by David Thorpe
July 2010
It was election time in Hungary this April and for those of you that missed it, last month the Hungarian Parliament passed a proposal to reduce the number of MP’s to 200 from the current 386. The decision comes into effect as of 2014 and there are two other proposals on the table to amend the Electoral Law and overhaul the entire election system. Wow! Can you imagine our lot getting stuck into the task quite like that? Hard to see isn’t it but Hungary is quite a place and has seen more than its fair share of change over the years. One of the things that I was surprised to learn when I first started travelling to Budapest some seven years ago was that Hungary had the highest owner occupier rate in the European Union. “Of course we should be doing business there” I was told “Just think of the potential”. Incredible I thought. We could insure every property and mortgage in the entire country! How good would that be? And then you get in to the detail, but more of that later.
There was undoubtedly (and still is today I hasten to add) huge potential in Hungary, just as there is in the whole of the Central Eastern European (CEE) region. The trouble right now is that the Hungarian economy is currently recoiling from wider European uncertainty. The Hungarian Forint fell again last month as the international markets got the jitters over chaos and rioting in Greece. Just as the euro fell to its lowest level against the dollar in over a year, the number of forints to the euro rose to over 280 for the first time in almost over a year. But what does any of this have to do with mortgages I hear you ask. Well a more direct effect on Hungarian pockets comes from the Swiss franc, which rose last month to over HUF 200 from 185 in less than a week. Most Hungarian mortgages are made in Swiss francs and such currency fluctuations can substantially increase monthly mortgage payments.
This is not a new problem and has been a major concern for some time now. In an attempt to try and help borrowers, the government introduced a series of measures to ease loan repayments. In 2008 they “encouraged” banks to allow borrowers to convert their Swiss franc loans to HUF without incurring penalties. Most borrowers were too nervous about HUF and for good reason too. Even now, with the base rate at a historic low of 5.25 percent, mortgage payments in HUF would be considerably higher than one in Swiss francs. At the end of 2009, the government passed a law to cap loans made in foreign currencies. Under new rules, all loans made in Euros were capped at 60% LTV and 45% in all other currencies and other measure include introducing maximum income/payment multiples.
This all leads me nicely to the first thing that caught my eye, Europe’s highest owner occupier rates. Between 2008 and July 2009, the housing market went from bad to worse. According to estimates, there was a 50% drop in the number of transactions in the first half of 2009. Despite a brief pick up in October 2009 the housing market is still characterised by a vast oversupply and analysts do not expect that home buying will start picking up until the second half of this year and I think they are being a tad optimistic. The problem is they have a lot of owners but no buyers. Prices in the market did not drop to the extent predicted in early 2009 and the trend only really surfaced in the second half when the government withdrew various subsidies that greatly slowed down the market. At the same time there was an upswing in rental activity but one marked with falling rents. As over supply of rental property exceeded demand, rents started dropping spectacularly. Predictably, mortgage lending suffered badly as almost all banks tightened their lending policies. According to statistics published by the National Bank of Hungary, outstanding residential loans amounted to just over HUF 6,000 billion as at 31 December 2009 with year on year growth of HUF 114 billion (1.9%). In term of year on year growth this is dramatically smaller than the HUF 1,587 billion growth achieved in 2008. When you exclude the impact of exchange rate fluctuation, the year on year growth was just HUF 2.8 billion.
All of this uncertainty is having a major impact on everybody associated with the real estate market in Hungary. But with uncertainty comes opportunity and maybe I will get to insure the entire market! There has been another change in legislation that concerns both mortgage lenders and property solicitors. Up until quite recently anybody registering an interest in real estate was made aware that any third parties could challenge that interest for up to three months. That period has just been extended to three years and understandably lenders are and lawyers are worried about whether they will have an enforceable mortgage. Sounds like a job for one of our underwriters! In all seriousness though, there have been some fairly horrific stories circulating in the Hungarian media recently concerning alleged mafia activity and property fraud. In one particular case an 83 year old pensioner was forced out of his home and made to sign a document transferring his property into that of the fraudsters. Shockingly only one of the 15 people allegedly swindled by the fraudsters is alive today.