Budapest home market overvaluation risk grows - MNB

"Despite the steady increase, on a national average house prices remain below the level justified by macroeconomic fundamentals, but in Budapest the risk of overvaluation has increased, and consequently careful monitoring of market developments in the capital has become even more important," according to the Housing Market Report.

The MNB noted that price growth disparities between Budapest and other settlements in the country had continued to grow. Home prices rose 20.2% year-on-year in the capital in Q2 and were estimated to have climbed 23.9% in Q3. Home prices in other cities were up just 16.3% year-on-year in Q2, and the average per sqm price of a home in such communities was only 37% of the average in Budapest.

"All factors are pointing towards quickening demand," the MNB said in the report, citing the improved financial position of households, supported by wage growth and long-term income prospects. It noted that home loan outlays rose almost 40% year-on-year in the first half, but the volume was still at only 80% of the level in 2008, before the start of the global financial crisis. In international comparison, home loans as a percentage of GDP "can be viewed as quite low", it added.

Debt cap rules applied by the MNB "ensure the expansion of lending in a sound structure", the central bank said.

The supply side of the market still cannot keep pace with the strong demand, evidenced by the fact that more than two-thirds of new homes in the capital are now sold prior to completion. The main causes for the gap may be a shortage of labour and building materials as well as the relative low productivity of the sector, the MNB said.

The MNB projected home completions in the capital would peak at 15,700 in 2019, then dwindle to 3,000 in 2020, after the VAT rate on home construction reverts to the 27% main rate. But it said that delays in construction could push some completions into 2020, adding that 60% of projects are behind schedule at present because of tight capacity.

The risk of overheating on the home market in Budapest is mitigated by the fact that, "for the time being", there is no indication of lenders shifting towards financing at a higher level of risk tolerance, the MNB said. However, the market should be "closely monitored" to ensure that the increase in house prices beyond what is justified by fundamentals is not coupled with excessive risk tolerance in lending, it added.