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Scope Ratings says the resilience of the residential real estate market is visible in stable or falling yields across the region as asset prices have risen, a trend reinforced by restrictions introduced by governments to contain the spread of Covid-19 infections, which has put a premium on quality living space, and minimise the economic impact on households and business.

“Hungary’s residential property market has turned out be the exception – even if it is likely to be temporary,” says Denis Kuhn, analyst at Scope. “The market experienced a steep decline in transactions and prices during 2020 in contrast with nearby markets such as Austria and the Czech Republic,” Kuhn says.

In the capital, Budapest, house prices fell 5.6% in Q2 2020 from the previous quarter, according to the National Bank of Hungary (MNB). Preliminary data point to further decreases in prices in Budapest in the third quarter. Hungarian house prices rose overall in 2020, according to the MNB, though at a much slower pace than initially forecast – up by around 5% instead of 10-15%.

The tax-related volatility in Hungary’s house prices goes back to 2016 when the government lowered value-added tax on the sale of new-build apartments to 5% from 27% to encourage home ownership. The government put a time limit on the tax benefit, with the concessionary VAT rate expiring at the end of 2019. The policy drew forward house purchases to the second half of that year, creating a boom in transactions swiftly followed by a significant decline in early 2020. The tax-induced slump coincided with the onset of the Covid-19 pandemic which further reduced demand for new homes amid increased economic uncertainty.

Tax policy has now changed again. The government introduced measures to support the housing market in October last year, including a cut in VAT again to 5% for all new apartment sales carried out before 31 December 2022.

“We expect these measures to have multiple consequences for the Hungarian market – for consumers and for the credit outlook for the corporate players in the residential property sector.

First, transaction volumes should rebound given the strong underlying demand for modern living space in Hungary, especially in Budapest where there is net population growth and a large stock of outdated accommodation.

Secondly, the savings of the lower tax will result in both cheaper gross prices for buyers as well as higher net sales prices for builders. The previous cut in VAT on new home sales in 2016 translated into an average 9% cheaper gross price for buyers – equivalent to a 40% incidence of the measure on consumers – according to MNB analysis.

“The biggest beneficiaries are likely to be real estate developers,” says Kuhn. “Credit quality of leading residential developers is set to improve through better operating margins while land values for residential real estate projects should appreciate again, notably in top locations in Budapest.” Gains for construction companies will be more modest given much of the building work for the next two years is already contracted.