Economy
Hungarian housing loans most expensive in Europe
The key messages of the MNB’s Financial Stability Report offer few novelties. These could be summed up in five points:
- Previously identified risks related to the global economy eased, but have not disappeared completely. A continued improvement in economic prospects has been observed at the global level. Some political uncertainty factors declined considerably in Europe, although other future risks remain. Apart from the Mediterranean countries, a pick-up in lending, both retail and corporate, has been observed in the EU. Based on the growth rates of loans outstanding, both the Visegrád and Baltic countries are among the leaders in Europe, as in these countries sharp growth is experienced along relatively low credit penetration. Compared to 2010, the ratio of non-performing loans is higher in several countries, especially in Cyprus and Greece, but Croatia, Portugal and Italy are also in this “danger zone". The NPL ratio in Hungary is already below the 2010 level. Debt stocks keep on growing in several countries that could increase their vulnerability, and mortgage lending for home purchases can be considered excessive in several countries. Commercial real estate markets have also had major capital inflows which is reflected in falling yields and declining vacancy rates.
- In 2017, marked growth was observed in domestic lending and the housing market. The MNB said average housing prices remain lower than the level justified by macroeconomic fundamentals, while home purchase with borrowing also seems to be affordable, taking into account the average income position of households. housing prices in Budapest already exceed the level justified by the demand side fundamentals of the housing market, albeit just slightly. . On a regional basis, however, the Hungarian housing market is heterogeneous in terms of market turnover, changes in prices and the developments in housing starts, with the most striking difference seen in house prices. Starting from 2016, the strong growth in housing market demand was followed by an expansion in supply as well, which was reflected in a sharp rise in the number of newly issued home building permits (which is expected to peak in Q418). The expected further increase in new supply may dampen the rapid rise in housing prices. The affordability of newly built dwellings in Hungary does not differ significantly from that of other CEE countries. In Hungary, 8 years of gross salary is needed for the purchase of an average 70-sqm new dwelling (which is 11 yrs in the Czech Republic), but despite the steady rise in house prices, the affordability of buying homes from loans is considered high. Further expansion in household lending is expected over the forecast horizon. The credit gap will not close over the forecast horizon, i.e. lending is not expected to be overheated, and the build-up of prudent lending is ensured by the debt cap rules in force. Corporate lending as a whole also continued to expand in the first three quarters. Accordingly, based on transactions, loans outstanding increased by 8.3% yr/yr. Including the transactions of the self-employed sector, the annual growth in SME lending amounted to 13%, but even excluding the latter the annual growth rate was 9.5%. Following the termination of the Funding for Growth Scheme at the end of Q1, the dynamics of SME lending and also total corporate lending remained practically unchanged.
- In this report, special attention is devoted to the extent of households’ financial vulnerability, and at the same time households’ financial literacy is also assessed. The focus is on solutions that would mitigate the interest rate risk of housing loans. In the spring of 2017, the Magyar Nemzeti Bank conducted a questionnaire survey of 1,500 Hungarian households with loans. In this micro-level examination of financial vulnerability it found that 14-15% of households with loans can be considered financially vulnerable. Another 12-13% can be identified, which is not yet vulnerable, but its financial awareness is unsatisfactory. Nevertheless, this group is more than half of the transitional set around the vulnerability threshold, i.e. increasing financial awareness may move a considerable portion of households out of the zone that is close to vulnerability, the MNB said. Fixed-rate loans remain a lot more expensive than variable-rate loans, and their spread is 1.5 ppts on average, which makes Hungary a market leader in Europe. Looking ahead, certified consumer-friendly housing loans are intended to address this issue through new lending, while in relation to risks arising in the existing stock of loans, incentives for refinancing with interest rate fixation might be taken into consideration.
- The credit institutions sector was characterised by extremely high profitability in 2017 H1 again, although this is still attributable to unsustainable, one-off items. Over the medium and long term, the profitability of the banking sector can mainly be ensured by boosting lending activity, expanding the range of services and increasing cost efficiency; the latter can be achieved by intensifying the utilisation of digital technologies and automatisation. A significant portion of this high profitability stems from the reversal of previously recognised provisions. The sector’s ROE of around 14% recently is not sustainable. The return calculated with the long-term level of loan loss provisioning was between 5-7%, which is much lower than the nominal profitability in the pre-crisis years. Strategies to increase banks’ profitability include: 1. Increase lending (change of asset composition: higher share of assets with higher interest rate, increasing net interest income), 2. Other income sources (broadening service spectrum, cooperating with FinTech corporations, investing in FinTech), 3. Reducing costs (digitalisation, automatization, lower number of branches, consolidation). The bank also found that certain consumer groups are very keen on fintech solutions. One million consumers can already generate potential demand for novel solutions. Hungarian institutions mainly see the spread of fintech innovations as an opportunity, not as a threat.
- The portfolio cleaning of non-performing loans from banks’ balance sheets continued in 2017 and so far this has not resulted in any significant losses for the Hungarian banking sector. Thanks to this portfolio cleaning, the shock resilience of the sector has improved significantly. The initial capital adequacy of institutions is solid, and loan loss provisions would not increase significantly even in a stress scenario. Thus, most of the banks would remain profitable even in the scenario assumed in the stress test. The cleaning of balance sheets will help to improve banks’ lending activity over the long term, while the social implications of debt settlement should be followed with increased attention.
