a.

Annual growth in real house prices was close to or exceeding 10 % between 2015 to 2019 and was especially pronounced in Budapest. According to estimates produced by the Magyar Nemzeti Bank (MNB), such dynamism led to significant overvaluation, peaking at 18 % in Budapest and 3 % in the country as a whole in the third quarter of 2019. MNB data indicates that price developments have diverged significantly in different parts of the country. On the one hand, in real terms house prices in Budapest started slowing down in late 2019, stagnated or slightly declined in 2020 and remained moderate in the first half of 2021. On the other hand, prices accelerated to double digit growth in other areas, especially in smaller municipalities and rural areas, in which households were eligible for the government house purchase subsidy. From a forward-looking perspective, the return of international tourism will be an important determinant of house price developments in Budapest. In the country as whole, further utilisation of various government subsidy programmes (3) may contribute to demand pressures on house prices, while the preferential value added tax for new construction (4) may ease supply constraints in the medium term.

b.

Mortgage credit has been increasing robustly since mid-2018, with real annual growth rates higher than or close to 5 %. Even though, according to the MNB estimates, only about half of housing transactions were realised through bank credit in 2020, real annual mortgage credit growth accelerated to an average of 6,8 % between January and August 2021. In the meantime, real growth of household credit amounted to an average of 10 % year-on-year. While this growth outpaced the real growth of mortgages, it has been driven by the growth in prenatal baby support loans, as well as the have share of household loans in moratorium (31 % of total RRE loans and 42 % of eligible RRE loans were still in that moratorium, and therefore not amortizing, in June 2021). Without the effect of the moratorium, the real annual growth of mortgage and household credit in the first half of 2021 reached 0,7 % and 2,7 %, respectively, according to MNB estimates. The broad range of government subsidy programmes, including the additional government subsidy programme introduced at the beginning of 2021, has also contributed to the growth in household credit (5).

c.

Even though mortgage loans were provided with very high loan-to-value (LTV) ratios prior to 2008, 90 % of the stock of loans bore LTV ratios of less than 80 % in the first half of 2021. This has been the result, to some extent, of fast growth in house prices and old loans being amortised. Additionally, the LTV ratios of new loans have been limited to 80 % since 2015. As regards the debt service-to-income (DSTI) ratios, however, about 22 % of existing and almost 25 % of new mortgage loans (expressed in terms of volume) in the first half of 2021 had DSTI ratios between 40 % and 60 %. This has been partially the result of higher limits on the DSTI ratio for high-income borrowers, whose share of new lending has been growing: in the first half of 2021, about 60 % of new lending for housing purposes was eligible for the higher 60 % limits to the DSTI ratio limit (with borrowers’ monthly net income above the regulatory threshold of HUF 500 000), and 5 % of new housing lending had a DSTI ratio above 50 %. Even though maturities of the new loans have been lengthening slightly, according to the MNB, the evidence does not suggest that longer maturities are being increasingly used to circumvent the existing limits on DSTI ratios.

d.

Fixed interest rates became more frequently used in relation to household credit after the MNB introduced a certification trademark in 2017. This is only available for housing loans with an interest rate fixation period of at least five years. The expansion of housing loans with longer interest rate fixation periods has been further amplified by the lower limits to DSTI ratios, applicable since October 2018, for mortgage loans with an interest rate fixation period shorter than 10 years. As of February 2021, about 75 % and 25 % of new loans were fixed for 10 and 5 years, respectively. Taking into account the stock of loans, however, loans with fixation periods shorter than one year still represented almost 40 % of the credit issued, although this share has been gradually decreasing.

e.

The loan moratorium related to the COVID-19 pandemic has recently been extended until June 2022. However, eligibility in respect of the moratorium has been reduced, and the household loan stock that remained under moratorium accounts for around 5 % of the total outstanding household loan portfolio. According to the MNB’s analysis, loans in the earlier and wider-ranging moratorium of household borrowers who are employed in vulnerable sectors accounted for approximately 10 % of all outstanding loans.

f.

The ESRB acknowledges the macroprudential measures that are in place in Hungary that mitigate the current real estate vulnerabilities, namely the limits on the LTV and DSTI ratios. Furthermore, the ESRB acknowledges that banks have duly recognised the increase of credit risk due to the extended moratorium by classifying some of the loans as Stage 2 loans.

g.

From a forward-looking perspective and taking into account the medium-term risk outlook, the current macroprudential policy mix is considered to be partially appropriate and partially sufficient. If RRE vulnerabilities keep increasing, tightening the limit on the DSTI ratio, complementing it with a maturity limit, and/or introducing a systemic risk buffer or countercyclical capital buffer would contribute to mitigating those vulnerabilities. Nevertheless, macroprudential policies should be complemented by broader policy action aimed at the mitigation or elimination of the factors which facilitate or promote increasing household indebtedness or unbalanced housing affordability. These policies should support the current macroprudential measures to address the remaining vulnerabilities identified in the RRE market in Hungary efficiently and effectively, without producing excessive costs for the Hungarian real economy and financial system. In Hungary, government subsidies and support loans can contribute to fuelling demand for owner-occupier housing, leading to higher overvaluation of house prices as well as indebtedness of households, against a backdrop of an insufficient supply of housing. Further policies could therefore include removing incentives for higher household indebtedness, especially government subsidies and support loans, and ensuring adequate housing supply and an efficient rental market. It would be advisable, in the coming quarters, for the national authorities to continue to monitor the credit quality of household debt under moratorium and ensure adequate provisioning for the expected losses.