Budapest, 13 May 2019 – In 2018, the Hungarian housing market continued to pick up, accompanied by strong demand. Meanwhile, regional differences widened as measured by market conditions. House prices rose by 15.2 per cent in nominal terms during the year, representing a faster rate of increase relative to 2017. In Budapest and in towns outside the capital, the annual rate of increase in house prices accelerated: in the former from 15.8 per cent in 2017 to 22.9 per cent in 2018, and in the latter from 13.3 per cent to 18.2 per cent. According to preliminary calculations, in Budapest the annual increase in house prices is likely to remain strong at above 20 per cent in the first quarter of 2019. In villages, by contrast, there was a significant slowdown in 2018, with the annual rate of increase in house prices being 2.3 per cent. As a result, the gap between house prices in Budapest and rural settlements widened further. In Budapest, the risk of residential property prices becoming overvalued increased significantly, due to sharp rises in house prices. The number of new completions is likely to peak at around 29,000 in 2019; however, supply might begin to fall markedly in 2020.

In 2018 the upswing of the domestic housing market continued within an environment of strong demand, which was also manifest in the dynamic growth of house prices and in the increase in the number of market transactions. However, the territorial differences in the domestic housing market continued to strengthen during the year. In 2018 house prices grew by 15.2 per cent nationally according to the MNB’s aggregate nominal house price index, which means slightly faster dynamics compared to the 14.6 per cent experienced in 2017. In real terms, house prices rose by 11.6 per cent in 2018 nationally. Considering price dynamics by settlement type, it is safe to say that the price gap continued to widen between larger and smaller settlements. In Budapest house prices grew by 22.9 per cent on a nominal basis in 2018, which means meaningfully faster dynamics compared to the 15.8 per cent registered in 2017. In rural cities the annual growth of house prices increased from 13.3 per cent in the previous year to 18.2 per cent, while in villages it decreased from 16.9 per cent to 2.3 per cent. The level of average square metre prices registered in villages therefore constituted only 21.6 per cent of the average level in Budapest in 2018, the value of which was still 36.2 in 2012.

Despite the dynamic increase, as a national average housing prices are still below the level justified by the economic fundamentals, while prices in Budapest have exceeded that level by some 15 per cent, therefore the risk of overvalued house prices in the capital has increased significantly. However, if we break down the housing market conditions of the capital, we can discover meaningful differences. Firstly, in the inner districts the ratio of investors may be higher partly because of tourism, secondly, the presence of foreign home buyers is also focused here, and thirdly, new housing developments are mainly present in the inner districts. At the beginning of the current housing market cycle, house prices in the inner districts started to increase more rapidly compared to the outer districts, which tendency has now reversed owing to the upward pressure on prices exerted by demand crowded out by the higher price level. Housing market experts estimate the ratio of investors in the capital at about 35 to 40 per cent, whose presence, according to the Housing and Real Estate Market Advisory Board (LITT), on the one hand alleviates the upwards pressure on rents, on the other hand, by renovating properties they improve the quality of the housing stock.

The upswing of the housing market is supported by several factors from the demand side. The underlying waging processes determining incomes further strengthened in 2018, and the financial position of households has also improved, due to a savings inclination that is high by historical comparison. Meanwhile, housing loans lent by credit institutions increased by 31 per cent in 2018, and nominally the value of new housing loans reached the same levels as around the time of the crisis, but in real terms they fall short of it. This reduces risks in the structure of indebtedness so that by the end of 2018 the issue of variable rate loans with an interest rate period of less than one year had been practically terminated, partly as a result of regulatory measures.

The family protection measures announced by the Government could substantially increase general demand in the housing market. In small localities affected by the rural HPS (Home Purchase Subsidy Scheme for Families), 43 per cent of transactions completed in 2017 and 2018 and involving properties larger than 90 m2 remained below the value of HUF 10 million, therefore the relatively high amounts of the HPS support increase the attraction of these small settlements significantly. Earlier, the extension of HPS in 2016 and the temporarily reduced VAT rate of new homes also had a meaningful impact on the domestic housing market. In Budapest the distribution of newly built apartments according to floor space changed: after the amendment of HPS, construction of relatively more housing units larger than 60 m2 started. According to our estimates, in addition, after the reduction of the VAT rate the price of new homes decreased by 9 per cent compared to the prices of used homes, i.e. 60 per cent of the tax cut benefited parties other than the consumers.

In 2018 36.7 home construction permits were issued and 17.7 thousand new homes were built, which means a decrease of 3.4 per cent and an increase of 22.9 per cent respectively, compared to 2017. According to the current plans of developers, deliveries of new apartments may peak in 2019, with approximately 29 thousand apartments. However, from 2020 the supply of new homes could become substantially tighter, for reasons including the end of the temporary term of validity of the reduced VAT rate and the uncertainty preceding the decision. In the deliveries of new homes, a decrease of 59 per cent can be expected in Budapest and 74 per cent in rural areas, compared to 2019. In total, the supply of new homes cannot keep pace with demand, and the number of newly announced homes falls short of the new homes purchased in the respective periods of time. As conveyed in the meeting of LITT, real estate professionals attribute the setback in the number of constructions of new homes mainly to the VAT rate having been restored to its original high rate and the cyclically high construction capacity demand of the state. Expanding the construction industry and within that, home constructions, to a healthy level would be desirable not only because of the currently low renewal rate of the housing stock by regional comparison but because it would also substantially promote economic growth. According to our calculations, the construction of ten thousand additional new apartments could create value added corresponding to 0.6-0.7 of GDP for 2018 and as many as 55 thousand jobs.