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Hungarian Market Collapses After Forex Loans Debacle

Hungarian Market Collapses After Forex Loans Debacle
Pedestrians pass the Hungarian parliament building, across the Danube river, in Budapest, Hungary. The economy is set to contract 0.6 percent this year. Photographer: Balazs Mohai/Bloomberg

Erzsebet Zolyom counted on a quick sale of the two-bedroom apartment in downtown Budapest she inherited last May to ease her financial troubles. Instead, it’s put her deeper in the hole.

After a costly renovation and a parade of viewers, Zolyom still can’t sell the 87-square-meter (936-square-foot) property, even though she has slashed the price by almost a fifth to 23 million forint ($104,000).

“I thought it’d be sold in the blink of an eye,” the 47-year-old geography teacher said. “I can see now how naïve I was. It feels like a cruel joke by fate.”

Hungary’s residential real-estate industry ground to a halt after foreign-currency mortgages, which fueled a boom before they were banned in 2010, saddled homeowners with ballooning repayments when the forint sank to a record and prompted buyers to flee the market. The slump in demand forced home construction to fall last year to the lowest level since the government started collecting data in 1930 as Hungarian banks booked hundreds of billions of forint in losses.

Real-estate transactions fell to 90,000 in 2011 from 270,000 at the market’s peak in 2003, the year before Hungary and seven other former communist countries joined the European Union, Budapest-based OTP Mortgage Bank estimates.

Since 2008, home prices have dropped by an average 15 percent, according to the lender. If inflation is stripped out, prices sank 30 percent in the four years through 2011, the Royal Institute of Chartered Surveyors said in February.

Construction Slump

The number of homes built in Hungary last year fell 39 percent from 2010 to 12,655, fewer than in the slumps between the two World Wars and at the beginning of the Communist era of the 1940s and 1950s, state statistician Erika Csetenyi said. Construction permits dropped 28 percent last year to the lowest number since at least 1990, a year after communism ended, she said.

“There’s a stalemate in the real-estate market and we need to deploy all possible tools to get things started,” said Daniel Gyuris, the head of the mortgage unit at the country’s largest lender, OTP Bank Nyrt. “Current market conditions were spawned by people’s fear of unemployment and the string of negative economic news coupled with a freeze in lending as a result of extreme risk aversion.”

The real-estate market plunge outpaced the contraction in other countries in the region. New home construction in Poland shrank 8 percent in the first nine months of last year, compared with 38 percent in Hungary.

Economic Decline

The construction industry shrank for a sixth consecutive year in 2011, shaving off 0.1 percentage point from last year’s 1.7 percent economic growth rate, according to statistics office data. Construction slumped 7.6 percent from a year earlier in 2011 and declined 1.5 percent in January.

The economy is set to contract 0.6 percent this year, according to the Organization for Economic Cooperation and Development. That compares with growth of 2.5 percent this year for Poland and 1.2 percent in neighboring Slovakia, according to the European Commission’s forecasts released in February.

The jobless rate will probably rise above the 10.7 percent level at the end of last year, the central bank said in December, undermining Prime Minister Viktor Orban’s goal to combat unemployment and deliver on a campaign pledge of creating 1 million new jobs in 10 years.

“The freeze in the real-estate market poses a grave threat to the employment of low-skilled labor,” said David Nemeth, an economist at ING Groep NV in Budapest. “It’s another piece of bad news for the already sluggish economy.”

Zoltan Nemes, a 35-year old computer programmer in the Hungarian capital, said he put plans to buy his first home on the backburner as he frets about the future. Even heavy discounts aren’t enough to lure him to the market, he said.

Hard to Commit

“When I look at prices, a part of me wants to go out and buy a place right now,” he said. “But loans are very expensive and I see too many people losing their jobs around me, I’m simply afraid to commit myself to such a deal.”

Demand for mortgages evaporated in recent months as customers grew wary about their prospects and interest rates on forint-denominated loans rose to around 12 percent, said Robert Toman, head of household credit at Raiffeisen Bank International AG’s Hungarian unit.

“Both the real-estate market and mortgage lending are hibernating,” said Toman, “and as to which came first, it’s a question of the chicken and the egg.”

Hungary’s market is faring worse than other central European countries because the forint’s 19 percent drop against the euro since mid-2008 raised the cost of installments on foreign-currency mortgages, which account for about two-thirds of all home loans, and delinquencies soared, putting hundreds of thousands of Hungarians at risk of losing their homes.

‘Debt Slaves’

The government is struggling to protect homeowners by forcing banks to accept some of the loss burden. Orban said on March 15 that Hungarians won’t spend their lives as “debt slaves” and indebtedness was a “bridle” on millions of families.

Demand for foreign-currency mortgages took off in 2003, when the government stopped subsidizing forint-denominated home loans, and rose sharply after 2006 when state austerity measures sapped households’ disposable income, prompting Hungarians to finance consumption from credit.

Repayments subsequently soared after the forint plunged 39 percent against the Swiss franc from 2008, in which the majority of mortgages were denominated, since mid-2008.

Orban forced domestic lenders to swallow losses on franc mortgages by allowing their repayment at a discount exchange rate, turning the banking industry unprofitable for the first time in 13 years in 2011.

Lenders’ Losses

Domestic lenders booked a combined pretax loss of 370 billion forint on the repayment program, according to data from the financial market supervisor. The number of mortgage contracts dropped 6 percent to 2.21 million by the end of 2011 from their peak in mid-2010, the authority said. Mortgage lending at OTP Bank, the country’s largest lender, declined 8 percent in the last quarter of 2011 from a year earlier.

“The economic environment isn’t conducive to a stable rise in demand, even though property prices most likely bottomed out,” said Attila Dery, a chief analyst at Otthon Centrum, one of Hungary’s largest residential real-estate management companies. “The market of newly built properties is essentially dead.”

Large-scale property projects have disappeared from the capital as developers feared growing risk and financing became scarce.

Market Retreat

Real-estate development company SCD Group sold its property portfolio in Budapest and around Lake Balaton earlier this year as the “outlook for profitability on the real-estate market was unfavorable” and financing scarce, owner Gabor Juhasz said in a statement published by state news agency MTI on March 6. The company owned several office buildings in the capital’s affluent Buda districts and commercial properties in the center of the city.

Output in Hungary’s construction industry declined 7.8 percent in 2011, the sixth consecutive annual contraction.

Liquidations jumped 42 percent in January from a year earlier, while construction output will probably shrink to half of 2006’s level, according to Opten Informatikai Kft., which publishes weekly reports on Hungarian corporate bankruptcies and liquidations.

Government plans for state interest-rate subsidies on mortgages and non-repayable grants for home purchases may help thaw market conditions, though a turnaround in overall market trends is unlikely before 2013 and depends on economic, political and financial conditions, property broker Joneslang LaSalle Inc. said in a report on Hungary.

Unsold Stock

“Developers will cautiously monitor the development on the demand side before making any moves on the supply side,” it said in the report. “It is likely that development companies will concentrate on getting rid of the primary market’s unsold stock and only a few new projects will be launched for sale.”

On a quiet mid-town street in Budapest, just walking distance from restaurants, bars and a bustling street market, Erzsebet Zolyom is hoping for a breakthrough in the sale of her apartment, even though the flow of potential buyers has thinned to a trickle. She is getting desperate.

“I would hate to lower the price further,” she said. “But I may just have to if I want to ever sell this place.”

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