 2015, according to Otthon Centrum (OC). Based on OC's most recent Residential Market Monitor in Q3 2016, cheaper rental apartments can be found in the peripheral parts of Pest, while the expensive ones are located in the central districts such as District 5, with average monthly rents as high as HUF 3,500 (US$ 13.80) per sq. m.

AVERAGE PRICE PER SECOND HAND DWELLING

  Detached Condominium Housing Estate Total
  2015 2016. I–IV. 2015 2016. I–IV. 2015 2016. I–IV. 2015 2016. I–IV.
Central Hungary HUF 19.3 million (US$ 74,911) HUF 20.1 million (US$ 78,016) US$ 17 million (US$ 65,983) HUF 20.2 million (US$ 78,404) HUF 12.1 million (US$ 46,965) HUF 14.5 million (US$ 56,280) HUF 16.8 million (US$ 65,207) HUF 19.3 million (US$ 74,911)
Central Transdanubia HUF 10.5 million (US$ 40,755) HUF 11.2 million (US$  43,471) HUF 8.4 million (US$ 32,604) HUF 9.2 million (US$ 35,709) HUF 7.6 million (US$ 29,498) HUF 8.4 million (US$ 32,604) HUF 9.3 million (US$ 36,097) HUF 10.1 million (US$ 39,202)
Western Transdanubia HUF 10.7 million (US$ 41,531) HUF 10.9 million (US$ 42,307) HUF 11.2 million (US$ 43,471) HUF 11.7 million (US$ 45,412) HUF 11.3 million (US$ 43,860) HUF 12.3 million (US$ 47,741) HUF 10.9 million (US$ 42,307)  HUF 11.3 million (US$ 43,860)
Southern Transdanubia HUF 8.1 million (US$ 31,439) HUF 7.7 million (US$ 29,887) HUF 8.3 million (US$ 32,215)   HUF 8.9 million (US$ 34,544) HUF 7.2 million (US$ 27,946) HUF 8 million (US$ 31,051) HUF 8 million (US$ 31,051) HUF 8.1 million (US$ 31,439)
Northern Hungary HUF 5.7 million (US$ 22,124) HUF 5.7 million (US$ 22,124) HUF 7.1 million (US$ 27,558) HUF 7.4 million (US$ 28,722) HUF 5 million (US$ 19,407) HUF 5.5 million (US$ 21,348) HUF 5.9 million (US$ 22,900) HUF 6.1 million (US$ 23,676)
Northern Great Plain HUF 6.2 million (US$ 24,065) HUF 6.2 million (US$ 24,065)  HUF 9.1 million (US$ 35,321) HUF 9.8 million (US$ 38,038) HUF 9.2 million (US$ 35,709) HUF 10.4 million (US$ 40,366) HUF 7.4 million (US$ 28,722) HUF 7.5 million (US$ 29,110)
Southern Great Plain HUF 6.7 million (US$ 26,005) HUF 6.8 million (US$ 26,393) HUF 8.7 million (US$ 33,768) HUF 9.6 million (US$ 37,261) HUF 6.7 million (US$ 26,005) HUF 7.5 million (US$ 29,110) HUF 7.5 million  (US$ 29,110) HUF 7.9 million (US$ 30,663)
Hungary (whole) HUF 10.3 million (US$ 39,978) HUF 10.3 million (US$ 39,978)  HUF 13.4 million (US$ 52,011) HUF 14.9 million (US$ 57,833) HUF 9.6 million (US$ 37,261) HUF 11 million (US$ 42,695) HUF 11.6 million (US$ 45,024) HUF 12.4 million (US$ 48,129)
Source: KSH

Interest rates are still falling

Hungary's housing loan interest rates are still declining. In Q4 2016, average APRs on housing loans were 5.46%, a 0.3% drop from the 5.81% prevailing rate in Q4 2015, based on figures from the Hungarian National Bank (MNB).

Average interest rates on loans for house purchases in July 2017:

  • Floating rate, or with IRF up to 1 year ― 3.13%
  • IRF over 1 year and up to 5 years ― 4.96%
  • IRF over 5 and up to 10 years ― 5.89%
  • IRF over 10 years ― 5.27%

Hungary interest rates

In 2016, about 51% of housing market transactions were accompanied with a loan, up from 49% in 2015 and 46% in 2014, according to MNB's report last May. 

From a sharp fall by almost 10% in 2015, the total amount of mortgage loans had a milder decline of 2.8% by end of 2016. The fall of mortgage loans in 2015 was attributed to the decrease in foreign currency loans of around HUF 1,732 billion (US$ 6.20 billion), which exceeded an increase of HUF 1,405 billion (US$ 5.03 billion) in forint loans, according to the Hungarian Central Statistical Office's (KSH) report on residential mortgages.

Banks are expected to offer even easier credit during the second half of 2017, as competition intensifies with the spread of Certified Customer Friendly Mortgage products, according to MNB's lending survey. Banks also saw that credit demand is picking up and this trend is projected to continue for the second half of the year as well.

Improving newly-built homes market

The number of newly-built homes sold went up by almost 18% to around 4,000 units in 2016, while in Budapest, new home sales went up by 119.2%. However their share of total sales is still marginal, accounting for only around 3.1% of the total home sales (3.2% in Budapest), according to the KSH, compared to a 9.15% share of total sales in 2008 (14.39% in Budapest).  The recent rise of newly-built homes can be partly attributed to the reduction of VAT on newbuild homes from 27% to 5%.

"The only limitation to the number of newly built dwellings on the short term seems to be the available construction capacity of the building industry," said Gábor Soóki-Tóth, Otthon Centrum's head of research, in its Q1 2016 Residential Market Monitor. "Looking at the projects under construction lately I expect more and more buyers considering to opt for newbuilt homes – and not only the families who plan to buy with the generous help of the Government."

Construction activity is up

Hungary housing credits construction

The construction sector has been recovering, with output up 35.4% y-o-y in May 2017, according to KSH. During the first half of 2017, the number of residential property units completed rose by 46% y-o-y to 5,004 units. The number of residential permits issued went up by 10.6% to 6,841 during the year to June 2017. In 2016, the number of residential permits issued had risen sharply by 87% to 12,206.

  Number of Construction permits issued Number of dwellings built
  H1 2016 H1 2017 H1 2016 H1 2017
Budapest 3,948 8,378 981 981
County towns 3,996 4,260 1,090 1,507
Other towns 3,887 4,382 869 1,574
Villages 2,308 2,803 477 942
Hungary (whole) 14,139 19,823 3,417 5,004
Source: KSH

About 48% of new dwellings built during the first half of 2017 are located in Transdanubia, while 38% are built in Central Hungary (which consists of Budapest and Pest county), based on the figures from the KSH.

Built Dwellings, annual change (%) 2016

  For own use For lease For sale
Budapest -0.70 91.18 61.32
County towns 3.08 408.82 85.63
Other towns 4.96 -23.26 46.73
Villages 5.70 -19.05 102.88
Hungary (whole) 3.98 67.33 65.07
Source: KSH

Hungary share in total by credit

Housing credits and subsidies transferred for construction rose by 112.9% during the second half of 2016 (Q3- Q4 2016).

The mortgage crisis is over

Hungary rating home loans

Hungary’s residential mortgage market ground to a halt in 2009 as a result of the decline in the value of the Forint against the Euro.  A large portion of mortgages were backed by foreign currency loans, burdening homeowners with swelling repayments, and prompting buyers to exit the market.

Foreign currency mortgages were banned in August 2010, and a number of measures were introduced to manage the foreign currency loan crisis:

  • an early repayment scheme
  • exchange rate fixing
  • foreclosure quota
  • home protection interest subsidy
  • establishment of the National Asset Management Company

The introduction of an early repayment scheme in September 2011 unilaterally changed the terms of all foreign currency loan contracts and allowed debtors to make a one-off repayment of their loans at a discounted exchange rate. Banks had to cover the difference between the discounted exchange rate and the current exchange rate.

Those unable to afford early repayment of foreign currency loans have been able to get help since 2012 by paying the instalments at a fixed exchange rate. Nearly 173,000 contracts for the fixed-rate payment scheme had been concluded by October 2014, according to the Hungarian National Bank (MNB).

As of December 2015, only 0.2% of the stock of housing loans was in foreign currency, down from 52% in December 2014. Legislation adopted in November 2014 required financial institutions to convert all outstanding foreign currency-denominated loans into HUF claims.

The National Asset Management Inc purchased properties of debtors unable to pay mortgages, allowing debtors to continued use of these properties as tenants. Around 19,628 collateralized properties were purchased from January 2013 to December 2015.

One sign that the crisis is over is that from January 1, 2015 creditors have been allowed to sell any non-performing residential real estate, without restriction.  From October 2011, the government had limited banks to designating 2% of homes in non-performing portfolios as "for sale". The quota rose to 3% per quarter in 2012, to 4% per quarter in 2013, and to 5% in 2014.

As of December 31, 2016, around 88.5% of current loans were "problem free" (2.8 percentage points higher than at year-end 2015), while 4.1% were "under special watch". Of the total current loans, 1.2% were "below average", while "sub-prime" (consisting of doubtful and bad loans) had a combined share of 6.2%.

Hungarian economy accelerating in 2017

Hungary gdp growth

The Hungarian economy grew by only 2% in 2016. The economy had performed better during the previous three years, with GDP rising by 3.1% in 2015, 4% in 2014, and 2.1% in 2013.

The sluggish growth was attributed to the decline of EU investment funds, as gross fixed capital formation fell by 15% y-o-y. Household consumption rose by 4.2% y-o-y, mainly driven by increasing employment and real wages, while government consumption stagnated at 0.1%, according to the Hungarian Central Statistical Office (KSH).

Hungary's Ministry for National Economy expects the economy to accelerate  to 4.1% GDP growth for the full year of 2017, due to the strength of the market services sector, as well as the implementation of projects backed by funds made available in the EU programming period 2014-2020, according to the Ministry for National Economy.

"Highly favourable investment data and steady GDP growth are signalling, as a whole, that the country’s economy has been growing dynamically," the Ministry stated in a recent publication. The European Commission also expects the Hungarian economy to grow robustly and the OECD has revised Hungary's growth estimate for 2017 from 2.5% to 3.8%, and raised its growth forecast for 2018 from 2.2% to 3.4%.

Unemployment in Hungary was at 4.3% in Q2 2017, down by 0.9% from the same quarter last year. In August 2017, consumer price in the country rose by 2.6% y-o-y.

Orban's authoritarianism may be causing his popularity to slip

Despite accusations of authoritarianism, the economic growth after the crisis boosted the popularity of Prime Minister Viktor Orban, propelling him and his party, Fidesz (the Hungarian Civic Union) to victory in the 2014 elections.  It won 133 seats, followed by Unity with 38 seats, Jobbik with 23 seats, and LMP with 5 seats.

During Orban’s second term as prime minister, his government altered the constitution, reducing the number of Members of the Parliament (MPs) from 386 to 199.

However, Orban's growing authoritarianism has met rising resistance. In a recent move towards the creation of an "illiberal" state, in April 2017 the Hungarian Parliament imposed stringent restrictions on foreign universities, a move viewed by critics as primarily directed towards the Central European University (CEU), founded by philanthropist and Hungarian NGO supporter George Soros. The university's student body is mostly composed of international students with liberal values, the opposite of Orban's populist views.

In response, large anti-corruption street protests occurred in Budapest last May, expressing support for CEU and NGOs. During the same month, two United Nations Special Rapporteurs also expressed their objection against the Hungarian government's draft “Bill on the Transparency of Organisations Financed from Abroad” that would limit NGOs activities.

Amidst these issues, Orban and his ruling right-wing party Fidesz saw a drop in voter support, based on recent opinion polls. Even though Fidesz remains the most popular party, its voter support declined to 31% from 37% in January, based on the poll conducted by pollster Median between April 21 and 26, 2017.

Orban's personal approval rating fell by nine percentage points to 40%, while his cabinet's approval rating plunged from 50% to 40%. This trend could affect the results of the upcoming parliamentary elections, which will be held in or before spring 2018.






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