The upturn on the Hungarian housing market continued in 2018 H1, as reflected both in the dynamic increase in house prices and the rising number of transactions. On a national average, domestic house prices rose by 16.2 per cent on an annual basis at the end of Q2, according to the values of the MNB’s aggregate house price index. At the same time, in real terms, house prices advanced by 12.7 per cent, while according to our forecasts, an increase of 11.5 per cent can be expected for 2018 as a whole. Despite the steady increase, on a national average house prices remain below the level justified by macroeconomic fundamentals, but in Budapest the risk of overvaluation has increased, and consequently careful monitoring of market developments in the capital has become even more important. The risks are mitigated by the fact that, for the time being, there is no indication that credit institutions in the capital are shifting towards financing at a higher level of risk tolerance.

The Hungarian housing market shows a strong level of spatial heterogeneity, and the disparities between the individual settlement types continued to increase in 2018 H1. Compared to a rate of 15.6 per cent at the end of 2017, the annual nominal growth rate of house prices in Budapest had accelerated to 20.2 per cent by 2018 Q2. During the same period, in other cities annual house price growth rose from 13.3 per cent at the end of 2017 to 16.3 per cent, while in villages it slowed down from 16.9 per cent to 11.8 per cent. In light of these developments, the price gap between smaller settlements and the capital widened even more. The average square metre prices registered in villages now reach only 22 per cent of the average values in the capital, while the price level registered in other cities reaches 37 per cent; by contrast, in 2012, when the smallest price differences were registered, these values were 47 and 62 per cent, respectively. According to preliminary calculations the annual growth rate of house prices accelerated once again to reach 23.9 per cent in Budapest during 2018 Q3, while as a national average growth of 16 per cent was registered at the same time.

In the domestic housing market, all factors are pointing towards quickening demand. The improving financial position of the household sector and the intense wage outflow also substantially boosted the savings of this sector, which – along with the long-term income prospects – paints a more positive picture of prospective demand conditions in the housing market. In 2018, interest in purchasing and intentions to renovate started to increase again among households. In 2018 H1, credit institutions’ newly extended housing loans increased by almost 40 per cent on an annual basis, but loans for housing are also starting to play an increasingly dominant role within consumer loans. Interest rate spreads narrowed significantly in the period under review, and as a result the average spread on loans with fixed interest rates has reached those for loans with variable rate. Although the volume of newly issued loans accounts for 80 per cent of the corresponding value from 2008, there is still room for further expansion in housing lending. Calculated at real value, current loan volumes are still lower, while in terms of the number of transactions, there is even a decrease in housing loans – with higher average contract size – compared to 2008. Domestic housing credit-to-GDP can be viewed as quite low by international standards. The debt cap rules applied by the MNB ensure the expansion of lending in a sound structure, while in an effort to mitigate the interest risk of households and to encourage further mortgage loans with fixed interest rates, from October 2018 the central bank introduced a payment-to-income regulation differentiated by interest rate fixation period.

The supply side of the domestic housing market still cannot keep up the pace with the strong demand, which is exemplified by the fact that more and more new dwellings under development in the capital are sold prior to completion; in 2018 Q3 this ratio was 68 per cent. On the other hand, market participants reported practically inexhaustible demand for new dwellings, and early demand has also appeared in the market. During 2018 H1, 6,517 new homes were completed, which exceeds the value registered in the same period of the previous year by 30 per cent, but the number of building permissions issued dropped by 9 per cent in the same period. As a result, the annual renewal rate of the domestic housing stock amounted to 0.36 per cent at the end of Q2. A high level of regional heterogeneity can be seen, as the latter figure is 0.9 per cent in Central Hungary, while in Northern Hungary it is only 0.1 per cent. On the whole, however, the renewal rate is low compared to the countries of the region. The main causes may be the tight labour and material capacities of the construction industry and the relatively low productivity of the sector, while certain interviewed experts were of the opinion that the lack of the use of efficient technologies may also play a role.

In Budapest, housing completions may peak in 2019. We project the completion of 7,400 new homes in 2018 and 15,700 new homes in 2019. However, supply may dwindle from 2020, owing to the termination of the preferential VAT rate, and this assumption is confirmed by the uniform opinion of market participants. We expect the completion of a total of 3,000 homes for this year. 60 per cent of projects are falling behind owing to tight capacities, here with part of the large number of planned completions in 2019 may shift to 2020.

On the whole, all of the factors in the domestic housing market point to the continuation of strong demand, while there are several factors working against a healthy upswing in housing loans. The increase in house prices is not yet excessive at the national level, but the market in Budapest must be closely monitored to ensure that the increase in house prices beyond what is justified by fundamentals is not coupled with excessive risk tolerance in lending.