Economy 12 May 2017, 2:00pm

Housing price rise in Hungary could remain in double-digit territory

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Hungarian housing prices rose 15.4% year on year in 2016, accompanied by continued considerable regional heterogeneity. Price appreciation was the strongest in Budapest, where it amounted to roughly 22.5%, way over the price increase in rural towns and villages. The housing market has reached a more mature phase, where supply is responding by adjusting to the increased housing market demand, the Hungarian central bank (MNB) said in its latest housing market report on Friday.

Price rise continues

The rate of the price increase may decelerate in the future therefore neither growth in the volume of new housing loans, nor the national average rise in housing prices show sign of overheating. Despite the moderation, however, price rise is expected to remain in double-digit territory.

The Hungarian housing market cycle entered a more mature phase in 2016, with the supply side responding to increased demand staging a clear recovery, the MNB said in the report.

In addition to households’ improved income and labour market position, a low interest environment continued to support the demand side. Meanwhile, the recovery in lending is making increasing contribution to growth in demand.

The extension of processing time for construction permits resulted in a slower rise in house starts, but after a sharp rise in the number of construction permits issued, the number of completions showed also a double-digit increase in 2016.

Several new housing project started in Budapest, the majority of which will be completed in 2018, and thus price pressure on the Budapest housing market may decline, due to a continuous rise in supply.

In respect of developments, the lack of skilled labour may continue to represent a restrictive factor. However, the fact that the growth rate of housing prices has exceeded the growth rate of construction costs for years, has a favourable impact on the willingness to develop property.

In 2016, housing prices grew by 15 per cent on a national average, but in regional terms the picture is more heterogeneous. In Budapest, housing prices were 22.5% higher at the end of 2016 compared to the previous year, while housing prices appreciated by 13.8% in rural towns and by 9.3% in villages.

According to the MNB house price index, Hungarian nominal house prices grew at a rate of 15.4% in 2016, while a slight rise in inflation resulted in a deceleration in the annual growth of real prices by the end of the year (13.4%).

Growing lending

In 2016, lending processes also continued to support the recovery of housing market demand. In addition to favourable financing costs, the volume of new housing loans granted grew by about 42%. The weight of housing purchases from loans increased somewhat, exceeding one half of the transactions.

Housing affordability from loans deteriorated in 2016 H2 even despite the decreasing financing costs and increasing income, which is attributable to the rising house prices, although its level is still favourable based on the HAI index. In Budapest, however, the high house price level significantly lowers housing affordability for households. In parallel with the continuous increase in demand, the volume of newly disbursed loans also increased, with both the amount and share of new housing loans rising.
HAI shows how many times the income of a household with two average wages covers the income necessary for the purchase of an average (65-square-metre) dwelling with a loan.

Overall, neither growth in the volume of new housing loans, nor the national average rise in housing prices shows sign of overheating.

Stable real estate market: Lake Balaton

In addition to the Budapest housing market, the real estate market of the resort area around Lake Balaton is outstanding both considering its size and in tourism terms, and hence this report deals with housing price developments around Lake Balaton as a focus topic. Housing prices in the Balaton region show greater stability over the long term: following the crisis, they lost value to a lesser degree compared to the national average, but currently price appreciation faster than national average is not being observed.

Overall, based on the current developments on the housing market it can be established that the recovery on the market has passed through its initial phase, and the housing market has reached a more mature phase, where supply is responding by adjusting to the increased housing market demand. According to MNB calculations, in terms of the national average, the Hungarian housing price level is below the level justified by macroeconomic fundamentals, and thus the continuous increase of housing prices can still be deemed sustainable. However, trends in Budapest must be monitored closely, the MNB stated.