By Gergely Pálffy, Raiffeisen Bank in Budapest, and Michael Heller, RBI |
Imagine an investment in an asset with an associated cash flow stream of more than 750 years. Potentially no property in Hungary better reflects the long-term nature (though admittedly the initial owner was probably aware of the limitations of present value calculations) of real estate investments than Vörös Sün Ház (Red Hedgehog House). Located in the famous Buda Castle Quarter in the heart of Budapest, just 200 meters walking distance from Matthias Church, the building was constructed around 1260 and looks back at a changeful history. By today’s standards it would be the embodiment of a mixed-use property, being used as tavern, residential building, ball house, theater and even a dental surgery throughout the centuries. Yet alone the building plot Vörös Sün Ház is standing on, has gained significant value in the past five years.
Last year, Hungary was just the second country (after the Czech Republic) within the CE/SEE region to surpass real price levels seen a decade ago. Budapest in particular experienced a rapid rise in prices. The Hungarian National Bank (MNB) currently sees an increasing risk of a fundamental overvaluation in the capital. In contrast, nationwide prices are seen to be still slightly below the level justified by economic fundamentals. With an average of 7.1 gross salaries for a new dwelling (70 square meters), absolute affordability in Hungary improved in 2017 and is – by comparison to regional peers – in line with Poland, but considerably better than in the Czech Republic or Slovakia.
In addition to solid macroeconomic fundamentals (rising real incomes, low unemployment), a revival of the housing loan market and certain housing policy measures, it is also the supply shortfall that has arisen in recent years that has the potential to contribute to further price growth. The particularly slow adaption of the supply side was facilitated by substantial labor shortages in the construction industry. Over the past two years Hungary has experienced one of the strongest increases in construction costs in the European Union, primarily driven by the labor factor, but also by higher material costs. In addition, the high level of government activity in infrastructure construction is leading to some extent to a crowding-out in residential construction. In fact, completion of new dwellings rose strongly in 2018 – the third consecutive year in a row – by 23 percent year-on-year to around 17,700 apartments. However, they are still considerably below the long-term average of the past 20 years. In the CEE-region, Hungary was – with approximately 1.8 completions per 1,000 inhabitants – again at the lower end of the completion scale.
Overall, domestic housing market developments are still favorable, although growth rates are not as fierce as in previous years. The trend reached its peak in the first half of 2016, both for new and existing homes, immediately after the introduction of the preferential VAT for new homes, aimed at supporting the construction sector and lowering the cost of housing for the population. At that time, the price of new homes rose by 12.2 percent year-on-year and by 17.2 percent for existing homes. Annual averages also peaked in 2016, at 10.2 percent and 13.6 percent respectively.
In 2018, strong growth was still seen in both segments, while supply was trying to catch up with demand. According to the latest available data, the price of new residential properties rose by 3.6 percent year-on-year in Q4 2018, while existing ones increased by 9.5 percent. As a result, on average in 2018, the former were 5.4 percent and the latter 8.8 percent higher than a year earlier. For new homes, this is a four year low.
According to official statistics, at the end of 2018 the average price per square meter of new homes in Budapest was 591,000 forints, in county seats 359,000 forint and in villages 301,000 forint. Of course, some private sector surveys may show much higher values across the country, since official statistics are mostly based on earlier contracts and reflect values closer to the older price levels. Whichever statistics we look at, the average square meter price in the capital in most districts doubled in five years.
In recent years, housing prices in Budapest have moved far above of the rest of the country, including price levels in the Budapest agglomeration. In 2018, the price level of the external districts of Pest already exceeded the prices of the most expensive western sector in the agglomeration. While in 2013 the Buda districts were the most expensive, in 2018 the list was led by the fifth district of Pest. The other county seats also experienced higher prices, but they fell short of the average in Budapest.
Among the counties, Győr-Moson-Sopron is at the forefront, while its housing prices are already at the same level as Pest County: the price per square meter was 30,000 forints in the agglomeration area of the capital, while in Győr it already exceeded 310,000 forint in the second half of 2018. In addition, the amount of 181,000 forint measured in the other settlements of Győr-Moson-Sopron County is outstanding in relation to the majority of counties.
Housing market turnover has been rising gradually since 2013, but as in housing prices, sales also eased slightly in 2018. The 2017 turnover has almost reached the level of 154,000 transactions before the crisis, but in 2018 the growth slightly subsided. Last year, 145,000 homes changed hands. This was the lowest turnover of the past three years. The growth rate, which has been gradually slowing since the peak of 2014, turned negative last year. The annual growth rate of total turnover was -5.7 percent. The last downturn was in 2012, when total trade shrank by 2 percent. Of course, these values are far from the 41 percent drop in 2009.
The downturn was not set off by the postponement of the expected abolition of preferential VAT for new homes from 2019 to 2023. The growth rate of new residential property sales fell from 25 to 15 percent, and for existing homes from 4 to -7 percent in 2018. The share of existing homes in total turnover fell to 95 percent last year from 96-97 percent in previous years. That is, the dominance of existing homes in the housing market has not changed.
Looking at the latest statistics about the combined slowdown in overall turnover and price dynamics, we can say that the housing market has reached a mature stage in Hungary. It is premature to anticipate a halt in price increases, but it is likely that the growth rates seen in 2016 will not return. Presumably, we can settle for a more modest one-digit price increase over the coming period.
Gergely Pálffy is Macroeconomic Analyst at Raiffeisen Bank in Budapest
Michael Heller, CFA, is Real Estate Investment Analyst at Raiffeisen Bank International in Vienna.