Economy 22 October 2024, 11:20am

Hungarian housing loans with sub-5% APR in the pipeline, but eligibility is narrowing significantly

Portfolio

Although many expected it given the government's announcement a month ago, not all borrowers will be able to get a home loan with an APR below 5%, it has become clear in recent days. While the issue may even be put to a "national consultation", the ministry is open to ideas from banks that would sharply narrow the pool of eligible borrowers to young people buying their first, smaller home, by encouraging demand for energy-efficient housing.

On 19 September, Economy Minister Márton Nagy held a meeting with representatives of the Hungarian Banking Association, where he asked for the banks' cooperation on four points. In what seems to be the most important announcement, he

asked the banks to "voluntarily" reduce the APR on housing loans to below 5%.

This would also mean interest rates below 5% for new home loans, compared to the recent average of 6.56% in central bank data, which banks apply to market-rate home loans.

At the time, the Economy Minister initiated that the Hungarian Banking Association should work out within two months when and how the Minister's requests could be met. According to information Portfolio has received,

the banks are preparing to put their proposals on the table of the ministry by mid-November.

In doing so, they would be narrowing down the pool of eligible borrowers, as they do not want to lend at a loss: the 10-year government bond yield used as the main benchmark is at 6.73%, the BIRS at 6.47%, and they have been rising in recent weeks, so it would be a big mistake to price them below these levels en masse.

According to what Portfolio has learned, the banks would limit the application of the "voluntary" 5% APR on five points, and this is essentially what Radován Jelasity, Erste CEO and president of the banking association, talked about at Portfolio's Budapest Economic Forum summit last Thursday:

it would be made available only to first-time home buyers,
within that only for young people under 30 (see also baby loans),
and only for green home loans (this would conveniently mean loans for new construction, as it would not cover energy efficiency upgrades of second-hand homes, according to our sources),
with a size limit (e.g. maximum 50 m²)
and a house price limit (e.g. HUF 1 million per m²).

21% of housing loans are taken out by borrowers under 30 years of age, 16% of housing loans are for new construction, and the share of first-time home buyers is around 28%,

according to the latest statistics from the National Bank of Hungary (MNB) and Duna House. So we are talking about a narrow common intersection of these sets, and that's without even mentioning the size and price limits. All in all, banks would probably lend only a few percent of the market's housing loans with an APR below 5% if the yield environment did not take a sharp downward turn.

It seems that the tightest cross-section would be below HUF 1 million per m² if the banks' idea remains as it is (although this is not yet final, according to our sources), as the average price of new apartments (i.e. green apartments) in Budapest is already above HUF 1.5 million, and according to the latest Budapest Housing Market Report,

only 3.7% of the new housing supply in Budapest is below HUF 1 million per m².

The situation may be better in the countryside, so it is conceivable that an APR below 5% would have a positive impact mainly on rural housing investment.

With a tight supply of new homes, prices are unlikely to fall this year, not least because housing construction costs have more than doubled in Hungary since 2015, the biggest increase in the EU.

The big question now is how the government will react to the banks' package of proposals, which are highly restrictive but still generous in terms of money market returns. The reaction so far has been encouraging:

a deputy state secretary of the Economy Ministry (NGM) at a recent private event reportedly took a very similar position to the banks' approach, and
Economy Minister Márton Nagy told journalists at the Budapest Economic Forum last week that "the question in this area is to whom we can give the 5% mortgage interest rate, which is now around 6.5-7%". In this context, he mentioned that young couples want to buy their first home, "we are not talking about billionaires". This could be an indication that the government is targeting this group to get preferential interest rates. He also added that we are talking about 40-50 m² flats with a price per m² of HUF 1 million, and that this could even be combined with green objectives, working with the sector.

So it looks like

the government and the banks' ideas are converging, and apart from a narrow group of people, there will be no mass interest rate cuts in the housing loan market.

Cover photo: Portfolio