The End of an Era?

The adversities caused by the coronavirus pandemic are engulfing new sectors of the economy and few are likely to escape unscathed. Experts warn that the Hungarian property market is also set to suffer in the coming quarters with many owners being forced to sell and buyers being few and far between.

In recent years, many Hungarians purchased properties with an intent to rent them out as demand for short- and long-term rentals skyrocketed. At the same time, returns on other types of investments were nosediving as central banks across the globe slashed interest rates.
With the onset of the pandemic, demand for rental homes – especially short-term rentals like AirBnB collapsed. Compounding many landlords' woes was Budapest's move this year to follow the likes of Barcelona, Paris and Amsterdam in capping the number of days per year property owners are allowed to rent out their apartments for short stays. In addition, a large percentage of property buyers took out loans to finance the purchases and with the end of the government-ordered moratorium on loan repayments drawing closer, many property owners may be forced to sell.

Sellers’ market
In the last two to three years, about 30 percent of home buyers have bought an apartment for investment purposes, many of them on credit, according to László Balogh, chief economist at real estate portal ingatlan.com. A large percentage of these homeowners are likely to sell their apartments as the drastic drop in tourism leaves them without an income from holiday rentals and the payment of installments on mortgages will resume shortly with the end of the moratorium, Balogh notes. Although the government recently announced a half-year extension to the moratorium, this will only apply to families raising children, pensioners, registered jobseekers and public employees.
Those renting out their apartments on a long-term basis are faring somewhat better but the return on their investment is also declining. As holiday rentals virtually disappeared from the market, many switched to renting out their properties on a permanent basis, which in turn led to a significant extra supply on the rental market. Consequently, rental prices have fallen by approximately 20 percent since March 2020.

Falling prices
The expert estimates that about 4-5 thousand apartments may be up for sale in Budapest alone in the short term due to the above reasons. This number accounts for 10-12 percent of the annual turnover of home sales in the capital. This, in turn, could generate a selling spree in inner city districts, which could result in a decline in prices. According to data from ingatlan.com, the median price per square meter of second-hand flats in Budapest currently offered for sale is HUF 715 thousand. In Budapest’s 7th district, where many people bought flats for investment purposes given the area’s touristic allure - the average price per square meter is HUF 813 thousand, which is 4 percent lower than a year earlier. The trend is only set to accelerate as the number of homes for sale increases over the coming months.

New home market under pressure
In the summer months, developers sold about 1,000 newly built flats in Budapest, which is almost double the record-low figure seen in the previous quarter. Nevertheless, that number is still the second weakest value in the last four years, according to the Budapest Housing Market Report, published in September. There were hardly any transactions in the inner districts of Pest, the most popular area thus far. Even more alarmingly, the number of newly launched residential projects and the number of homes to be built fell below the record low registered in the previous quarter, signaling a drastic slowdown in this segment of the market.

Central bank to the rescue?
The recently published proposals of the National Bank of Hungary, which aim to support the government's crisis management and economic recovery program, contain measures related to the housing market. A large part of the central bank’s suggestions would encourage the construction of new homes, without which the newly built segment of the housing market would essentially cease to exist within a few years. This would obviously have a significant impact on prices as well. Some of the most essential proposals from the central bank include introducing a 5% VAT rate for newly built homes versus the current 27%, together with a 4% special tax. That would still leave developers with a much smaller tax burden than the current one. Extending the scope of VAT refunds for the construction of new residential properties for private purposes, a rental housing program for young people as well as government employees, and a new mortgage program to encourage the construction of energy-efficient homes are some of the other proposals. The proposed measures could significantly contribute to ensuring that new housing projects do not disappear completely by 2022-2023. Currently, the number of new dwellings planned after 2022 per quarter does not reach a thousand, which is a drastic decline compared to previous quarters.