House prices rising again
There was a 13.2% rise in prices of existing condominiums in Budapest in 2006, according to figures from the real estate agency Otthon Centrum. This is a significant pickup after price rises of only 4.17% in 2005.
Hungary’s real estate boom has lasted six years, with a rapid expansion in new building, mortgage lending, and price rises until the end of 2003. Half a million people took out a house loan between 2000 and 2005. Even rental income was enough to pay off the loan, and bank surveys suggest that around 15% of new purchases were broadly speculative. But in December 2003 restrictions on new loans began to squeeze the market, causing a slowdown in 2004 and 2005.
Activity is still depressed, especially in the new-build market. There was a significant decline in the appetite for construction after 2004, and most of the new buildings launched before then are now built. In 2005, new construction permits in the country capitals dropped by 31%. The price of new condominiums in Budapest actually declined in 2006, by 2.68%. In the first half of 2006 there was a 32% decline in construction permits in Budapest.
The only thing arguably keeping the new build market afloat is a vibrant mortgage market, led by banking competition and financial innovation. There are more loans every day, and the average size is rising. An increasing proportion of new loans – an amazing 80% - are based on Swiss dollars, which are then converted into Hungarian Forint. The preferred loan maturity is 20 years. Market competition to lend is fierce, and banks offer 100% loans for new build homes.
So where is the market heading?
Some optimists believe that this year’s rise in the prices of the non-newbuild market will continue: “The property scene is extremely vibrant in Budapest,” notes the real estate agent Budapestate. “Much of the excitement comes from major infrastructural developments which are set to alter the transportation network of the city, as well as the forming of “office corridors,” truly expanding the concept of the city center.”
An increasing differentiation is appearing between luxury segments and the rest. At the top end of the market new developments with prices of €8,000 per square metre are reported by Otthon Centrum, destined for foreign residents. For more typical quality used condominums in premier areas of Budapest, Global Property Guide figures suggest much lower prices of around €1,800 - €2,000 per sq. m.
However with an economic slowdown in process, it is difficult to envisage rapid house price growth.
Hungary’s economic problems are largely the result of ten years of government failures to stem social spending. Inflated budget deficits have been run, putting a brake on economic growth. Now there is stagflation. The admission by Hungary's Prime Minister Ferenc Gyurcsany late in 2006 that he lied to voters is symptomatic of the political classes’ unwillingness to tackle the persistent problem of excessive social spending and budget deficits.
The situation has deteriorated to the point where the government was forced to draft a package of emergency austerity measures in the hope of putting its finances back in order.
Base long-term interest rates have risen from 6% to 8% (as of October 2006). Inflation is now 7.8% (January 2007), and is expected to be around 9% during the next few months, up from just 3% in Q2 2006. GDP growth in 2006 was around 3.6%, and is expected to fall.
The rental market remains small, consisting around 8% of total housing. About 92% of houses in Hungary are owner-occupied, the highest in the European Union and one of the highest rates in the world.
Foreign and local demand
The first wave of post-opening foreigners bought in the 7th, 8th, and 9th Districts, which have a lot of historic charm. “Many foreigners bought investment apartments in 2001-2002,” says Andras Patkai of Budapestate.com.
“The foreigners bought in streets which often looked a mess, thinking these areas were beautiful but dirty,” says Patkai.
“They imagined that the graffiti would be cleaned up and that they would look like Vienna. Well, the graffiti is still there and it doesn’t look like Vienna. It has taken much longer to clean these areas up than anyone imagined.”
“These were refurbished in a low quality, superficial way. This is no longer good enough!”
As the standard of living of Hungarians has risen, the gap between the quality standards of foreigners and Hungarians has narrowed enormously. Now local demand is leading the market, and the locals want something different from what the foreigners bought.
“People want the atmosphere of the street to be right, the building entrance to be good, they want air-conditioning, even saunas, and, of course, parking,” says Patkai.
“There is a shift towards higher-quality apartments in a higher quality environment, with good surroundings,” says Patkai. “Most investors have not yet caught up with this shift.”
The areas now attractive to locals are the 4th, which is on the Danube and has clean air, good ecology, and excellent connection to the centre; District 10, which used to be an industrial area but has seen a lot of new building and is also favourably located, and District 16, which the one-time home of the wealthy.
Foreign buying is dominated by Dutch, German, Austrian and Swiss buyers, though in the past year Irish buyers have suddenly appeared in large numbers, buying exclusively in Budapest. There has been some widening of the areas where foreigners are willing to buy, with Angyalföld (district 13) and Józsefváros (district 8) making an appearance.
Budapest realtors have tended to advise foreign buyers not to buy ‘classic’ city-centre foreign-oriented apartments, but to go for smaller, more out of town apartments, but this advice does not seem strongly confirmed by Global Property Guide research, which suggests that yields of 6% - 8% area available in Central Budapest.
