Which Type Of Funding Is Most Appropriate For HungaryEssay Preview: Which Type Of Funding Is Most Appropriate For HungaryReport this essayIntroductionThis paper is subject to argue which type of funding is most appropriate for Hungary, one of the emerging countries that is under severe macroeconomic pressure and faces challenges regarding its housing and mortgage market.
After analyzing past and future performance of the Hungarian housing and mortgage market as well as macroeconomic development, a funding mix is suggested that intends to solve current and prospective problems on the Hungarian mortgage loan market. Since all three elements, the past and future development of macroeconomic situation, housing market as well as mortgage market are highly interconnected and have a significant impact on the type of mortgage funding in Hungary, the following shall provide an overview.
Overview and forecastHousing marketFirst, the past and future performance of the Hungarian housing market can be described by examining house prices as well as house construction. In general, the Hungarian housing market is characterized by the third highest owner occupation rate (92%) in the European Union and is thus way above the EU average of 69% (chart 1). Although the number of housing units built has been dropping since 2005, and are currently stagnating, some promising signs can be seen as housing permits are expected to increase from the end of 2013 onwards (chart 2). According to the FHB Land Credit and Mortgage Bank Company, house prices are expected to rise, since a gentle and slow-paced upward sloping curve will possibly put an end to the “valley shaped” downward trend that started in 2006 (chart 3).
Macroeconomic situationSecond, important macroeconomic indicators such as interest rates, GDP growth, employment rates as well as income expectations have an impact on future housing demand and are thus examined in the following. Compared to other EU countries, the Hungarian economy was significantly hit by the slow-down in 2011 and 2012. While in 2012, Hungarians GDP growth reached bottom, the macroeconomic prospect seems rosier as the International Monetary Fund (IMF) predicts a recovery-growth of about 1% for 2013 and a stable upswing until 2017 (1.8%) (chart 4). The unemployment rate currently amounts 10.9% and is in line with the European Unions average of 10.7% . In addition, the decreasing GDP goes hand in hand with a continuously shrinking real income in 2012, which is expected to stabilize in 2013. To conclude, the moderate favorable macroeconomic outlook for the upcoming years, signals that Hungary has reached the turning point what could lead to increased future demand in the housing market.
Mortgage marketBeside those forecasts, the Hungarian mortgage market shows a similar picture and has an idiosyncratic structure as depicted in the following. In Hungary, only mortgage banks can provide loans that qualify for a government program of interest rate subsidies, and most of the bonds have been issued by the mortgage banking subsidiaries of OTP and FHB banks. The mortgage market is characterized by a very strong correlation between the net lending of residential mortgage loans and housing unit transactions as it is indicated in chart 5. The market conditions are perfectly described by the fact that, on the one hand, due to the recession, since 2006 the number of housing market transactions has been decreasing significantly, and on the other hand that, parallel with this, the lending of residential mortgage loans declined dramatically.
The current situation on the mortgage market looks as follows. Lending in foreign currencies (EUR and CHF) is prohibited and residential mortgage debt to GDP ratio was 2011 in line with the other Eastern European countries and with 23% far below the EU average of 52% (chart 6). The high interest rates on HUF-denominated mortgages (Representative interest rate on new mortgage loans of 12.54% , 2011, chart 7), the effect of early repayments at non-market rate on sweeping away savings, and the weak housing market in combination with the poor macroeconomic performance resulted in a stagnating mortgage lending activity in 2010 and 2011. Although the average Loan-to-Value (LTV) ratio amounts 50%, the significant decrease in house prices as a result of the crisis resulted in the fact that 36% of the mortgage debtors have an LTV which is above 90% . In fact, Banks can grant mortgage loans with a maximum 75 % LTV ratio.
Funding and banking sectorThe three major mortgage banks (OTP, FHB, Unicredit) fund their mortgage loan portfolio by issuing covered bonds which is the common form of mortgage finance in Hungary. In 2011, covered bonds accounted for 25% of the total mortgage loan portfolio, while 75% of the total mortgage loan was financed by deposits. There has been no issuance of MBS (Mortgage-Backed Securities) to date. Although, the loan to deposit ratio of the banking sector in Hungary decreased to around 130 % by the end of 2011, it is still high in international comparison. The rating agency Moodys notes that banks performance 2012 remained weak and net interest income, which represents a strength of the Hungarian banks, declined by 6.5% in September 2012 year-on-year, mainly reflecting the increase in funding costs and risk spreads.
Summary and conclusionThe following conclusion is based on the effects of all the factors examined so far.From customers/borrowers perspective, as regards the determinants of demand, consumer confidence, GDP growth as well as the associated income growth, significantly high interest rates on mortgages loans and especially housing market prospects have shaped the households decisions on house purchases. On the one hand, Hungarians are currently on a par with Greece and thus one of the lowest in the world in terms of consumer confidence . On the other hand however, the GDP growths slowly but steadily even though below-average with an estimated increase until year 2017, and the Hungarian housing market is on the edge to recoup from losses since 2009 indicating moderate demand over the medium term.
Larger and more realistic housing prices are likely to be the result of the financial and economic situation of Hungary, which as you guessed is at such a great disadvantage to Hungary.
The problem of affordability is a source of great anxiety among many Hungarians. As a result of the financial situation of Hungary and a housing crisis being exposed, many people have seen their homes fall into cheap debt due to low borrowing costs due to the high costs of financing other people’s homes.
The current situation can make it a real burden for any homeowner to avoid a default and even more so for those that are willing to deal the risk of a default on and pay the full cost.
The problem is that, at present, a majority of Hungarians have no choice but to purchase their home in the hope of the economic growth.
And that has led to one of the major problems that both the public and private sector may face over the past few years, the current financial situation.
The Financial Crisis
The crisis of 2008 in the USA has been very different from that of Hungary – a situation that started when the central bank created its own private-sector bank to rescue the financial system.
As a result of this, it was difficult for Budapest, the most economically oriented central democracy in the European Union to accept and implement the reforms that would have prevented the recent crisis. However, due to the financial crisis, the central banks of Europe continued to adopt certain policies that led to economic problems in Hungary, most notably the creation of sovereign debtors’ banks that now require central banks to lend more and allow investors to borrow to do business in the private sector.
In fact, the German Federal Federal Bank of Eisendorf allowed for all this – to borrow an extremely high amount of money and lend in other countries. The Bank was in fact a self-governing corporation that made a lot of money lending to investors, which was a big reason why it was able to do such a high rate of return as it had with the Bundesbank which caused the country to grow slowly.
What was different in Hungary was that, due to the very high income growth, the interest rates was not even in the 3.95% range. Moreover, the only way to guarantee that your children will succeed in school is to lend them money. In other words, you needed to have a lot of money you could keep for yourself or your family. So on the one hand, all money is money – so in today’s world people borrowed from private banks all the different amounts of money in the world. As a result, it was the central bank of most of the countries that lent out money, only the most economically prepared countries like the U.S., U.K., Denmark and the U.S. had the same ratio of the dollar against the dollar. On the other hand, as a result of being in a foreign currency country, it was easy to go as far as Europe and to buy everything at the euro exchange rate. Therefore, the money had no real value. There were no real reasons why it could not become one of the more common way for investors. After all, it was very cheap and there were all those
From banks perspective, previous years of downturn associated with increasing funding costs and higher risk spreads, but a positive outlook for the housing market, high non-performing loan (NPL) ratios as well as monetary policy and new regulation regarding the capital base of the sector such as Basel III, might have a strong impact on lending standards and the mortgage activity in particularly on the type of funding chosen by Hungarian banks.
In accordance with the analyses of FHB Land Credit and Mortgage Bank Company, I belief