Rise in home prices still ‘sustainable’, says MNB

"According to our calculations, in terms of the national average, the Hungarian housing price level is below the level justified by macroeconomic fundamentals, and thus the continuous increase of housing prices can still be deemed sustainable. However, trends in Budapest must be monitored closely," the central bank said in the report.

The MNB noted that home prices rose 15.4% for the whole country last year, but were up 22.5% in Budapest. The central bank added that it expects home price appreciation to slow to 12.3% for the whole country in the first half of 2017.

The recovery on Hungaryʼs housing market "has passed through its initial phase" bringing the market to "a more mature phase" as supply adjusts to increased demand, according to the report.

Higher household disposable income, supported by wage rises and improved employment, is boosting demand on the housing market, as is the low interest rate environment. Home loan outlays were up 42% last year, and demand for credit is set to increase further with an easing of credit conditions, the MNB said.

On the supply side, home construction is catching up with demand, albeit at a slower rate than that seen during the last market upturn. In the current market cycle, the start of construction on homes is tracking changes in the number of home building permits issued with a delay of eight-to-nine quarters, slowing from a delay of five-to-seven quarters in the cycle before the economic crisis.

The expansion of the housing market "may be hindered to a great degree" by a shortage of skilled labor, the report said. Wage inflation may put pressure on construction costs, though these are still rising at a slower rate than home prices, it added.