_ Szabolcs Pásztor, associate professor, National Public Service University, senior analyst, Oeconomus Economic Research Foundation. Budapest, 9 November 2023.*
In Hungary, it is still a novelty to support young first-time home buyers with targeted and larger discounts, however, similar initiatives have already started in other countries, including Poland and the United Kingdom. The purpose of these is to ease the housing crisis and get young people into housing as soon as possible. The brief comparison can direct attention to the approach of other countries and shape the perception of the not yet concreted domestic framework. The overview of the Polish example is particularly emphasized because of the economic, historical and cultural analogies.
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The MNB announced in mid-October 2023 that it is preparing a new plan for young borrowers buying their first home. For the time being, the central bank identifies that due to the expected transformation of family subsidies and the difficulty of generating self-reliance for borrowers buying their first home, the possibility of obtaining a home does not improve, and sometimes worsens. According to the plans, in the first half of 2024, the self-financing requirement would be reduced from the current 20% to 10%, and in line with international examples, the uniform 80% loan-to-value limit would be relaxed by reducing the mandatory self-financing of first-time home buyers. This 10% self-reliance requirement would only apply to young borrowers buying their first home , which would mean a relief of HUF 3 million in the case of a HUF 30 million home purchase.
It is precisely about the fact that the central bank recommends the use of discounted loan coverage ratios (HFM) to commercial banks in order to support their home loan options among those buying their first home . Among the underlying reasons, we find that housing prices have risen extremely rapidly in recent years, and it has become significantly more difficult for young people with little savings and low incomes to buy a home. In any case, the central bank does not consider the measure to be risky because the affected clientele typically represents a low risk, as the income of young debtors and those moving up the ladder is expected to increase in the future .
Among young borrowers, the proportion of loans granted with low self-worth was around 30-40 percent in 2022, which meant a HFM value of over 70 percent. Currently, the mandatory self-sufficiency is a minimum of 20 percent. The proportion of loans granted with a stretched HFM value was particularly significant among sole borrowers who were not eligible for state aid. Buying a home is an insurmountable challenge for the majority of people without loan financing, but banks lend up to a maximum of 80 percent of the estimated market value of the property to be purchased, meaning that at least 20 percent of your own capital is definitely required.
In the case of young first-time home buyers, therefore, in accordance with international examples, it may be appropriate to set the HFM limits differentiated at 90 percent. One of the tangible benefits of this, even in the short term, may be that young people can get an apartment years earlier . It is also a well-known fact for commercial banks that young home buyers save for an average of 10 years just for their own money . This is also a problem because the difficulty of getting an independent apartment can also cause demographic problems , because many people do not want to have children until they get their own apartment. However, there may be a downside to this step, as the introduction may further increase the rate of home ownership, which is already in the range of over 90%. All of this can be a problem because the capital of households continues to be concentrated in the real estate sector, instead of directly helping the blood circulation of the economy.
This is the first time an initiative of this kind is taking place in Hungary, but there are already countries within the V4 region where this scheme has already been introduced. Poland offers a good basis for comparison, as the recent election in the country also highlighted that housing, and especially the acquisition of real estate for first-time home buyers, is a stressful problem. Among the reasons for this, we find the record increase in real estate prices, the rising interest rates of the year 2022 and the available real estate supply. In addition, the demand for real estate increased even more with the arrival of more than 1.3 million Ukrainian refugees. All this was not always a problem, because until recently real estate developers were faced with soaring demand, which was accompanied by an extraordinary number of new real estate transfers in 2021. This process was mainly supported by the record low interest rates introduced by the central bank during the pandemic. However, the trend came to a complete halt when the central bank started raising interest rates to combat inflation. Since last September, the benchmark interest rate has been at 6.75%, which was only 0.1% during the height of the pandemic. The increase in the cost of loans reduced interest in mortgage loans by about 70% . And this had visible “results”: last year, sales of new properties in Poland’s seven largest cities fell by 38% . This had little effect on prices, as they not only decreased, but also increased by 9% per square meter.
There are also initiatives around renovation and remodeling, because according to the 2021 census, almost 2 million apartments – roughly 12% of the total – are uninhabited in Poland . In Warsaw, roughly 207,000 apartments, one fifth, were empty. According to some estimates, 2.2 million apartments would be needed in Poland. However, the estimates are very scattered: they fall between 650 thousand and 4 million.
Noticing these trends, on July 1, 2023, the Polish government introduced a new law that makes it easier to buy a first apartment or house. The initiative offers loan interest support for the first 10 years of the loan period, which is why the time has come for many to buy a new home. More precisely, it is possible to take out a 2% subsidized mortgage loan . In addition, foreigners can use this opportunity in addition to Poles, but only if they have not yet reached the age of 45. In the case of couples, it is sufficient if one of them fulfills this requirement, i.e. the other party can be older than this.
Of course, only first-time home owners are eligible, and neither member of the couple can own another property. The rules are strict and the restriction also applies to the case where one of the parties already had property but sold it. The discount cannot be used even if someone is currently paying off a mortgage loan, or if they may have had such a mortgage loan contract before. The maximum value of the loan is PLN 500,000 for singles and PLN 600,000 for spouses (married or unmarried with at least one child). The maximum value of the deductible of 200,000 puts the maximum value of the purchase between 700 and 800,000 PLN. At the same time, a housing savings package is also possible, which offers an interest rate equal to inflation or the housing price index. Those who deposit between PLN 500 and PLN 2,000 into their savings account at least 11 times a year over a period of three to ten years, and spend the accumulated amount on the purchase of real estate in the following 5 years, will be entitled to an additional bonus, which is adjusted to the inflation measured during the savings period they adjust.
According to another initiative, no capital is required and the purchase of the property can be 100% covered by a loan. The missing deductible (20% under normal circumstances) is provided by the state-owned development bank, BGK (Bank Gospodarstwa Krajowego). You have to pay a fee of 1% in total, but only because the deductible is 0%. An example is the case where someone buys an apartment for PLN 500,000. Normally, 20% (PLN 100,000 must be paid) and the remaining PLN 400,000 is the mortgage loan. In the case of the 2% interest subsidy, the entire loan amount (500,000) is covered by a mortgage loan. You only have to pay PLN 1000 for the missing self-power (100 thousand * 1%).
However, there is also a bottleneck in the system: the maximum amount guaranteed by the entire BGK can be PLN 100,000. If the couple were to buy a property worth PLN 600,000, then 20% of PLN 600,000 is 120,000, but the maximum commitment is PLN 100,000. In this case, 580 thousand can be secured with the help of a loan, but the remaining PLN 20 thousand must be paid from savings, which appears as self-sufficiency.
In many cases, the use of the property is immediately restricted. In certain cases, subsidies are withdrawn: (i) if the property is sold or rented out within the first 10 years, (ii) or if another property is purchased for residential purposes. Each of these means that if the bank realizes that one of them has been implemented, the subsidy will be frozen immediately and the mortgage loan will switch to standard, where the interest rate is higher. In two cases, all subsidies that were previously paid must be repaid: (i) if the mortgage loan was repaid in the first three years, (ii) and if misleading information was included during the application for the mortgage loan and this was reported by the bank to the authorities indicates to, and the customer is condemned. There are some restrictions regarding earlier repayment, but only for the first three years. On the one hand, it is not possible to repay an amount greater than 20% of the loan, and on the other hand, any repayment and repayment is allowed after three years.
Despite the strict rules and restrictions, the schemes are very attractive, because currently the interest rate on mortgage loans available at Polish banks is around 7%, so a loan with a fixed interest rate of 2% is particularly favorable. As mentioned earlier, the programs are also available to those who do not have Polish citizenship. The only requirement is that the foreign citizen lives in Poland and earns enough to qualify for credit.
The measures are expected to increase demand for real estate, which will be met with lower supply for a while. After the significant increase in mortgage interest rates in 2022, the market basically collapsed, as lending fell by more than 50% in terms of volume and many real estate developers decided to freeze their new investments for the time being. Since the cycle in the construction industry takes more than two years, there is no possibility of a quick adjustment on the supply side. For this very reason, expectations are wide in the sense that further price increases are expected on the real estate market. The initiative will last until 2027, but many people are already criticizing the Polish approach and arguing that banks will increase their margins in the case of subsidized loans, and in the next step real estate developers will do the same, and this ultimately means that housing becomes even more expensive.
In the United Kingdom, they are already ahead of the Polish and Hungarian initiatives on this issue, because the so-called First Home scheme, which provides a discount for first-time home buyers . The bottom line is that in the case of first-time home buyers, you can buy a home for 30 or even 50% less than the market value. The property can be new and built by a real estate developer, or it can be used, but in this case the purchase is made from someone who originally acquired it earlier within the framework of the program. This initiative is only available in the UK and will save the average new build property in England around £100,000.
Within the framework of the program, first-time buyers aged 18 or older can get a mortgage loan for up to half of the price of the apartment, where the household income does not reach 80,000 British pounds (GBP), (90,000 British pounds in the case of London). In addition, the local council can formulate additional conditions: for example, they can define the range of essential and vital workers, identify those who already live in the affected settlement or receive a modest income.
The program works in such a way that, as a first step, prospective buyers can choose from the advertisements in the given settlement or region that include properties advertised in the First Home scheme program. The real estate developers sell these apartments to the first owners at a 30-50% discount in all cases. In the case of transactions, an independent expert examines whether the discount applies to the real market price. Homes cannot cost more than £400,000 in London or £250,000 elsewhere in the UK after the discount has been claimed . After that, the apartment can only be sold to someone who is entitled to buy within the framework of the First Home initiative. In this case, the same percentage discount that the previous owner received must be provided, and this is based on the market price at the time of sale.
The first 2021 First Homes properties went on sale in Bolsover, West Midlands, in June. Since then, First Home properties have also been offered in Staffordshire and Durham, and another site has been announced in Hampshire, where 310 homes will be available to buy under the scheme. Of course, there are also critical voices for this program, despite the fact that it is not yet possible to study the long-term effects over decades. According to some experts, the program interferes with the balance of supply and demand, which could ultimately increase house prices more in the long run. The long-term effect can therefore be particularly harmful. However, the building companies have an indisputable interest in keeping house prices high, so if they are arguing against the government’s First Homes programme, they are probably more concerned that it will push house prices down. According to others, this is the more likely scenario, since more people are able to buy a cheaper apartment for the first time, which in the longer term will/may have an impact on the other rungs of the home ownership ladder. Special concerns also arose regarding the fact that the program could reduce the number of affordable and social rental apartments. Much depends on how many of these new properties can be built in a relatively short time.
After reviewing the emerging Hungarian initiative and two already implemented grants for access to housing, it is clear that the measures are, on the one hand, not accidental: there is an acute housing crisis in the case of young people, and on the other hand, governments are not entrusting the solution to the problem to the market. Initiatives have already been launched in many countries that aim to improve the access to housing for young families with the help of larger discounts. The Hungarian program to be introduced shows many similarities with the Polish one, but many questions are still open, and the United Kingdom’s First Home program offers a unique solution that differentiates between real estate and real estate, and therefore offers an alternative with a more market-oriented and a less market-oriented solution.
*Republished from the original publication with the Oeconomus Economic Research Foundation.