13 June 2022
Following a protracted rise in domestic house prices, which was outstanding by European standards, housing price dynamics broke a record again in early 2022. House prices increased by 21 percent in annual terms in 2021 Q4 and, according to preliminary data, by 25 percent in 2022 Q1. At the end of 2021, residential real estate prices were significantly higher, increasing by an estimated 18 percent on average, than would be justified by real economic indicators. As a result, house price overvaluation reached an unprecedented level. Extensive support programmes are also contributing to housing market demand; however, demand brought forward due to rising inflation and interest rates also appeared on the market in 2022 Q1. The supply of new housing lags far behind demand. Housing construction is hampered by several market frictions. Of these, a substantial increase in the cost of building materials is expected in the future too.
Following the steady increase in the housing market over the past eight years, house prices broke another record in 2021. This was primarily due to the outstanding price increase in the countryside. Based on the MNB house price index, Hungarian house prices rose by an annual rate of 21.4 on average in 2021 Q4, a record high in the current cycle, compared to 8.9 per cent measured a year earlier. In Budapest, house prices were 11.3 per cent higher at the end of 2021 compared to a year earlier, and annual house price growth in provincial towns, at 25.0 per cent, was also the highest recorded in the current housing cycle. Based on preliminary data provided by real estate agents, there were further extremely sharp price increases in 2022 Q1, presumably reflecting rising inflation and purchases brought forward due to the rising interest rate environment. As a result of the record high increase in housing market prices, average house price overvaluation in Hungary rose to an estimated historic high of 18 per cent.
168,000 housing market transactions were realised in 2021, which is a significant increase of 15.6 per cent compared 2020, a year affected by the pandemic. The number of sale and purchase transactions rose primarily in Budapest. In addition to favourable labour market conditions, the new housing subsidies starting from the beginning of 2021 and the FGS Green Home Programme also contributed materially to the high number of transactions and buoyant lending. Despite the rising interest rate environment, the average interest rate on housing loans paid by customers rose only moderately over the period to March 2022, due to increasing disbursements of subsidised and central bank refinanced loans. Looking ahead, half of the banks expect demand for housing loans to decline in 2022 Q2-Q3.
In 2021, around 20,000 new residential properties received occupancy permits, which is a significant decline of 29.5 per cent in annual terms. The number of newly built homes fell again in 2022 Q1 year on year. The annual renewal rate of residential properties in Hungary is 0.4 per cent, which is low by European standards. On the other hand, the number of new building permits issued increased by 32.7 per cent during the year, probably mainly due to the reintroduction of reduced VAT for buildings that obtained building permits before the end of 2022. Overall, the supply of new homes cannot keep up with demand: the number of unsold homes in the Budapest market was 27 per cent lower in 2022 Q1 than a year earlier.
The adjustment of the supply side of the housing market is hampered by several discordant factors, which are expected to continue to deteriorate this year. In 2021, the largest increase in home construction costs was registered in Hungary among EU Member States. In 2022, the war has led to further rises in raw material and energy prices and supply chain problems have intensified, which will increase development costs and raise uncertainty about housing constructions. Looking ahead, further price increases are expected for construction materials, which could lead to additional delays in the completion of certain projects. According to market participants, the uncertain regulatory environment may lead to a sharp drop in housing investment in the short term, which will have a negative impact on supply over the next two years.
http://www.mnb.hu/en/publications/reports/housing-market-report