Strong demand and supply side frictions on the housing marketPrint
Budapest, 11 May 2018 – In 2017, the domestic housing market picked up further in a favourable macroeconomic environment. House prices rose by 13.8 percent in nominal terms, and growth may continue in 2018. Housing transactions expanded by 2 percent last year. The strong, annually over 5 percent, dynamics in real disposable income, the favourable labour market trends and the dynamic, although healthier, expansion in lending for house purpose all supported the rise in market demand. However, considering the low ratio of loans to GDP, there is room for further growth in housing loans. On the supply side of the housing market, more frictions can be identified, hindering vigorous growth in housing construction. On the one hand, developers are struggling with planning, due to uncertainties related to the preferential VAT rate, while there is a shortage of skilled labour of almost 40,000 workers in the construction industry, which adds to the tightness of capacities. As a result, 63 percent of ongoing housing projects in the capital city are in delay, while developers do not plan any notable amount of new housing completions from 2020. As regards house prices, there has been no overheating yet; however, in the capital city prices have already reached a level justified by fundamentals, thus the housing market must be closely monitored further.
The upturn in the domestic housing market observed in previous years continued in 2017. According to the MNB’s aggregated house price index, house prices rose by 13.8 per cent on a national average, representing slightly slower growth compared to the 15.4 per cent registered in 2016. In real terms, house prices rose by 11.4 per cent in 2017. In addition to the continued increase in prices, the roughly 2 per cent rise in housing market sales transactions also demonstrates the continuing recovery on the market. Despite the strong rise, the level of house prices remains below the level justified by the macroeconomic fundamentals on a national average, i.e. there is no overheating yet. On the other hand, house prices in Budapest have already reached this level.
Hungarian housing market developments are still marked by strong regional heterogeneity, but the focus is tending to shift to an increasing degree from the capital to rural settlements. In 2017, the number of sales tended to rise in those – typically smaller – settlements, where the price level was still lower, while on the other hand in Budapest the number of transactions started to decline, due in part to the substantially increased price level (growth of 101 per cent by the end of 2017 compared to the end of 2013). The larger price increase observed in the capital resulted in a widening price gap between Budapest and rural areas: in 2017, the average square meter prices observed in villages were 25 per cent of the average prices recorded in the capital, while this ratio was 47 per cent in 2012. The annual rate of price appreciation in Budapest already shows gradual deceleration, albeit in the light of the high price level, this still represents substantial price appreciation. While in 2015 house prices in Budapest rose by 26.8 per cent, in 2016 and 2017 they were up 23.6 and 13.3 per cent, respectively.
Factors influencing the demand side of the housing market improved further in 2017. The more than 5 per cent rise in households' disposable real income, the continued decline in unemployment and increasing savings resulting from the vigorous wage outflow, suggest that demand will remain robust. Lending for housing is also characterised by buoyant demand: in 2017, the volume of new housing loans rose by almost 40 per cent, while 45 per cent of housing transactions involve bank loans. However, in Hungary the volume of outstanding housing loans as a per cent of GDP is one of the lowest in Europe, and thus there is still room for lending, which is kept within prudent bounds by the debt cap rules.
According to our preliminary house price index estimated on the basis of data provided by housing market intermediaries to monitor current house prices, house prices rose further in the first quarter of 2018, increasing by 4.7 per cent nationally in nominal terms (annual growth of 13.8 per cent) and by 3.4 per cent in Budapest (annual growth of 12.1 per cent). In the light of the housing market fundamentals, according to our forecast the rise in house prices may continue throughout 2018, by 11.1 per cent in real terms and by 13.9 per cent in nominal terms.
In 2017, the supply side of the housing market was characterised by further growth, but looking ahead the healthy rate of home constructions is hindered by severe frictions. In 2017, roughly 38,000 new construction permits were issued and almost 14,400 new homes were completed, exceeding the values recorded in 2016 by 20 per cent and 44 per cent, respectively. However, the renewal of the Hungarian housing stock, i.e. the number of new homes relative to the stock of dwellings, is occurring at a slow rate of merely 0.3 per cent per annum, which is extremely low in a regional comparison. As regards the capital, the completion of new homes may peak in 2018¬–2019, as residential property developers anticipate the completion of 8,800 and 10,000 new homes this year and next year, respectively, compared to 2,800 in 2017. However, by 2020 the number of planned completions will decline sharply, mostly due to the fact that then, according to the presently effective rules, the preferential 5 per cent VAT rate of new homes will be phased out.
With a view to understanding the housing market processes more thoroughly, in March 2018 the MNB interviewed several major housing market actors (developers, contractors and intermediaries), where the senior executives and experts of the companies summarised the key frictions of the supply side of the market in the following three points: (1) due to the uncertainties related to the preferential VAT rate, developers are not keen on planning from 2020, (2) there is a shortage of skilled labour of almost 40,000 workers in the construction industry, which results in tight capacities, (3) commercial property and government investments are siphoning off significant capacities to the detriment of housing developments, and on the whole these factors result in the over-utilisation of construction capacities. As a result of the foregoing, housing projects face major delays, and developers have postponed the anticipated completion date in the case of roughly 63 per cent of the dwellings under construction in Budapest.
On the whole, housing market fundamentals imply a further upturn, but frictions on the supply side are hindering a healthy increase in home construction, while further growth in the completion of new homes would be welcome in terms of the renewal of the domestic housing stock. As regards house prices, no overheating can be observed for the time being, but due to the high price level in Budapest and the rapid increase in lending, the market must be closely monitored.
MAGYAR NEMZETI BANK