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Is the market already booming?


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   For many years’ analysts and real-estate agents were sending rather depressing reports about the Hungarian residential property market. After the market crashed in 2008, it seemed everything worked against a recovery. The general economic environment in Hungary, foreign exchange rates, financing facilities evaporated overnight, and an uncertain future were all discouraging buyers. The annual turnover in the market fell to 85-100 thousand transactions, and it stayed there for years. This is the level supported by “necessities” of people’s lives rather than interest or demand. That seemed to be the number of transactions that take place whatever the price(s) are and wherever they tend to go.


So what’s happened now?


First and foremost, the number of transactions started to rise as it became easier to sell. Transactions that previously took several months to conclude started to close in weeks. And then in days, and now, in some cases it takes less than a day to sell a well-priced and well-located property. The turnover growth in Budapest is over 40% and consistently rising.



Obviously as the demand moved the market out of its balance, prices inevitably started rising as well. Not evenly, not slowly but in a rather eccentric fashion. There are locations all over the country where prices are still stagnant if not declining, but in certain places – pockets -  the prices rose by more than 30%. Certain streets, certain neighbourhoods and certain apartment types of property greatly outperform others and that makes it difficult to illustrate with statistics an exact trend. Why has one apartment appreciated by more than 30% when another in the same district – let alone two corners down the same street – not or only by single digits?

Why does the market act so strangely?

Well in a word - Its not. If you want to understand why prices move the way they do, you need to look at the reasons of they changes.

What is the motivation of the present buyers? The economy is growing but that growth is not  robust  and is not widespread. Net wages in real terms are not growing and the general opinion is rather pessimistic about the future. In such an environment one would not expect a market turnaround. What makes people buy then?

  • Interest rates have been falling and taking into account the charges and taxes relating to bank deposits, we are witnessing negative returns in many cases.
  • Following the scandals of certain players in the investment business (certain domestic brokerages, banks and saving cooperatives), people are turning away from alternative financial investments.
  • The long pending issue of the Swiss franc denominated mortgages finally seems to come to an end. The uncertainty around the subject kept both potential borrowers and banks away from the mortgage business and allowed huge bulk of non-performing mortgages to remain in the system. The latter could have crashed the thin market in a split second, if those collaterals were effected in large numbers.
  • And the general market trend also kept buyers away. As long as prices were steadily declining, postponing a purchase naturally meant savings as well as an overall deflationary trend in the market. Once prices started to grow, all those players had been delaying a purchase immediately all wanted to buy before the market became too expensive.

If you take that four reasons into consideration, you realise why only certain segments of the market started to react, and why those segments grow at previously unprecedented  speeds.

There is demand for properties that are easy to let and therefore can produce positive real returns for the investors. As downtown Budapest is now trying to make money on tourist accommodation and the AirBnB frenzy, that is the obvious choice for retail investors.

There is demand for properties that are eligible for mortgage financing. Banks have naturally become more cautious about lending and assessing the underlying collateral. This only reinforces the price hike, since funding is available for those apartments that are already appreciating.

And at last the cheapest properties, where buyers have limited resources and they feel that if they miss the chance now, they might not be able to purchase any property in the foreseeable future.

Is it time to sell? Or time to buy?

Many foreign investors took the opportunity when the value of their properties approached the original purchase price (at least in domestic currency), and chose to sell. This way finally they could say to themselves that they “did not lose much”.

It is difficult to judge that approach. First of all one would have to take into consideration the other costs and rental returns of the past years. Also one would have to assess the opportunity cost as well, the potential profits that these properties can make these days. It is worth mentioning that not only prices have been going up in the past couple of months, but rents are also steadily increasing in the same locations. (As this is the main attraction to the domestic investors/buyers.) AirBnB and Apart-Hotels have driven rents up in certain streets by as much as 50% over a 1  year period! . New investors are looking at 5-7% returns before taxes in euro based existing cash-flow and with risks they can better understand than those in the financial markets.

Will prices keep on rising?

For the near future they certainly will, even if at a slower pace. We have been saying for many years, that once the prices start to recover, the first few months will be the most dramatic as the supply will just not be there. A development takes a minimum of 18 months to two years to complete and as developers still do not have easy financing, they are not even starting to build yet.
On the other hand sellers that witness the market rally are easy to shy away since they feel, that the longer they wait the more they can get. That is why there is an over supply of buyers for “good product”.
There are long-term growth prospects as well (Budapest is still the cheapest capitol in the region) but the time required for this gap to close is an open question.



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