Prices in Hungary (was part of post on Sunday Indo article)


Maybe I'm being very stupid here, but if it does not make sense to use the carry trade to make a cash deposit from CHF to HUF due to risk, why does it make perfect sense to some people to use the same carry trade for a mortgage (to buy an investment property in HUF, that generates rental income in HUF, but then to finance the mortgage payments via a loan in CHF)?

Isn't it exactly the same currency risk, except perhaps even bigger because you have no liquidity or flexibility in the mortgage that you would have in a cash deposit if things went pear shaped? I mean if the interest rates are really not that different then why stack up even more risk on what is an already risky venture for a euro based investor?

If the HUF crashes and you have a HUF mortgage, at least your EUR debt liability goes down in line with your EUR income. Whereas in a worst case scenario for the carry trade, the CHF strengthens as a traditional safe haven (liabilites go up), the euro weakens (back up cash goes down), and the HUF catches flu (income & capital value go down).

I got burned (not very badly admittedly) during the last bear stock market, where my US-based stock exchange holdings lost value, but the dollar also went the same way down as the fed pumped liquidity into the system, meaning those holdings were worth even less in euros. I tend to invest mainly in Euro and liquid Sterling based assets because I don't like that sort of nasty surprise.

Or do they get their rental income in CHF?
 
Totally agree with you - it is the same currency risk, but the vast majority of mortgages taken out in Hungary in recent years by locals have been in CHF. As a Euro-based investor, it seems to make sense to borrow in EUR either in your home country or with slightly higher rates in Hungary. Rent for most types of apartment can be set in Euro also when rented out to non-locals. Borrowing in HUF almost never happens anymore as interest rates are crazy.
 

Now that starts to make sense: borrow in Euro's, with rental income in Euro's from ex-pats (if you can find them). I guess ex-pats are the few that can afford these new builds, which would be worrying if the rental market is/gets saturated. You still also have the risk that your capital asset (the property) is priced in HUF, but that is a lower risk that you can potentially ride out, rather than a cash crunch which has immediate effect. I also clearly remember the day Sterling dropped out of ERM: I was earning GBP and spending DEM at the time. Ouch.

Correct me if I'm wrong, but you seem to be suggesting that Budapest is therefore a delineated market. You have ex-pat investors that are chasing ex-pat rentals (in the new builds I'd guess) and locally based investors chasing local rentals (presumably in the classic apartments.) These two markets could have very different dynamics. Or is this an over-simplification?
 
Budapest is a very delineated market but unfortunately it's much more complex than that! One of the main issues in Budapest is the lack of high quality rental accommodation. The vast majority of classic apartments in the city, even in the central districts, are in dire need of renovation, terribly furnished and have some major issue such as no light, building falling apart, unusable layout, noise, location, etc. These are typically owned by locals. A much smaller percentage are furnished to an acceptable standard, usually by foreign investors who purchased a few years ago or wealthier Hungarians. A very small percentage of apartments are furnished to a high standard, priced correctly and have no major issue in relation to the flat itself, the building or the location. The latter properties appeal to local and non-local tenants alike. However, in most cases, expats will be your tenants. In my experience, if you try to rent out one of these latter type of apartments, you will find a tenant very easily. The problem is finding the right apartment!

Locals also purchase new build apartments in certain developments. Some locals consider these quite trendy and 'Western'. In many ways, they are the 'easy' option compared to classic properties, where renovation is almost always required. Secure parking and easier financing are other obvious advantages to new apartments.

The only properties which are heavily marketed to locals over here at the minute are such new build projects in slightly outer districts such as XIII, IX, XI, XIV. Prices are often higher than even perfectly-renovated apartments in perfect buildings in the city centre - just one of many anomalies, which exist in the Bp property market. Certain expats (particularly when parking is a priority) prefer to live in these newer properties, while, typically speaking, younger expats prefer to live in perfect classic apartments in the city centre. Finding a new apartment is a piece of cake, while finding a good classic apartment with no major problems at a realistic price is extremely difficult.
Camry said:
****BUBBLE ALERT****
Click to expand...
Correct, but that bubble burst about four years ago! Lack of proper local financing is one of the major obstacles to capital appreciation at the minute.
 
I think I see what you're referring to, Camry, but this would only be true if locals were borrowing heavily in foreign currencies at low rates. Unfortunately, this is not possible either. CHF mortgages are the most common but LTV rates are quite low and when you add excessive handling charges to the recently-increased risky foreign-currency interest rates, monthly payments are high compared to typical Eurozone mortgage rates. It could be argued that foreigners, by accessing cheaper mortgage rates, could theoretically push up prices artificially but I don't think this has had a particularly significant effect.

Hungary has one of the lowest personal debt levels in Europe and locals prefer not to take out any mortgage where possible, so there is not much liquidity in the marketplace at the minute.
 
budapest said:
Borrowing in HUF almost never happens anymore as interest rates are crazy.
Click to expand...

If it's crazy to borrow in the local currency to fund the purchase of local assets, isn't is even more insane to borrow in some other currency? I'm not even remotely close to what is going on in Hungary, but on the surface it seems like a classic herd approach. "Everyone is doing it so...". Ouch. Pyramids, bubbles and crashs come to mind. For people who are doing this, are they not entering into two large and risky investment/gambling ventures:

1. €200k (say) dependant on the movement in currency rates between the HUF and CHF

2. €200k (say) dependant on the net total return from an investment in the Hungarian property market.

I wouldn't even spend €5k buying a car in Hungary funded by a swiss franc loan, much less spend €100k or €200k on a property asset. What is depressing is that I can walk into the RDS and have 20 year olds selling both of the above investments to me. I can walk past an auctioneers window in Athlone and see these being advertised. Crazy? Crazy indeed. At best, both of the above sound like extremely high risk investments and frankly neither sound appealing. It's difficult to know who has the know-how to understand the factors that might impact either or both of these investments, other than multi-millionaries who might be willing to take a risk with a very small part of their money. For those who have the neck and money to gamble, best of luck to you.
 
I think the main reason why most locals borrow in CHF is simple - because for the past few years, interest rates have been extremely low and rates for HUF are extremely high. Even though there is a risk involved, monthly payments have tended to be much lower and every forint counts at the minute for cash-strapped locals. In addition, banks are pushing this route.

CHF rates have increased somewhat in the recent past, but in any case, it seems to make more sense for the EUR-based investor to finance with EUR rather than CHF. The EUR/HUF rate is more stable as the Hungarian government will intervene if it moves too far in either direction. Rents can also be fixed in EUR. 5-7 years into the mortgage, it will by default become a EUR mortgage anyway.

Most investors seem to take a very short-term view of overseas markets. In my opinion, the fact that Budapest is doing okay considering the fact that locals are having to cope with incredibly tough economic measures is very significant. Secondly, FDI stock per capita in the region for end of last year still puts Hungary well ahead of its neighbouring countries:

Czech Republic: EUR 5,719
Hungary: EUR 6,170
Poland: EUR 2,361
Slovakia: EUR 3,338
Slovenia: EUR 3,133
 
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