FHB House Price Index Q and an international outlook

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FHB House Price Index Q1 2014 and an international outlook FHB House Price Index Q1 2014 The downward trend in the national index is slowing The FHB House Price Index decreased to 154.

1 FHB House Price Index Q and an international outlook FHB House Price Index Q The downward trend in the national index is slowing The FHB House Price Index decreased to in the first quarter of 2014 (Figure 1). House prices declined by 2.5%, in real terms as well as nominally, compared to the same period of the last year. In order to prepare the current index, FHB used its updated market information and own observations, as well as all data processed by the National Tax and Customs Administration (NAV) until July The FHB House Price Index values: Q Q Q Q Figure 1. The development of the FHB House Price Index (Source: FHB) If the index value stabilized on the Q1 level throughout 2014, the downward trend of the past few years would slow down to a 1.2% decline on an annual basis. The increase in the number of market transactions can initially result in declining prices nationwide, since the previously postponed sales and purchases finally take place, therefore the decrease in prices will be realized in these areas as well. In case of a persistent demand, markets with excess supply will shrink, and prices can begin to take up in more and more areas and segments, as examples already show in Hungary as well as elsewhere in Europe.

2 Figure 2. Changes of the FHB House Price Index on quarter to quarter basis (Source: FHB) House prices have been decreasing since the peak of Q1 2008, however, this decline slackened nationwide between 2009 and 2011, and remained at a low level in This trend was broken in 2013, as the rate of decrease was 6.1%, similar to the change measured in According to data processed since then the national trend has returned to stagnation (Figure 2). In addition, the assessment of the stagnating trend is favorably affected by further details. First, inflation has abated to 0%, resulting in the stabilization of house prices in real terms. Second, the activity of the National Asset Manager Company (NET) continues to play a major role in the development of the national index and if we disregarded those apartments sold at discounted prices, an increase could be measured in some of the favorable locations. In the following, we show some examples of the better performing markets. Diverging house price trends The stabilization and turnaround of house prices are not generally observable; the market is still strongly polarized. Some submarkets not only persistently outperform the national average, but have already reached a turnaround. In our previous publication we highlighted the following domestic regional markets as the most stable ones even during the crisis: the area of Lake Balaton; parts of economically well performing Western Hungary; areas most positively influenced by new metro line 4, and the coordinated timetable of Kelenföld train station (area of Érd and Budaörs, and the affected parts of district 11); the popular parts of big cities within a 2 hour drive on the highway; the renascent downtown of Budapest. As shown on Figure 3, a definite turnaround has taken place over the past year in the center of Budapest, in easily accessible cities, and in Western Hungary. 2

3 Figure 3. House price development in the most promising areas (Source: FHB Index) Housing market indicators Household incomes continue to improve Income and employment indicators, key factors of the demand side of the housing market, have been improving according to recent statistical data collected in 2013 and most recently in Employment rate in Q was an outstanding 6.8% higher than in the same period in 2013 (Figure 4). The bulk of the rise is still attributed to public employment; however, jobs were also created in the private sector. Average wages also increased in the first quarter. Thanks to the 0% inflation, both gross and real wages grew by 1.8% compared to Q (Figure 5). Figure 4. Change in Employment (Source: HCSO) Figure 5. Change in average gross wages (Source: HCSO) Optimism has been on the rise in the past year in the Hungarian economy. The Central Bank of Hungary (MNB) published the most recent and most optimistic forecast; however, this year s growth is expected to be over 2% by all analysts and international organizations (European Commission, IMF) as well. Besides the favorable employment and income data, the improvement can also be traced in the central bank s GDP growth expectations for 2014 and Figure 6 shows that in June 2013 the MNB predicted a 1.5% GDP growth for 3

2014; a year later the expectation almost doubled to 2.9% for the same year. Expectations for 2015 are relatively stable showing a 2.5% growth rate (Figure 6). Figure 6.

trend in 2014. Seasonally adjusted loan disbursement indicators published in May this year show that lending returned to its pre-early-repayment level, measured in November 2011.

4 2014; a year later the expectation almost doubled to 2.9% for the same year. Expectations for 2015 are relatively stable showing a 2.5% growth rate (Figure 6). Figure 6. Changes in GDP growth expectations (Source: MNB) According to central bank data, apart from the first two months temporary slowdown, housing forint loan disbursement is showing a dynamically growing trend in Seasonally adjusted loan disbursement indicators published in May this year show that lending returned to its pre-early-repayment level, measured in November If the growing interest observed in the first half of 2014 (Figure 7) persists throughout the year, it could make a definitively positive impact on housing market turnover. The anticipated long-term low below 6% - credit rates can bolster this process for a prolonged period. Figure 7. Interest rates and the value of disbursed residential loans (Source: HCSO and FHB estimate) Due to the continued MNB base rate cuts, credit rates as well as deposit rates have been sinking to record lows as well. By August 2014, the average market rate was under 6%, and the best available interest rates in FHB Bank s selection are below 5% (Table 1). 4

5 Interest rate (% / year) APR 1 (%) FHB Five Fix Loan for property purposes or for loan refinancing Market rate loan with 5-year interest period on HUF basis 2 5 year ÁKKH %, currently 5.71%- 7.71% % FHB Referencia Loan for property purposes or for loan refinancing FHB Home Creation Subsidized Loan for purchasing or building new homes FHB Home Creation Subsidized Loan for used homes, modernization or home addition Market rate loan with 1-year interest period on HUF basis 3 12-month BUBOR % currently % Subsidized loans with 5-year interest period Year 1-5 : 6.00% From year 6: % Year 1-5: 6.00% From year 6: % % % % FHB State Subsidized Loan for purchasing or building new homes 6.00% % FHB State Subsidized Loan for modernization 6.00% 6.88% FHB Home Creation Subsidized Loan for purchasing or building new homes FHB Home Creation Subsidized Loan for used homes, modernization or home addition FHB State Subsidized Loan for purchasing or building new homes Subsidized loans with 1-year interest period Year 1: 6.00% From year 6: % Year 1: 6.00% From year 6: % % % 5.85% % FHB State Subsidized Loan for modernization 5.85% 6.72% Housing market can back the acceleration of the construction sector this year The output in the construction sector, which showed stagnation or decrease prior to 2013, gradually accelerated last year. The volume index of the production shows a steady growth since February 2013, the Hungarian Central Statistical Office (HCSO) registered a double-digit growth throughout the first five months of this year (Figure 8). This year s performance in the construction of other structures is outstanding, primarily triggered by railway renovation, road construction, and utility infrastructure development according to information released by the statistical office. Growth is somewhat slower in the main group of buildings, where industrial investments proved to be the main drive (Figure 9). 1 APRs were determined by taking the current conditions and legislation in force into account, assuming a 5 million HUF loan with a 20-year maturity. If conditions change then APRs might change as well. APR does not reflect the risk of loans with variable interest rates. Applying for mortgage loan property insurance for the collateral is also needed. The information is not complete for further details and conditions please visit or check related Announcements or General Terms and Conditions. 2 Special interest rate of FHB Five Fix loans available from April 1, 2014 until repeal, but must be taken before October 31, The interest rate is higher by 0.75 percentage points without the discount. 3 Special interest rate of FHB Referencia loans available from March 1, 2014 until repeal, but must be taken before October 31, The interest rate is higher by 1.25 percentage points without the discount. 5

Figure 8. Output of the construction industry (Source: HCSO) Figure 9. Output of the construction industry in the main groups (Source: HCSO) Housing construction rebounds from a very low level.

6 Figure 8. Output of the construction industry (Source: HCSO) Figure 9. Output of the construction industry in the main groups (Source: HCSO) Housing construction rebounds from a very low level. H data showed an increase, mainly because of Western and Central Hungary s favorable processes. Compared to the same period of the previous year 22% more homes were handed over (2013: 2680, 2014: 3265). In Budapest a 16% rise in prices was measured by the Hungarian Central Statistical Office (2013: 886; 2014: 1024), which, however, is still only the third of the pre-crisis level of 2008 (Figure 10). Figure 10. Building and occupation permits in Budapest (Source: HCSO) International outlook European housing markets on different trajectories The assessment of the international housing market is a regular part of the FHB Index. The most important lesson of this year s analysis similarly to the domestic situation - is the polarization of markets. Some of the European housing markets were either less affected by the crisis or have already approached a turning point, while in the other group the post-crisis turn of the trend has not yet occurred. Figure 11 illustrates the different paths of house prices. 6

7 Figure 11. Changes in house prices in some highlighted countries (Source: BIS and FHB Index) Prices rose in a number of countries in Q4 2013, with the highest increase measured in Ireland, the United Kingdom, Sweden and Germany (Figure 12). The biggest drop in prices was registered in Italy, the Netherlands, Spain and Portugal (Figure 13), and Hungary s situation also turned unfavorable over time. Figure 12.House price trends in growing markets (Source: BIS) In the meantime, after suffering huge losses due to the burst of the real estate bubble, the pace of price decrease slackened in Spain and Portugal. In case of Portugal this is the consequence of government programs creating larger demand, aiming at making the country s real estate market attractive for more investors. 7

8 Figure 13. House prices in markets on a downward path (Source: BIS) Price increase causes concern in Germany and Austria In Germany the rapidly increasing house prices are a cause for concern. Prices have been surging since the second half of the year by 3% annually. Growth is even more intensive in larger cities, ranging between 6% and 8.5% in May 2014 according to Commerzbank data. Low interest rates in the Eurozone strongly influence the development of prices. In Germany, however, the house price to income ratio is still low compared to the majority of other European countries, including Hungary (Figure 14). Figure 14. Affordability of housing in selected countries (Source: Global Property Guide, BIS, Eurostat, FHB) The case is similar in Austria, where real estate prices have also been increasing dynamically. Prices have been rising since 2004 in Vienna, and doubled by the end of 2013 based on data of the Austrian National Bank. The country as a whole shows a somewhat more modest nominal growth of 37.1%. In the Austrian capital prices increased by 2.3% in the last quarter of 2013 compared to the previous quarter, while on a national level a 1.9% drop was registered. According to expectations, prices will stabilize this year. 8

9 Will the market revive in Spain? Besides Ireland, Spain is the other European country that suffered a severe burst of the price bubble. In the last quarter of the previous year the downward trend of Spanish residential property prices slowed down. According to data of the Spanish National Bank, the decrease in house prices slowed down to 4.2% year-on-year by the last quarter, as opposed to nearly 4.5% in Q3. The same is shown by the Tinsa IMIE Index, which measured a 10.5% annual fall in prices in June 2013, while in June 2014 the price drop was only 3% compared to the previous year. In addition to the nationwide decline, in Madrid and in regions with a strong demand for existing homes, the decrease is lower than the national average, and in some cases even an increase was measured. For instance, in markets of attractive touristic locations such as the Balearic and Canary Islands the decrease is nearly over: prices only decreased by 0.1% from June 2013 to June 2014 according to the Tinsa IMIE Index. This is also a good example for growing regional differences, similarly to the Hungarian trends. In Ireland the average yearly growth is the consequence of Dublin s performance, while in other areas of the country a slight decrease continues based on data of the European Mortgage Federation. The growth in the capital is attributed to the scarcity in residential properties, which pushes up the prices. In Denmark as well, the area of Copenhagen is considered to be the main driver of the growth. According to European Mortgage Federation data, France is also characterized by this duality: newly built and existing house prices are declining in Paris and in the Ile-de-France region, while new home prices continue to rise in other parts of the country, due to the planned VAT increase. Mixed trends in housing construction In terms of building permits, the countries of Europe took different paths as well. Although, currently only a few countries (Bulgaria, Belgium, Germany, the United Kingdom, Sweden) reach the housing construction level of 2010 (Figure 15a), real estate development is taking off in more and more countries. Germany stands out in this indicator as well, as housing construction shows a steep upward trend, and the number of issued building permits grew by 50% since Figure 15a-b. Number of building permits issued (Source: Eurostat) A substantial part of markets lately showing signs of picking up in terms of building permits are nonetheless quite far from earlier levels. The upturn is very recent, it could only be observed in Q Good examples for this are the Netherlands, Denmark, the Czech Republic and Hungary as well. In many countries, however, the turning point in housing construction has yet to come as their markets are still decreasing or in a better case stagnating (Figure 15b). Spain, Ireland and Poland, France and Portugal belong to this group. Improving economic outlook In our earlier issues we have shown that there is a strong link between cyclical changes and the performance of the housing market even during the crisis. Beyond the direct housing market indicators, we should therefore also consider the prospects of the economy as a whole. The economies of the EU are still not 9

10 soaring but there are positive cyclical changes, which might support the recovery of the housing market. Among the European countries the real GDP growth will be around 2%, while economic activity might improve further in the next year (Figure 16). The 2% and 3% GDP growth of Germany bolsters the entire European economy. The Baltic countries, which suffered the biggest setback during the crisis, have started to catch up, while Poland is still at the forefront. All in all the improvement of the economic situation carries a positive message for the housing market in most of the countries. Figure 16. GDP growth expectations in European countries (Source: Ameco) Good news in mortgage lending Without lending it is hard to imagine a housing market revival. In many European countries the total outstanding mortgage stock is still shrinking (Figure 17). It is a good sign that in some countries gross residential lending has been approaching the pre-crisis level, or is showing an increase. For the time being this group is still the minority, including Belgium, Denmark, Sweden, the Czech Republic and France. 10

bigger picture we have to add that in several countries the gross residential loan disbursement is

11 Figure 17. Changes in the total outstanding mortgages between 2012 and 2013 (in euro, Source: EMF) For the bigger picture we have to add that in several countries the gross residential loan disbursement is well below the pre-crisis level according to European Mortgage Federation data. The lag is above 30% in Spain, Ireland, the Netherlands, Hungary, Italy, Portugal and the United Kingdom. 11

12 Our services adjacent to the FHB Index The FHB House Price Index is published quarterly. Before its introduction, no other product of this kind was available in the Hungarian market. It is distinctive in terms of the measured time intervals and the quality of the underlying data, as well as its methodological foundations, which conform to international expectations. Since the introduction of the FHB Index in 2009, MNB (the Hungarian National Bank), RICS (The Royal Institute of Chartered Surveyors) EMF (European Mortgage Federation), Global Property Guide and the European Commission refer to it as a featured housing market indicator. Updates to the FHB House Price Prognosis and the FHB Agricultural Land Price Index are published regularly. The methodology behind the model rests on three pillars: I. On the basis of international and local experience, we have identified relations between selected Hungarian macroeconomic indicators, money-market and credit market indices, transactional data of the housing market and housing prices. (We base our view of the development of the macroeconomic and financial environment primarily on the projections of the Hungarian National Bank.) II. The FHB Banking Group has been one of the major actors among Hungarian housing market financiers for over a decade. Our operations cover the entire country, and we have access to information from the most significant real estate appraisers, which is complemented by FHB Real Estate Ltd s own professional experience. Our forecasts, therefore, include processed and verified local assessments as well. III. With respect to the economic crisis, we do not disregard empirical facts gained from analyses of similar depressions that have affected real estate prices so far. We have, therefore, included the international experience obtained from similar crises in our model. Our database, which covers the entire country and the methodological development of the FHB Index make FHB able to provide help to the financial sector to fulfill the collateral re-valuation obligations under Basel II (Government Decree No 196/2007 on the Management of Credit Risk and the Calculation of Credit Risk Capital Requirement). We are proud that our service has already been ordered by a number of Hungarian banks, subsidiaries of large international financial institutions. The banks will also need to comply with the strict regulations in the future, it is, therefore, useful to apply a procedure that conforms to international standards and can also be supported by documented methodology if required by authorities. For the implementation of the modern, internal valuation methodology, it is preferable to use a model that is based on transactional data and documented methodology whereby efficient and mass re-valuation becomes possible. By using this model, credit risk capital requirement can be reduced substantially, and excess capital can thus be freed. FHB Jelzálogbank Nyrt. has been using the real estate monitoring procedure which also meets the requirements of the modern, internal valuation methodology since FHB also undertakes the preparation of unique research products meeting individual needs. In these, we offer local information on apartments and lots, more detailed explanations on the extent and dynamics of our prognosis as well as the analysis of the risks surrounding the realization of the trends forecast We are pleased to give customized offers and to respond to any inquiries. Molnár Zsolt Deputy Chief Executive Officer FHB Ingatlan Zrt. Ingatlan értékelési Igazgatóság Telephone: +36(1) Fax: +36(1) Mobile: +36(30) molnar.zsolt@fhb.hu dr. Nagy Gyula FHB Index project leader FHB Jelzálogbank Nyrt. Telephone: +36(1) Mobile: +36(30) nagy.gyula@fhb.hu, the exclusive research partner of the FHB Index 12

FHB House Price Index analysis of 2011 and House Price Prognosis for 2012

FHB House Price Index analysis of 211 and House Price Prognosis for 212 FHB House Price Index 211. A further moderate decline in house prices was recorded in 211 According to the figures in FHB House Price