November 18, 2022. An almost ten-year boom in the housing market has now come to an end. While we still saw a huge price increase in the second quarter, it ended in the third quarter. Demand plummeted, loan interest rates dropped, borrowing decreased, and the number of transactions fell by a third. According to the MNB Housing Market report, apartments in Hungary are overvalued by an average of 22 percent, which carries significant risks.
You could already see from the reports of the market participants that a boom in the housing market that had lasted for almost a decade had come to an end. Bank reports and information sheets revealed that housing lending fell sharply in September and October. This has now also been reflected in the figures of the MNB.
Here's the twist
According to the latest Housing Market Report, in the first half of 2022, the housing market reached the peak of its multi-year cycle in the favorable macroeconomic environment. A significant economic slowdown can already be expected in the second half of the year and in 2023. By the end of the year, the unemployment rate may rise slightly, and the real disposable income of households is also expected to decrease, and these factors predict a decrease in housing market demand.In the third quarter of 2022, there are already several signs that a turnaround has occurred in the domestic housing market, and looking ahead, we can expect a further slowdown of the domestic housing market in line with the uncertain economic outlook and rising mortgage interest rates.
There was still a price increase in the first half of the year
In the first half of 2022, the increase in the price of the domestic housing market continued with extraordinary dynamics. Based on the MNB housing price index, in the second quarter of 2022 housing prices increased by 24.8 percent on a national average, compared to 21.4 percent at the end of 2021, which in nominal terms represents the highest price dynamics measured in the current, 9-year housing market cycle. In the rural towns, there was an annual price increase of 31.2 percent, which exceeded the national average, and in Budapest, housing prices rose by 20.4 percent in one year.In real terms, however, the price increase has already slowed down to 12.8 percent in the first half of the year from 13.3 percent in the fourth quarter of 2021, and falls short of the 16.1 percent real annual price increase that marked the peak of the cycle. Based on preliminary data, in the third quarter of 2022, the annual growth of housing prices in real terms is expected to slow significantly to 1.7 percent.
Apartments are overvalued, which is risky
As a result of the continuing rise in housing prices, exceeding the level justified by favorable economic fundamentals, the overvaluation of housing prices rose to a historically high national average of 21.5 percent by the second quarter of 2022, the MNB writes in its Housing Market Report. In Budapest, this phenomenon eased somewhat, and the overvaluation, according to the MNB's estimate, amounted to 10 percent in the second quarter, which is still high, however.Overvaluation can carry risks from several sides, which is why, according to the MNB, close monitoring of processes is justified. On the one hand, excessively high housing prices can force borrowers into a more strained situation, and on the other hand, a correction of housing prices may also occur, which also means a devaluation of bank mortgage collateral.
Demand decreased, the number of transactions fell
Demand on the domestic housing market decreased significantly in the third quarter. According to the MNB's estimate, the number of transactions decreased by 22.6 percent, in September the decline was 34.2 percent compared to last September. The last time the number of sales and purchases in the third quarter (32.3 thousand) was this low was in 2013, during the turn of the housing market cycle. With regard to the individual settlement types, the number of transactions decreased by 16.5 percent in rural CSOK settlements, by 16.9 percent in Budapest, by 30 percent in county seats, by 25.9 percent in other cities, and by 36.9 percent in other municipalities.A market with much lower activity than experienced in recent years may be an indicator of the turn of the housing market and may predict a significant decrease in housing price dynamics. Experts expect a continuous decrease in demand, and according to their expectations, the bottom point will come in February-March 2023. Currently, a widening housing market trajectory is emerging, in which properties with poor energy efficiency are characterized by falling prices, those with good energy efficiency are characterized by stagnant or rising prices, and new construction offers are characterized by further price increases.
Credit collapsed
In the second quarter of 2022, the issuance of home loans set a record, however, since July, loan issuance has already shown a year-on-year decline, and in August, issuance already fell by 19 percent on an annual basis. (The banks are already talking about a 50 percent drop in September-October.) The decrease in contracts of the NHP Green Home Program (NHP ZOP), the demand brought forward to previous months due to the rising interest rate environment, and the decrease in housing market activity also played a role in the correction.As a result of the continued rise in housing loan interest rates and the housing market's rise in prices, the availability of housing for households that are not eligible for home building subsidies, or to a lesser extent, has fallen to a low level not seen for years. Based on the responses to the Lending Survey, banks tightened the conditions for access to home loans in the third quarter of 2022, and almost all institutions experienced a decline in loan demand. Looking ahead to the next six months, the tightening may continue with the increase of mark-ups, and in addition, the vast majority of banks expect a further decrease in credit demand.
What happened to the new apartments?
In the first three quarters of 2022, the number of newly built apartments handed over increased by 7.7 percent thanks to the increase in rural housing construction. According to the MNB's forecast, in 2022, as a result of the significantly increasing number of new construction permits in recent quarters, a total of around 23,000 new apartments are expected to be completed, which would correspond to an annual increase of 17 percent. This is in line with the expected slowdown of the economy and the decrease in housing market activity starting this year. Based on developers' expectations, the annual number of apartments built in recent years of around 20,000 may gradually decrease by half in the next 2 years due to the worsening economic outlook, mainly due to the uncertain demand for new apartments.The new housing market in Budapest has narrowed on both the supply and demand side. In the third quarter of 2022, within the new condominium projects under development and sale in the capital, the still available supply decreased by 36 percent year-on-year due to early purchases in the first half of the year. In the third quarter, the number of new apartments sold in the capital fell by 40 percent on an annual and quarterly basis, while the free supply was characterized by dynamic price increases. The average square meter price of new apartments in Budapest rose by 33 percent on an annual basis. Looking ahead, market participants do not expect prices for new apartments to drop, primarily due to the significant increase in construction costs experienced in recent years.
The chances of owning your own apartment in Hungary have decreased
In 2022, European capitals will also be characterized by a deterioration in the availability of housing. Budapest was the fifth least affordable capital city in Europe in the third quarter of 2022 in terms of the ratio of house prices to incomes, which corresponded to its ranking a year ago. (We would add that, in addition, the average income this year was significantly raised by the one-off benefits at the beginning of the year. So if we were to correct the numbers with those, the situation would be even worse.)In Budapest a year ago, 16.3 years of national average income was needed to buy a 75 square meter residential property, and in October this year it was already 18.0 years. The median house price/income ratio of European capitals rose from 11.0 years to 12.8 years. Accessibility has also deteriorated in the capitals of the other Visegrád countries, so a person with a national average income of 25.3 years in Prague, 23.8 years in Bratislava, and 19.9 years in Warsaw can buy an average-priced property with a floor area of 75 square meters.