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House construction in Budapest

Less Transactions and Rising Market Bargain

D&T
June 12, 2020

The coronavirus pandemic led to a sharp fall in housing market activity at the end of March 2020; and construction activity is also expected to slow. Looking ahead, the market of new homes may be supported by the preferential, 5% VAT rate applicable in brownfield zones, says a report by the National Bank of Hungary (MNB).

In the first quarter of 2020, the coronavirus pandemic reached the Hungarian housing market already in a decelerating state and caused significant upheaval in the market conditions. In 2019 several signs implied that the ascending phase of the Hungarian housing market, lasting since 2014, had come to end. According to the MNB’s house price index, quarter-on-quarter house prices stagnated on a national average in the last quarter of 2019, while a decrease of 2% was measured in Budapest, which has been unprecedented for years. As a result, the annual growth rate of house prices declined materially, to 16.2% nationwide and to 14.1% in Budapest.

According to preliminary data, deceleration continued in the first quarter of 2020; the annual growth rate of house prices fell to 12.3% and 9.5% nationwide and in Budapest, respectively. In addition to the declining price dynamics, in 2019 the number of housing market transactions fell by 10.4% compared to 2018, while Budapest registered an even larger, 25.6% fall. In addition, at the end of 2019, the discount available to customers in the course of a market bargain significantly rose, primarily in Budapest, which may indicate declining demand.

Supply of new homes continued to rise in 2019; the number of newly completed homes was up by 19.5% compared to 2018. However, looking ahead, there are a number of signs implying a decline in the supply of new homes. This is primarily due to the ending of the preferential VAT rate at the beginning of 2020, as a result of which, there are already signs of decline in development activity; furthermore, the coronavirus pandemic may also hinder home constructions. The number of new building permits issued decreased already in 2019 by roughly 4.3%, and to an even larger degree, by 27% in annual terms, in the first quarter of 2020. In the first quarter of 2020 the number of homes in the newly announced projects in Budapest was one of the lowest in the current cycle, which indicates the slackening of the home development activity in the period ahead.

In the first quarter of 2020, the spread of the coronavirus pandemic and the restrictive measures implemented at the end of March due to safety reasons, resulted in an abrupt and drastic fall in market activity. In March, the number of sales transactions, in annual terms, fell by 29% and 38% nationwide and in Budapest, respectively, which was mostly attributable to the drop in the number of transactions observed in the last week of the month. Following this, in April the number of transactions fell by 58 and 70%, respectively, in annual terms. The pandemic made its impact felt also on the rental market immediately. Based on market data, compared to the end of February, by the end of April the number of flats for rent in Budapest rose by 22%.

According to the experts of the Housing and Real Estate Advisory Board, a large number of dwellings, which had formerly been rented out short term to tourists, may have been redirected to the long-term rental market. The average asking prices for flats to let also declined in most districts of Budapest, particularly in the downtown districts. On the supply side, the pandemic may primarily cause a delay in the completion of construction, and result in even fewer new developments in the long run. Construction is further decelerated by the scarcity of imported materials and also by the reorganization of the work processes for safety reasons.

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