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Government subsidies to boost home building

While the CSOK program and a reduction in the cost of VAT for building homes are expected to increase demand, supply may take a while to catch up, so prices could rise in the short term, says an analyst. Within a couple years, he anticipated that the volume of sales should return to  pre-crisis levels.

Gábor Soóki-Tóth, head of research at Otthon Centrum.

The government is increasing efforts to promote home construction, sparking anticipation of growth in housing development, but market forces are likely to keep these programs from igniting a full-on building boom, according to one analyst.

The number of homes sold in Hungary this year is expected to reach 150,000-155,000, as compared to the previous year’s approximately 135,000, due to the home subsidy purchase program (CSOK) the government is planning to introduce this year, said Gábor Soóki-Tóth, head of research at Otthon Centrum.

Soóki-Tóth said at a press conference on February 17 that, because the residential real estate supply will be unable to keep up with the increasing demand for new and used homes in the short-term, prices could increase by 5%-25%.

He told the Budapest Business Journal that this demand pressure would probably not be a long-term phenomenon, and that home prices in Hungary should normalize by 2017.

The government’s CSOK program, which is being promoted as a policy to help Hungarian families while encouraging construction, provides grants and loans to families who have children, or are planning to have children, so they can buy new homes. The grants, which can reach as high as HUF 10 million, come shortly after a reduction in VAT on housing, from 27% down to 5%, which began this year.

Because “developers have been holding back investments for years now”, the impact of both programs should be strong, according to Dénes Szabó, a partner specializing in real estate at the law firm of Taylor Wessing in Hungary. “Some experts predict a 30- 50% rise in the number of apartment-constructions alone this year and a not too substantial increase in land prices and construction fees,” he said.

Soóki-Tóth said that many of the projects that were suspended or halted earlier could be revived. Because most of the CSOK applicants will enter the property market at almost the same time, and no large-scale construction projects have been launched for years, the subsidy and VAT decrease will probably generate a sudden demand causing a temporary shortage in available dwellings, he said.

He added that the scarcity of newly built houses fulfilling CSOK requirements and an excess of demand over supply will push the prices up, at least in the short-term. In the next couple of years, Soóki-Tóth said, he expects that number of sales in the segment could reach the pre-financial crisis level of 180,000-190,000 purchases per year.

New building permits have mainly been issued in Budapest and in the biggest towns of Hungary, the analyst said. He added that homes purchased with the CSOK subsidy will most likely be found in more affordable parts of Budapest and surrounding areas, as well as countryside settlements, especially those in the area of industrialized cities.

While the CSOK subsidy is tempting for homebuyers, Soóki-Tóth said consumers would be wary when applying for the HUF 10 million subsidy, and especially the additional HUF 10 mln loan. “As experience of the crisis is still close, those who went through losing their homes or saw close acquaintances go through such hardships will be careful,” he explained.

Eligibility increased

The initial version of the subsidy last year offered a possible grant of only HUF 2 million, and apparently did not attract much interest. By January, more attractive conditions were added to the program, and the most recent changes were being put in place on February 15. The pro-family subsidies are given to couples who have children, or plan to have children in the next ten years. Those who take the grant on the assumption they will have children, but do not “deliver” in the end, will have to repay the grant with a steep penalty.

As Soóki-Tóth explains, the maximum allowance is a one-off payment of HUF 10 million (for those having three children) and the possibility for a further state subsidized loan of up to HUF 10 million. Those with one or two children get smaller subsidies on a sliding scale.

Applicants have to meet rigorous conditions to be eligible for the subsidy. Aside from having, or committing to, from one-to-three children, the newly constructed house may not be smaller than 90 sqm and a purchased apartment must be at least 60 sqm. According to the new regulation, state support can only be used for dwellings having a building permit as of July 2008.

According to Béla Kappéter, head of communications at FHB Bank, couples committed to having two kids are eligible for HUF 2.6 million in support, but the size of the purchased property may not be smaller than 50 sqm. For one child, the subsidy is HUF 600,000 and the minimum property size is 40 sqm. The scheme can also be used for resale houses and flats, though with considerably lower state support, said Kappéter.

Another condition for the grants and loans is that the maximum price per square meter may not be more than HUF 350,000, and the ceiling of the total purchase price is HUF 35 million.