www.fhbindex.hu, e-mail: [email protected]1 The FHB House Price Index for the third quarter of 2012 FHB House Price Index The index took a downturn According to the latest processed figures of the FHB House Price Index (HPI), residential house prices in Hungary have decreased in the third quarter of 2012 compared to the previous quarter and on a year to year basis as well. ‘Chart 1.’ shows the index values between 1998 and Q3 2012 in relation to 2000 values, while ‘Chart 2.’ indicates the annual nominal changes in the FHB index deflated by CPI. Following a 5.1% decrease in 2010, 2011 saw a decline of 1.9% in house prices, resulting in a 5.5% decline in real terms. In the second half of 2011 prices dropped by a further 1.6%. This trend has somewhat changed in the second quarter of 2012, when minor growth was registered at a low transaction volume. The decrease in the third quarter of 2012 is in contrast with the positive tendency recorded in the first half of the year, and is rather in line with the slow decline warranted by the bases of the residential housing market. House prices decreased by 1.5% in nominal terms compared to the previous quarter. In comparison with the same period of 2011, the recorded value shows a decline of 1%. Chart 1. Historic development of the FHB House Price Index (Source: FHB) The above figures show, that although in 2012 signs of fluctuation can be observed and the pace of the decline of the house prices on a nationwide basis have significantly moderated between 2009 and 2011, the prices related to the low turnover are still showing a downward tendency. The credibility of the observed trend has been decreased by the fact that it occured during the lowest level of residential housing transactions turnover of the past 10 years. Consequently the changes in the tendency haven’t occurred for the whole year of 2012 and the market continues to be heavily influenced by the weakness of the macroeconomic environment. The impact of the subsidized Home Buyer Loans that are available under even more favourable terms starting from January 2013 could be potentially measured earliest at the beginning of 2013.
The FHB House Price Index for the third quarter of 2012
FHB House Price Index
The index took a downturn
According to the latest processed figures of the FHB House Price Index (HPI), residential house prices in Hungary have decreased in the third quarter of 2012 compared to the previous quarter and on a year to year basis as well. ‘Chart 1.’ shows the index values between 1998 and Q3 2012 in relation to 2000 values, while ‘Chart 2.’ indicates the annual nominal changes in the FHB index deflated by CPI. Following a 5.1% decrease in 2010, 2011 saw a decline of 1.9% in house prices, resulting in a 5.5% decline in real terms. In the second half of 2011 prices dropped by a further 1.6%. This trend has somewhat changed in the second quarter of 2012, when minor growth was registered at a low transaction volume. The decrease in the third quarter of 2012 is in contrast with the positive tendency recorded in the first half of the year, and is rather in line with the slow decline warranted by the bases of the residential housing market. House prices decreased by 1.5% in nominal terms compared to the previous quarter. In comparison with the same period of 2011, the recorded value shows a decline of 1%.
Chart 1. Historic development of the FHB House Price Index (Source: FHB)
The above figures show, that although in 2012 signs of fluctuation can be observed and the pace of the decline of the house prices on a nationwide basis have significantly moderated between 2009 and 2011, the prices related to the low turnover are still showing a downward tendency. The credibility of the observed trend has been decreased by the fact that it occured during the lowest level of residential housing transactions turnover of the past 10 years. Consequently the changes in the tendency haven’t occurred for the whole year of 2012 and the market continues to be heavily influenced by the weakness of the macroeconomic environment. The impact of the subsidized Home Buyer Loans that are available under even more favourable terms starting from January 2013 could be potentially measured earliest at the beginning of 2013.
Chart 2.The annual changes of the FHB House Price Index, nominal and deflated by CPI, (1999-2012, in proportionate relation (%) to the previous year , Source: FHB)
Chart 3. Changes of the FHB House Price index on a quarter to quarter basis (1999 Q1 – 2012 Q1, in proportionate relation (%). Source: FHB)
Compared to the period of the depression, analysis of the quarterly values, inclusive of the latest quarter shows that following the positive changes witnessed in the first half of 2012 an adverse trend can be observed. It is still true however that as seen from the chart, in the case of the demand picking up, the prices will most likely turn into an ascending phase from the “valley” on-going since 2006.
The supply of new-build housing units A slow out from the bottom of the hole Although the number of housing developments has further decreased compared to the same period of the previous year – in the first three quarters of 2011 8,147 new residential houses were completed in Hungary and only 6,509 in 2012 so far – some promising signs can be observed.. Chart 4/a. and 4/b. shows the relation
between building and the issued home occupation permits on a national scale and in Budapest respectively. The conclusion of the charts is that both the number of new-build units and the issued occupation permits are very low. Nevertheless a significant turn has occurred in the first half of 2012 and for the first time since 2008 the number of building permits has exceeded the number of issued home occupation permits. Hopefully this trend is valid for the Budapest market as well.
Charts 4/a. and 4/b. The number of issued building and home occupation permits (Source: Hungarian Central Statistical Office)
Since a delay of approximately . three quarters can be observed between the issuing of the building permits and the home occupation permits (Chart 5.), a turn of trends preceding the second half of 2013 is quite unlikely. The supply of new-build housing units has probably reached a low point.
Chart 5. Forecast of the number of housing units built (Source: Hungarian Central Statistical Office, seasonally adjusted figures)
It continues to seem that the infrastructural restorations are keeping the construction industry afloat. As a result the industry volume of the contract portfolio has even started to increase lately (Chart 6.). Still there isn’t any news from the market sectors, on the basis of which a significant turn of events could be expected regarding the volume of building.
Chart 6.Construction industry output and contract portfolio (Source: Hungarian Central Statistical Office)
Financial position for households Continuously weak macroeconomic environment
For the households their financial situation and the available credit possibilities are the most determinative amongst the demand factors stipulating the residential housing market.
The employment determining the demand side showed an increase of 1% in 2011 (Chart 7.), and the Hungarian Central Statistical Office announced a positive shift for the first three quarters of 2012 as well. Recently analysts were puzzled by the fact that employment has risen in spite of no visible conjectural improvement. According to the latest employment statistics, it seems that the growth can be mostly attributed to the public works programs, so it gives less ground for optimism. The more optimistic explanation that corporations will come to the employment decisions delayed so far, could be also still valid, but even in this case the changes on the labour market could be fragile.
Chart 7. Changes in the number of employed compared to the same quarter of the previous year (%) (Source: Hungarian Central Statistical Office)
‘Chart 8.’ shows the nominal changes in wages deflated the CPI. Following the uneven increase in 2011, the real income of households decreased until the third quarter of 2012.
The decline in the real income of households combined with the effects of the early repayments (of the residential household mortgages) that have reduced savings, resulted in a substantive drop in demand in the residential housing market for 2012.
Chart 8. Changes in gross average salaries in the national economy (compared to the same quarter of the previous year, (%), Source: Hungarian Central Statistical Office)
Prospects of lending
The demand side has further declined following the early repayments of residential mortgages There is a quite strong correlation between the net lending of residential mortgage loans and housing unit transactions as presented in our earlier studies and indicated in ‘Chart 9.’. The market conditions are well described by the fact that, that parallel with the decrease in the number of housing market transactions during the recession, the net (new lending minus repayment) of the lending of residential mortgage loans has also dropped significantly. This statement is true even when the effects of the early repayments with favourable terms in 2011 and 2012 are filtered from the lending data. ‘Chart 9.’ illustrates the estimated developments without the effects of the early repayment-
Chart 9. The estimated number of housing unit transactions and the net lending of residential mortgage loans (Source: Hungarian Central Statistical Office data and FHB research and estimates)
There are also no changes on the front, that Hungarian households have been net loan re-payers for years (’Chart 10.’) and have remained net re-payers following the mass early repayments (at a rate more favourable than the market rate). Parallel with the aforementioned developments – also affected by the changes in the exchange rates of foreign currencies - the total amount of mortgage loan outstanding also decreased.
Chart 10. The total residential mortgage loan outstanding to households and net lending of residential mortgage loans(Source: Hungarian National Bank and FHB estimates)
The recurrence of the subsidised forint loans on the market actually shows on the prices of available loans. According to the „Survey on Lending” conducted by the Hungarian National Bank, the conditions of the lending further eased in the third quarter, meaning that the willingness of the banking sector to provide residential mortgage loans has increased significantly in 2012. (‘Chart 11.’)
Chart 11. Lending conditions and standards (Source: The Hungarian National Bank’s Survey on Lending)
From January 2013 a number of elements of the revived subsidy system have undergone further improvements. The rate of the government interest subsidy provided for five years of the Home Buyers Loan’s course has increased significantly and became constant (the rate of subsidy does not decrease during the five years). The amount of the available subsidised loan has also increased: in the case of buying a new house - it rose to HUF15 million (up from HUF10 million)-, and in the case of used houses and refurbishment it rose to HUF 10 million (up from HUF6 million). The types of real estate available on a loan with interest subsidy has broadened and the price limit of the real estates’ available through subsidised Home Buyers Loan was also increased: the maximum buying price of a used real estate is HUF20 million (up from HUF15 million in last year), while the maximum price of a new house is HUF30 million, excluding land price and VAT (in the prior system even the amount inclusive of taxes was below this limit).
State contribution through direct subsidy (e.g. social housing subsidy) and interest subsidy is already in place for the mortgage loan market , and a number of banks offer these products competing also with each other. Subsequently the loan supply pillar of the residential housing market’s revival is assured. The situation regarding new-build residential real estate supply is also vastly different from that of the early 2000’s, since on one hand, unsold new-build houses are on the market and on the other hand the capacity of the developers is much more flexible than previously. Consequently there aren’t any limitations in this field either. The key for the mortgage loan market to pick up is the positive turnaround of the expectations and real income of the households. The approximately 2% ratio of the number of annual housing unit transactions to the housing unit supply shows that the market of transactions is very narrow, both in an international comparison and historically, and we could not talk about an over heated market-state, even if the transactions market would double from its present volume. This means that on one hand a large number of households have put the decision of buying on hold and on the other hand the change of the price trend could occur fast, even in the course of a few quarters. One of the most important demand segments is the market of the first-time home buyers, the state of which segment impacts the other segments as well.
The situation of the first-time home buyers
The interest subsidy and the drop in house prices in real terms have made homes more available for younger people The first-time home buyers segment is of major importance in the residential real estate market, since they stipulate the demand meeting their requirements and possibilities. People falling under this segment typically have less experience in buying and maintaining houses and have only spent a short amount of time on the job market. Usually they are young people between the ages of 19-35 and are at the beginning of their professional career. The first detailed analysis of this segment in Hungary was made in 2011 under a special issue of the FHB House Price Index. The possibilities of the first-home buyers have improved the last year as a result of the revitalisation of the subsidy system and further improved at its extension in January 2013. The forint denominated loan with government interest subsidy available for the buying of new-build and used houses as well as for modernisation can also be coupled with the so called “social family subsidy” for housing purpose (szocpol). The improved subsidized mortgage conditions available from January 2013 are real alternative when comparing monthly mortgage payments to the monthly obligations paid for a rented flat. Although the recession has resulted in the decrease of the individual incomes , due to the parallel decline of residential real estate prices in real terms, houses became more easily available. The changes in real net incomes and in the price of residential real estate in real terms are illustrated on ‘Chart 12.’. FHB’s calculations based on data provided by the Hungarian Central Statistical Office also reveal that young people currently would have to work on average for 6 years for a typical first flat. This chart shows a positive tendency compared to the previous years’ values.
Chart 12. Changes in real net income and residential real estate prices in real terms (Source: Hungarian Central Statistical Office, FHB calculations)
In the research of the House Price Index, FHB examines five crucial aspects which determine the decisions of the young buyers: (1) job opportunities, (2) residential real estate prices, (3) government subsidy, (4) mortgage conditions, (5) inflation. Inflation is the only one of these aspects that took an unfavourable turn for the first-time home buyers in the past one year. Increased inflation effects the even distribution of the mortgage throughout the duration of the loan period. This rather favourable, but complex situation is shown on ‘Chart 13.’. From the viewpoint of first-time home buyers the extension of the housing subsidies and the improved conditions of mortgage approvals resulted in an indisputably positive change and the situation as mentioned previously, has continued to improve from 2013. 2013 also saw a change in the regulation of the Stamp Duty fees. As opposed to the generally slightly increasing service fees, the situation of the First-Time Home Buyers actually improved. Young people under the age of 35 are entitled of a 50% discount in Stamp Duty fees for buying their first house of less than HUF15 million value ( until now both the rate of the discount and the maximum price of the real estate was lower).
Chart 13. The situation of first-time home buyers (Source: Hungarian Central Statistical Office and FHB calculations)
Finally here are some interesting points from the viewpoint of first-time home buyers in Budapest. Based on data from the Hungarian Statistical Office, analysis of the residents by age distribution shows that the proportion of young people is higher than average within the Grand Boulevard (Districts VI., VII., VIII. and IX.) and in District XIII. and is outstanding in District IV. Another interesting observation: the proportion of people under the age of 30 is also higher in Csepel, partially as a result of low price-levels compared to that of othet areas of the capital. Comparing the recorded frequency of marriages in 2005-2010 by addresses (according to the Central Statistical Office data based on municipal certificates) shows that marriage is most common amongst the residents of Districts VII., IX. and XIII, followed by the residents of Újpest (District IV.), Terézváros (District VI.), Józsefváros (District VIII.) and Zugló (District XIV.) on the Pest side. On the Buda side District XI. is on this list mostly because of the tenants of the condominiums located in the quarters of “Lágymányos”, “Kelenföld”, “Őrmező” and “Gazdagrét”. Interestingly enough on the Buda side, the proportion of marriages is also relatively high amongst the residents of District I.
Chart 14. The average square measure of new-build residential housing units in Budapest (Source: Hungarian Central Statistical Office and FHB calculations)
Due to the substantial financial limitations, younger buyers are typically looking for smaller flats. Between 2005 and 2010 property developers seemingly reacted to these needs and built smaller housing units in downtown areas. ‘Chart 14.’ illustrates the square measure of new-build residential housing units in the capital. The chart once again confirms the public notion that smaller flats are more common in close vicinity of the Grand Boulevard.
The average square measure of new-build residential housing units 2005-2010, m2
Our services adjacent to the FHB Index The FHB House Price Index is published quarterly. Before its introduction, no other product of this kind was available on the Hungarian market. It is distinctive in terms of the measured time intervals and the quality of the underlying data, as well as its methodological foundations, which conform to international expectations. Since the introduction of the FHB Index in 2009, MNB (the Hungarian National Bank) and RICS (The Royal Institute of Chartered Surveyors) refer to it as a primary housing market indicator. Updates to the FHB House Price Prognosis are published regularly.The methodology behind the model rests on three pillars:
I. On the basis of international and local experience, we have identified relations between selected Hungarian macroeconomic indicators, money-market and credit market indices, transactional data of the housing market and housing prices. (We base our view of the development of the macroeconomic and financial environment primarily on the projections of the Hungarian National Bank.) The FHB Banking Group has been one of the major actors among Hungarian housing market financiers for over a decade. Our operations cover the entire country, and we have access to information from the most significant real estate appraisers, which is complemented by FHB Real Estate Ltd’s own professional experience. Our forecasts, therefore, include processed and verified local assessments as well..
II. With respect to the economic crisis, we do not disregard empirical facts gained from analyses of similar depressions that have affected real estate prices so far. We have, therefore, included the international experience obtained from similar crises in our model.
Our database, which covers the entire country and the methodological development of the FHB Index make FHB able to provide help to the financial sector to fulfill the collateral re-valuation obligations under Basel II (Government Decree No 196/2007 on the Management of Credit Risk and the Calculation of Credit Risk Capital Requirement). We are proud that our service has already been ordered by a number of Hungarian banks, subsidiaries of large international financial institutions. The banks will also need to comply with the strict regulations in the future, it is, therefore, useful to apply a procedure that conforms to international standards and can also be supported by documented methodology if required by authorities. For the implementation of the modern, internal valuation methodology, it is preferable to use a model that is based on transactional data and documented methodology whereby efficient and mass re-valuation becomes possible. By using this model, credit risk capital requirement can be reduced substantially, and excess capital can thus be freed. FHB Jelzálogbank Nyrt. has been using the real estate monitoring procedure – which also meets the requirements of the modern, internal valuation methodology – since 2008. FHB also undertakes the preparation of unique research products meeting individual needs. In these, we offer local information on apartments and lots, more detailed explanations on the extent and dynamics of our prognosis as well as the analysis of the risks surrounding the realization of the trends forecast We are pleased to provide customised offers and to respond to any inquiries.
Molnár Zsolt Deputy Chief Executive Officer
FHB Ingatlan Zrt. Real Estate Evaluation Directorate Telephone: +36(1)452-9208
