What price the Hungarian government’s ‘kiss’ for the housing market?

What price the Hungarian government’s ‘kiss’ for the housing market?
A residential development in Budapest, where the Hungarian government is set to offer subsidised loans to people.
By Kester Eddy in Budapest February 12, 2016

The new year has started well for Benjamin Lebor, a Budapest-based property developer. Mr Lebor, who builds and restores residential property in the Hungarian capital, has been enjoying the fruits of a fast recovering housing market over the past 18 months. And now moves by the Hungarian government of Prime Minister Viktor Orban to boost two key statistical indicators – babies and new homes – have made life look even rosier for Lebor and others involved in real estate.

The Family Home Build programme – generally known by its Hungarian acronym Csok (the word translates to “kiss” in English) – was originally launched on July 1 last year. But, keen to make an even bigger impact, the government announced sweeping changes around Christmas time designed, it says, to help Hungarians buy their own homes, start families and reverse the slow, but seemingly relentless negative demographic trend.

“Medium to long term, this is seriously good news, not only for families, but also for the hundreds of thousands who, directly or indirectly, have lost their jobs in the recession as a result of the collapse of both residential and commercial construction,” says Lebor.

“What's more, it may also encourage skilled construction workers who have sought work in Western Europe to return to Hungary,” he adds. “It's rather like seven years of famine, now perhaps time for seven years of feast.”

While the regulations are still being fine tuned, in essence, under the most favourable scenario, Hungarian couples are able to access a grant of up to HUF10mn (€32,000), along with a second HUF10mn in the form of a state-subsidised loan, to buy a new home if they have, or pledge to have, three children or more within 10 years.

Moreover, the VAT rate on new builds has been slashed from the standard 27% to a mere 5%, while various building permits, regulations and duties are to be waived or greatly simplified. An earlier cap of HUF30mn (€97,000) on the maximum value of a new home eligible for the subsidy has been scrapped.

Given that the average gross salary in Hungary is some €850 per month, it is understandable that a recent report on the construction industry described the policy measures as “capturing the public's imagination” with “Csok-fever raging” in Hungarian society. The report, written by GKI, an economic research institute, on behalf of the Employers' Association, found some 80,000 households were either “fully intending” or “inclined” to buy or build a new home in the next 12 months – a level not recorded since 2008.

Cost-beneficiaries analysis

Given such supporting evidence, both the government's and Lebor’s optimism for Csok seem fully justified. But while the government, real estate professionals and potential recipients of the handouts purr with delight over the programme, the opposition, aware that the programme will kick in nicely in front of the 2018 elections, are scathing in their criticism. “Csok has been created by Fidesz-people, for Fidesz-people… including several of [Prime Minister] Orban’s good old friends who have bought construction companies in the recent past,” Lajos Korozs, Socialist MP and vice-chairman of parliament's social welfare committee, tells bne IntelliNews. “And it’s all paid for by Hungarian taxpayers.”

Most ordinary Hungarians, certainly those in the lower middle-class and lower income groups who are unable to get a credit rating, an essential condition for the loan, will “automatically” be excluded from the Csok system, Korozs says.

Likewise, a spokesperson for Dialogue for Hungary, a small centrist party, points out that the kind of building being stimulated by the Csok programme will not benefit the more than 500,000 Hungarians who live in homes without even toilets. “It isn’t the building of new homes these people need, but the renovation of existing housing stock,” the spokesperson says.

But the crucial question is the cost to the budget. While the economy ministry, in a recent statement, stressed Csok would boost economic growth and argued the extra tax revenues generated from construction of just 3,000 additional homes per annum would cancel out the reduction in VAT rates, this does not include the long-term cost of subsidised loans and non-refundable grants.

Balazs Gulyas, a political activist who organised the protest against the internet tax in 2014, argues that if Csok is as successful as hyped, it spells economic disaster. “Put simply, if 100,000 people take this HUF10mn present, that's exactly HUF1,000bn [€3.2bn, or roughly 3% of GDP]. Government politicians say it could be taken out by ‘several hundred thousand’ families. If that is true, it would bankrupt the economy,” he warns.

But Balazs Romhanyi of the Fiscal Responsibility Institute, an independent economic think-tank, is more considered. While he dismisses the notion that Csok will stimulate any increase in births – based on the ineffectiveness of child benefits introduced in 2011 – he estimates the overall cost to be damaging, but bearable.

In his model, 5,000 families annually will benefit from Csok, resulting in a net additional cost to the budget of HUF52bn (€140mn) this year, rising to HUF113bn, or about 0.35% of GDP, by 2020. “This is a set of measures to increase GDP in the short term in exchange for worsening fiscal sustainability over the medium to long run,” he tells bne IntelliNews.

However, the limited impact is more by default than design, a result of the inability of the construction sector to cope with any rush for new homes. “There is a shortage of blue-collar, skilled labour [in trades] essential for house building – carpenters, bricklayers and the like. Many have gone abroad,” Romhanyi says.

Contrary to Lebor's thinking, for Romhanyi it's better such artisans do not return – at least, not too quickly. “The whole story could be a catastrophe if the sector could grow fast enough. Thank God the industry is in the cave right now. Basically, that's the saviour of the budget.”