Europe and Central Asia

Hungary

Country Profile

Nearly 68 percent of Hungary’s population of 11 million resides in urban areas. In 2009, while the total population decreased by 0.2 percent, the urban population grew by 0.4 percent.[1] Among the first privatized housing markets in Central Europe, Hungary maintains a high home ownership rate, reaching 70 percent in 1990[2] and 92 percent in 2003, compared to the European average of 68.2 percent.[3] Hungary’s outstanding residential mortgage loans to GDP ratio increased drastically from 5 percent in 2003[4] to 16.7 percent in 2009, but it was still well below the European average of 51.9 percent.[5] The average capital cost for non-subsidized mortgage loans in Hungary Forint stood at 14.2 percent in 2009, compared to 8.7 percent and 7.2 percent in Euro and Swiss Franc, respectively[6]. As a result, more than 60 percent of housing loans were made in foreign currency, as borrowers aimed to take advantage of lower interest rates for foreign currency loans, despite the high exchange rate risk.[7] In May 2011, due to the volatility of exchange rate, the Hungarian government had to temporarily fix the exchange rate on foreign-currency household mortgages to relieve borrowers from mounting debt repayments. [8]

The government has always played an active role in Hungary’s housing market. Before 1989, the housing sector in Hungary was heavily subsidized during the socialist regime, as home-buyers were granted subsidized housing loans and an up-front subsidy for home purchase based on the size of household.[9] By 1989, the government was spending 17 percent of its budget on the housing sector,[10] which became a heavy burden on the state budget.

After the political reform in 1989, along with the collapse of the centrally planned economy, the government ceased to provide housing subsidies due to the growing budget deficit. Formerly subsidized housing loans were transformed into market-rate loans with high interest rates, which imposed a heavy debt burden on households. People became reluctant to finance home purchases with credit, fearing that they would be unable to repay the debt. The housing market went into stagnation, and in 1997, only one third as many housing units were built as in 1980.[11]

In order to stimulate the market, the government launched a new housing subsidy program in 1999, which included interest rate subsidies and personal income tax exemptions. At first the new subsidy program was restricted to the financing of new constructions and aimed at young couples and families with children, while other home-buyers still had to pay the 18 percent interest rate for the loans. In the following two years, the program was revised several times, and many restrictions on the subsidy were lifted to accommodate a larger share of the market. In July 2001, subsidies were available for the secondary market for housing at 9 percent, which was lowered to 6 percent six months later.[12]

Hungary’s housing market responded enthusiastically to the generous subsidy program. Total outstanding residential loans more than tripled from 2001 to 2003, accounting for 7.8 percent of Hungary’s GDP.[13] Housing completions amounted to 35,543 units in 2003, compared to 19,287 units in 1999.[14] New home prices rose by 30.9 percent and 28.4 percent in 1999 and 2000, respectively, but prices remained relatively stable afterwards as the supply of housing began to meet demand.[15] Despite the effective outcome, due to the complexity and instability of the program, the government had to face much higher costs than they had expected. By 2003, the volume of subsidized loans reached USD $7 billion, forcing the government to substantially tighten the subsidy policy.[16]

Housing finance in Hungary is mainly provided by three types of institutions: commercial banks, mortgage banks and Bausparkassen. Bausparkassen are small credit institutions that offer banking and financial services, particularly mortgage lending. In 2008, commercial banks had a market share of over 50 percent, mortgage banks of 38 percent and Bausparkassen of 5 percent.[17] As the most common source of funding for mortgage finance in Hungary, covered bonds landed 46 percent of all outstanding mortgage loans, compared to the European average of 23.2 percent. In 2009, Hungary’s covered bonds issuance reached USD $2.3 billion, the highest in the European Union.[18]

[1]The World Bank. World Development Indicators Database. Web. 17 Aug. 2011.

[2]Black, Jaszcszolt, and Lee. Solving the Housing Problem: Lessons from Poland and Hungary in Creating a New Housing Finance System. 2000, p. 15.

[3] European Mortgage Federation. Hypostat 2009. 2010, p. 40.

[4] European Mortgage Federation. Hypostat 2003. 2004, p. 24.

[5] European Mortgage Federation. Hypostat 2009. 2010, p. 40.

[6] FHB. Housing Price Index Report. 2009, p. 6

[7] European Mortgage Federation. Hypostat 2009. 2010, p. 39.

[8] Bloomberg. Hungary to Fix Exchange Rate on Mortgages, End Eviction Ban. Web. 30 May 2011.

[9] Rózsavölgyi and Kovács. Housing Subsidies in Hungary: Curse or Blessing? 11 Oct. 2005, p. 2.

[10] Black, Jaszcszolt, and Lee. Solving the Housing Problem: Lessons from Poland and Hungary in Creating a New Housing Finance System. 2000, p. 15.

[11] Dobricza, Aniko. Housing Finance Subsidies in Hungary. 2004, p. 22.

[12] Dobricza, Aniko. Housing Finance Subsidies in Hungary. 2004, p. 22.