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PSzÁF warns austerity measures could hurt banks - extended

Austerity measures recently introduced by the government could have far reaching effect on the banks' property lending as demand for property falls as a result of declining real income, according to a study by financial market regulator PSzÁF.

PSzÁF expects home prices to continue to stagnate, or even fall, as a result of the government's austerity measures. Hungarian banks' combined property lending portfolio is worth about Ft 2,700 billion, representing 21% of the total stock of loans and 13% of total assets. Banks' margins on their property lending products are generally wider, than those on most products and a slowdown in the segment would have a marked effect on profitability. About 10% of all property in the country, i.e. Ft 12,500 billion, was mortgaged at the end of June.

The competition office expects home prices to continue to stagnate, or even fall, as a result of the government's fiscal adjustment measures. It estimated that average home prices could drop by 10-15% in the 2006-2006 period, which may be interpreted as a minor bubble burst. The competition office expects demand for mortgage loans and property investment products to decline in the near future, adding that credit institutions should also gear up to see their losses on loans grow transitionally. The most obvious means banks can resort to when a client fails to reimburse the loan is to foreclose on the collateral, which is in most cases a mortgage. Mortgage loans represent around 21% of total loans; about 10% of all property in the country was mortgaged in the middle of the year.

Hungary's GDP growth is expected to slow down from 4% in 2006 to around 2.5% in 2007 while household consumption will likely drop in real terms in 2007. „The negative pressure on lending growth, asset quality and real estate prices is therefore expected," Jiri Stanik of Wood & Co. has commented on Wednesday. „While the perception of Hungary's austerity program has been improving (as reflected in market developments and rating upgrades), the negative impact on the banking sector will be visible only in 2007," he added. Stanik believes the risk remains on the upside, adding he is bullish over the long-term. „In H1 2007, however, we might see negative newsflow due partly to the slowdown of the economy and restructuring of foreign subsidiaries." (Mti-Eco,