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Budapest homes slightly overvalued, says MNB

While Hungaryʼs housing market has not yet overheated in the country as a whole, prices in Budapest "slightly exceed" the level justified by economic fundamentals, the National Bank of Hungary (MNB) said in a biannual report on Friday.

"On a national average, housing prices are still below the level justified by economic fundamentals, while prices in Budapest have slightly exceeded that level," the MNB said in its report, cited by state news agency MTI.

"As regards house prices, no overheating can be observed for the time being, but due to the high price level in Budapest and the rapid increase in lending, the market must be closely monitored," it added.

The central bank noted a shift in housing market turnover from Budapest to other cities and towns. The rate of home price growth in the capital is on the decline, falling to 13.3% at the end of 2017 from around 18% at the end of 2016, it added.

On the national level, home price growth slowed to 13.8% last year, from 15.4% in 2016. The MNB projected prices would rise a further 13.9% in 2018.

Interviews the MNB conducted with developers, contractors and real estate brokers revealed that developers are "not keen" on planning from 2020, when the preferential 5% VAT rate on home construction is set to be phased out.

Added to this is the shortage of almost 40,000 skilled laborers in the construction sector; commercial property and state investments are siphoning off significant capacities to the detriment of housing developments, the MNB noted. Tight capacity has forced developers to postpone anticipated completion dates in the case of around 63% of homes under construction in Budapest, the central bank reported.

The MNB acknowledged the marked pickup in home completion and the issuance of home building permits last year, but said the renewal of Hungaryʼs housing stock, at just 0.3% per year, is still "extremely low" in regional comparison.

The central bank projected home completions in Budapest would reach 8,800 this year and 10,000 in 2019, before declining sharply, mainly because of the phaseout of the preferential VAT rate.