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Construction sector expected to turn around in 2017

Despite a drop in H1, more private construction, including new homes, should help boost the sector, and so should increased spending of EU funding, experts said.

Volume indices of construction output in Hungary. Corresponding period of previous year = 100. (Source: Central Statistical Office)

With Hungary’s spending of European Union funds this year well below the level of 2015, the construction industry is still suffering, but improvements are anticipated by 2017, analysts said, following the release of disappointing figures in mid-August.

“It is true that the building industry is very much influenced by the availability of European Union funds, but as new funds are expected to be opened soon, an increase is expected to follow,” Zsófia Antal, news editor of Hungarian professional portal, told the Budapest Business Journal. “The volume of new contracts was higher than in the corresponding period of the previous year, which signals a further growth in output.”

Industry observers said they were not surprised when the Central Statistical Office (KSH) reported on August 11 that construction activity was down 25.3% in the first half of the year. Output in June of this year reportedly dropped 16.2% compared to June 2015.

Analysts maintained that a turnaround would come next year, as building construction picks up the slack of civil engineering projects. Furthermore, they said, as the state readies additional infrastructure spending and calls down more EU funds, there should also be more of the civil engineering work that had propped up construction over the last couple of years. And there is also hope for a boom in housing development to help the sector bounce back. 

László Balogh, an analyst for real estate broker, told the BBJ that a pickup in home construction could improve output in the second half of the year, though he added that the sector would not start expanding until next year. 

On July 29, the KSH published data showing that the number of new dwellings built in the first half of the year was 3,420, up 11% from last year, and the number of dwelling permits and declarations on the construction of residential buildings was 13,236, or twice as many as in the first half of the last year. Balogh said this growth in home building was fueled by the government’s CSOK program, which gives qualifying families subsidies of up to HUF 10 million, as well as low-interest loans of as much as a further HUF 10 mln, for the purchase or construction of a new home. The CSOK program was simplified in February, and since then applications have increased, Balogh said.

Whether or not people are taking advantage of CSOK loan subsidies, they have been taking out mortgages at a faster rate this year. Banks gave out HUF 213 billion in home loans in Hungary in the first half of this year, a significant increase over the HUF 134 bln loaned in the same period last year, Hungarian National Bank director Gergely Fabian said on M1 TV on August 2, according to state news agency MTI.

Home loans were especially brisk in the second quarter of this year, when HUF 129 bln was lent, MTI reported. The total stock of home loans held by Hungarian households at the end of the first half of the year was HUF 2.970 trillion, which was still HUF 40 bln lower than the figure for the end of 2015, MTI said.


Sluggish prices seen set to rise


Consumer Price Index in Hungary. Corresponding period of previous year = 100. (Source: Central Statistical Office) 

Despite a drop in July, an analysis by CIB Bank sees CPI edging upward by the end of the year.

Even though Hungary’s Consumer Price Index (CPI) has been negative every month except one in the first seven months of 2016, economists for CIB Bank said in August that they expect inflation will be positive by year’s end. The CPI was down by 0.3% on average in July, compared to the same month a year earlier, the Central Statistical Office said in a release of preliminary data on August 9. Nonetheless, “annual average CPI may come close to 0.5%, showing that the July figure should not reshuffle inflation expectations”, according to an analysis published by CIB. “Core inflation (1.3% year-on-year) matched the January-July average of this year. According to our forecast, July’s -0.3% year-on-year was the lowest point of this year’s CPI path, to be followed by a modest rise in August and year-on-year rates close to 1% in the autumn months.” Given that prices seem to be behaving as anticipated, the analysts added that they do not expect the Hungarian National Bank (MNB) to change course on monetary policy. Indeed, the MNB stood pat in its latest rate-setting meeting on August 23, deciding to keep the base-lending rate at a record low of 0.9%, where it has been since May. CIB’s analysis noted that fuel prices contributed to the drop through a 2.2% month-on-month decrease this time, versus a rise in the preceding month, while in annual comparison they stood 13% lower. CIB maintained that, considering month-on-month changes, food and clothes prices also contributed to lower CPI, in tandem with seasonal price swings. Service prices accelerated to the highest month-on-month of this year (+0.6%), reflecting stronger domestic demand. This impact, however, failed to boost the price level of durable goods, CIB said.