The rescue package announced by the government for troubled debtors is hoped to finally reinvigorate Hungary’s residential property market. Any boost is highly appreciated, given that the market has been essentially frozen since 2009. But if you thought it would also mean bargains galore, don’t get your hopes up just yet.
The package allows banks to gradually sell off the toxic assets in their portfolios. Between October 1 and the end of this year, only 2% of non-paying debtors may be evicted, while this will rise to 3% per quarter in 2012 and 5% by 2014. If market hopes are realized, the changes will only narrowly reduce prices, compel banks to restart lending and also fuel buyer demand, something which has dramatically lapsed over the past years. Figures released by the Central Statistical Office (KSH) show that only 4,000 newly-built homes were sold in 2010, whereas the corresponding figures were 8,000 in 2009 and 14,000 in 2008. Aggregated sums for new and used apartments also showed a strong downward trend. Whereas altogether 191,000 homes were sold in 2007, the figure dropped to 91,000 in 2009 and further to 82,000 in 2010, the KSH said.
Though details remain to be hammered out, experts welcomed the measures. “A very long period of uncertainty now seems to be coming to an end, but there is still an abundance of questions remaining,” said Attila Déry, senior analysts of home brokerage Otthon Centrum. One of them is how the action plan will affect prices. Earlier, there were concerns that a full and immediate end to the moratorium on evictions would drastically reduce prices with the sudden availability of many cheap assets on auction. The government – mainly out of social considerations – seems to have avoided this by introducing the quota system. At the same time, Déry noted that the percentages involved are “rather cautious.” In his opinion, the government should be open to revising the quotas as time goes by since the long-term benefits may be lost if the cleansing process takes off but the limitations continue to apply.
Lifting the moratorium is also expected to encourage buyers reappearing on the market. As Dávid Valkó, senior analysts of mortgage bank OTP Jelzálogbank explained, the icy state of affairs on the market in recent years was caused mainly by buyers being discouraged from seriously considering purchases.
According to the bank’s calculations, there could be more than 200,000 prospective buyers around who have put off looking for a new home in the past years mostly because of uncertainties above the market and the lack of financing. Banks being able to recover at least part of their money currently locked in toxic assets is generally expected to finally create conditions whereby lending may be resumed.
Valkó also appreciated the plan because it will compel people who have defaulted on their loans but were earlier protected by the moratorium to address their problems and seriously consider selling the homes they can no longer finance. Furthermore, these debtors will possibly have better chances of getting near-market prices for the assets, since the reappearance of demand paired with the new supply is only expected to bring price drops of a few percent.
No pressure on prices
Therefore, those speculating on bargains once the moratorium is lifted will probably be disappointed, underlined Kata Kühne, Otthon Centrum’s managing director. “The greatest benefit of the national asset management company from a real estate market perspective is that the assets taken over from the troubled debtors will avoid open-market sale, thereby playing no major role in overall changes in prices,” she said.
Not that there was too much concern in this respect. In all likelihood, the asset manager will be taking over a large number of less-valuable properties in rural locations that are already difficult, if not impossible, to sell. The KSH found that of the 82,000 total transactions registered in 2010, 83% happened in Budapest. In contrast, the northern Hungarian region registered less than 100 deals. These conditions indicate that the assets to be auctioned in Budapest will be sold fairly quickly and thereby not have a lasting impact on overall pricing, Kühne said.
Benefits of higher costs
While apartment-hunters may find it counterintuitive, the demand side of the market would also likely benefit if the price range of real estate does not sink too low. Since the start of the crisis, property prices dipped 13% in Hungary, which is considerable, but is still much better than what happened in other countries. Experts explained this by the fact that Hungary, unlike, for example, the United States, did not have a property bubble to burst. Thus, even before the crisis took full swing, real estate prices only rose a few percent each year.
The National Bank of Hungary earlier warned that if prices sank too low, banks would be unwilling to up their mortgage lending activity due to the fall in the value of collateral. Given that some 8% to 9% of domestic consumption was financed from loans before the crisis, whereas the figure turned negative afterwards, the absence of loans also slows down economic growth in general, the MNB said.