Price falls due to weaker demand and oversupply in Budapest

Budapest’s house market remains weak, due to dwindling demand and oversupply. The average price of dwellings for sale in Budapest was €1,284 per sq. m. in June 2008, lower than the average price of €1,293 during the same period last year, according to ingatlan.com, a real estate portal.

Budapest’s newbuild condominium market, which was in the forefront of the housing market boom, registered price increases of 6% in 2007, according to real estate agency Otthon Centrum. With inflation at 7.9%, prices actually fell in real terms. From 2001 to 2004, the average annual price increase of Budapest new condominiums was 11.8% (5.3% in real terms).

Inflation-adjusted house prices posted on the Hungarian Central Bank (MNB) site (using data from Origo, a news website) show a grimmer scenario: real house prices fell 5.7% in 2007 from a year earlier. It was the 14th consecutive quarter that prices declined y-o-y.

Housing and mortgage boom

Hungary has one of the world’s highest owner-occupancy rates, at 92% (2003 data). The shift to a market-based economy in the 1990s saw massive privatization of state housing owned by local authorities. However, a significant portion of dwellings units were in poor condition. For instance, only 48.2% of dwelling units had central heating in 1996, only 75.6% had a lavatory and 84.4% had piped water.

To encourage the upgrading and refurbishment of dwellings the government started offering generous subsidies in 2001. Some of the measures include interest rate subsidies for mortgages, grants for younger couples with children to construct, enlarge or buy homes, VAT relief for new housing, and stamp duty waivers.

The subsidies made an immediate impact on the housing market. The increase in demand for new dwellings led to strong price increases. The average price of new condominiums was 50% to 70% higher than second-hand units.

With the subsidies, the mortgage market rapidly expanded, too. Housing credits rose from 1.4% of GDP in 2000 to 9.3% of GDP in 2004 and 12.4% of GDP in 2007. Total volume of housing loans to individuals rose from HUF189 billion in Dec 2001 to HUF1,508 billion in end-2003.

In 2003, 85% of the amount granted as housing loans was subsidized by the government while subsidized loans financed around 87% of housing related expenditures.

Withdrawal of subsidies

The generous housing subsidies were actually part of the re-election gimmickry of the government led by conservative centre-right Fidesz (Alliance of Young Democrats). The subsidies were too expensive to maintain, reaching HUF862 trillion in 2003 (around 1.8% of GDP).

The subsidies added to the fiscal constrain. The budget deficit jumped from 4.08% in 2001 to 8.95% in 2002 and 7.15% in 2003. The new government led by left-wing Hungarian Socialist Party (MSZP) reduced the amount of subsidies in Dec 2003 and January 2004. The total amount of housing subsidies declined to HUF 549 trillion in 2004 and HUF530 trillion in 2005. The share of subsidized loans decreased to 49% of new loans. The withdrawal of subsidies triggered housing market slowdown.

Even with the reforms, the government was still facing huge budget deficits, reaching a ten-year peak of 9.3% of GDP in 2006. The government cut back on spending and frontloaded tax increases.

While the deficit was trimmed down to 5.5% of GDP in 2007, economic growth was a mere 1.3%. From 2000 to 2006, the average annual GDP growth was 4.38%. The economic slowdown led to further weakening of demand.

Oversupply

With the housing boom, housing construction also picked up. Dwellings completed increased from less than 25,000 annually from 19998 to 2000 to more than 30,000 annually from 2002 to 2007. Dwellings completed peaked in 2004 with 43,913 units and 2005 with 41,084 units.

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’s capitals dropped by 31%. In the first half of 2006 there was a 32% decline in construction permits in Budapest.

Foreign demand

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 condominiums in premier areas of Budapest, Global Property Guide figures suggest much lower prices of around €1,800 - €2,000 per sq. m.

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!”

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.