In the first half of 2016, the macroeconomic environment broadly supported the continuing housing market rebound that has been under way since 2014. The improving income and labour market prospects and household’s improving net financial wealth all contributed to boosting housing market demand. The low interest rate environment also has a boosting effect through the pick-up in lending for house purchase and through the increasing investment purpose demand. However, the housing market stimulus afforded by the Home Purchase Subsidy scheme for families (HPS) has been slower than previously expected. The majority of the subsidies can be linked to used homes for now.
The supply side of the housing market has also started to adjust, as the number of construction permits issued doubled compared to the first half of last year. Constructions are below the necessary level, while the lead time between the issuance of construction permits and the completion of new developments has increased compared to the earlier housing market recovery. One of the reasons for this is that the work of construction companies is becoming more and more difficult due to the shortage of suitable labour. New developments are highly concentrated in the capital and its vicinity.
The upturn on the housing market shows a heterogeneous picture. On the one hand, market expansion is concentrated in used houses, with supply frictions making a significant contribution to this. Housing market turnover in 2016 H1 expanded by 10% in year-on-year terms, with that the approximately 140,000 transactions concluded over the past year already approaches the annual long-term average of roughly 160,000 sales transactions.
In order to track house prices, the MNB has constructed its own house price index, which is more capable of reflecting changes in house prices and does this using a long time series which also shows regional differences. The national MNB house price index rose by 3.8% in 2016 Q1, while nominal housing prices increased by 14.4% in year-on-year terms. According to our forecast, we expect a continued rise in housing prices although at a slightly slower rate, with a 9% increase in nominal housing prices in annual terms in the third quarter of 2016. The housing market also exhibits strong heterogeneity in geographic terms. The Budapest house price index rose by over 50% between 2014 Q1 and 2016 Q1, while the index for rural cities only increased by 20%, and the sub-index for smaller municipalities only rose by 15% over the same period.
In 2016 H1, the housing market recovery was coupled with a significant credit expansion, and the volume of newly granted loans rose by 47% in year-on-year terms. The differences between new and used home market trends are also reflected in lending: loan contracts for new homes only finance 10% of new home purchases or construction during the half-year period under review.
On the whole, the appreciation of house prices is not considered to be excessive. According to our estimates the level of house prices is below the level justified by economic fundamentals. Moreover, the volume of new housing loans should not be considered to be excessive either, and the debt cap rules ensure that lending for house purchase remains in a prudent framework. However, because of the dynamic growth rate of house prices (primarily in Budapest) the housing market should be followed closely.