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Milestones in European
Housing Finance
Edited by
)ens Lunde
Assocíate Professor
Department of Finance, Copenhagen Business School
Christine Whitehead
Emeritus Professor in Housing Economics
Department oÍ Economics, London School of Economics
WILEY Blackwell
This edition first published 2016
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Milestones in European housing ffnance / edited by fens Lunde, Christine Whitehead.
pages cm
Inc1udes biblíographical re{erences and index.
ISBN 978-1-1 1 8-92945-2 {c1oth)
1. Housing-Europe-Finance-History. I. Lunde, Jens, editor. I1. Whitehead,
Christine M. E., editor.
HD7332.A4M55 2016
332.7'22-dc23 2or5026160
A cata1ogue record for this book is avaílable from the British Library.
Wiley also publishes its books in a variety o{ electronlc formats. Some content that appears in
pÍint may not be available in e1ectlonic books'
Set in 10/13pt Trump Mediaeval by SPi G1obal, Pondicherry, India
Printed and bound in Malaysia by Vivar Printing Sdn Bhd
1 2016
Contents
Notes on Contributors
Forcword by David Miles, Professor of Financial Economics,
Impefial C ollege, London
Acknowledgements
1 Introduction: Milestones in European Housing
Fínance since 1989
lens Lunde and Christine Whitehead
Why analyse developments in housing finance?
Defining housing finance
The countries
Trends in mortgage systems
Mortgage debt and house price increases - enabling each other?
Conclusions
References
2 European Housing Finance Models in 1989 and'2014
lens Lunde and Christine Whitehead
Introduction
MoÍtgáge SyStemS
Funding the supply of mortgages
Mortgage cha racteristics
Overview
References
3 Australia's 25 Years with a Deregulated Housing
Finance System: Looking Back and Looking Forward
Tudith Yates and MarÍa Be]én Yanotti
The economic and institutional environment of the last 25 years
Key milestones
Impacts and implications oÍ changes
Emerging issues
Conclusion
Acknowle dgements
References
4 Milestones in Housing Finance in Austria over
the Last 25 Years
Alexis Mundt and Elisabeth Springler
The economic and institutional environment of the last 25 years
Finance milestones
xxí
xxiii
I
3
4
5
7
13
I4
t5
15
I6
ZT
z5
a1
J.)
35
ct
39
43
4B
5i
51
52
37
55
55
57
viii Contents
Impacts and outcomes
Looking to the future
Acknowledgements
References
66
70
7T
7T
Milestones in 25 Years of Housing Finance in Belgium 75
Sien Winters and Katleen Van den Broeck
Introduction 75
The Belgian housing finance system 76
The economic and institutional environment of the last
25 years in Belgium
Milestones during the last 25 years of housing finance in Belgium
Impacts
Lookíng to the Íuture
Acknowledgements
References
Milestones in Housing Finance in the
Czech Republic since 1990
Petr Sunega and Martin Lux
Introduction
Milestones in housing finance
Impacts
Future prospects
Acknowledgements
Notes
References
Milestones in Danish Housing Finance since 1990
lens Lunde
Introduction
The economíc environment of the last 25 yearc
The Danish mortgage system
Key milestones
The impacts of these milestones over the last 25 years
Paralle1 development in house prices and
owner-occupiers' net debt
The housing crisis, the nationalbanking crísis and
the Global Financial Crisis
The aftermath
The rescue operatíons
Looking to the future
Acknowledgements
References
76
77
86
8B
B9
89
93
93
9s
r02
106
10ó
106
107
109
109
110
111
113
I17
118
IZL
123
r24
I24
I25
IZ6
Content,s ix
Milestones in Housing Finance in England
Kathleen Scanlon and Henrvk Adamczuk
Introduction I27
The economic and ínstitutional environment of the last 25 vears I2B
Milestones in private housing finance IZB
Milestones in social and affordable housing finance 136
Impacts 138
Looking to the future L4Z
Note I43
References I44
Milestones in Housing Finance in Finland 147
Timo Töhtinen and Tommi Laanti
Introduction
Key milestones
Impacts and implications of changes
Looking to the Íuture
References
Further reading
Milestones of Housing Finance in France between 1988
and2014: Is the Ftench Credit System a Gallic Oddity?
Christian Tutin and Bernard Vorms
Introduction: A quarter of a century Iater
Finance milestones
Specifics of French housing finance
Impacts
Looking to the future
Conclusions
References
Milestones in the Development of the German
Housing Finance System in the Last 25 Years
Stefan Kofner
The initial situation in 1989
Milestones at a glance
German reuniftcation (1990): A friendly takeover
by the white knight? 184
The conversion of homeownership subsidisation from a tax to
a gÍant System |1996|: Heading Íor a new balance of tenures? 186
Integration and deregulation of capital markets:
127
10
147
148
I54
161
r62
r62
1ó5
16s
I66
17T
175
179
180
181
183
183
184
11
risks for the Íuture?
Trying to run a housing system without subsidies r87
190
x Contents
Measures to Íescue the ffnancial system since 2008
The dynamics of the German system of housing
finance since l9B9
Notes
ReÍerences
12 Moving from an Authoritarian State System to an
Authoritadan Market System: Housing Finance
Milestones in Hungary between 1979 and,20t4
[ózsef Hegedüs and Eszter Somogyi
From socialism to capitalism: the economic
and institutional environment
Finance milestones in the housing system
Impacts
The Íuture of the housing finance System
References
13 Housing Finance in Iceland: Milestones 1989-2014
Lúővík E]íasson and Magnús Árni Skú]ason
Introduction ZI9
The economic and institutíonal environment of the past 25 years zzo
The bumpy ride of Icelandic housing finance ZZI
Impacts 232
Looking to the future 235
References 237
14 Milestones in 25 Years of Housing Finance in Ireland 239
Padraic Kenna
Key mílestones
Emerging issues
Conclusion
Acknowledgements
Notes
References
15 Milestones in Housing Finance in the Netherlands, 1988-2013
Marja Elsinga, Hugo Priemus and Peter Boelhouwer
Introduction
Milestones over the three periods
Impacts
Reflection
Acknowledgements
ReÍerences
191
196
198
198
201
z0r
204
214
zr6
2r7
219
239
248
251.
z5z
252
253
255
255
256
265
270
27r
27r
Í6 Housing Finance in Norway: The Last 25 Years
Rolf Barlindhaug
Introduction
The economíc and institutional environment
oÍ the last 25 years
Finance milestones
The financial crisis
Impacts of the housing ffnance milestones
Looking into the future
Conclusion
Acknowledgements
References
Milestones of Housing Finance in Poland
Marta Widlak and lacak Laszek
Introduction
Housing finance milestones
Impact oÍ housing finance milestones in Poland
in the last 25 years 301
Looking towards the future 307
References 308
18 The Housing Finance System in Portugal since the 1980s 309
Romana Xerez and laime R. S. Fonseca
Introduction
Context: alegacy of family financing, the impact of
the I974 revolution and the period to 1989
Milestones in the development of the Portuguese
housing market and housing ffnance since 1989
Impacts
Conclusions
Acknowledgements
References
Í9 Evolution of the Housing Finance System in Russia
Maria Plotnikova, Andrey Tumanov and Evgeniya Zhelezova
lntroduction 325
Brief review of basic features of the Soviet era housing system 326
The housing system during the transition to a market
economy (1990s)
Forming the basis for a housing mortgage financing
system 11997-2005)
Between the market and the state (2005-2013)
Contents xi
273
273
274
275
ZBI
283
286
zB7
2BB
2BB
291
29L
292
17
310
313
319
3Zr
323
OLJ
325
328
329
ÓÓJ
20
xii Contents
State programmes to stimulate housing demand and supply
The effect of the GFC
What lies ahead?
References
Housing Finance in Slovenia: From a National Housing
Fund to a Bank-Driven SYstem
Andreia Cirman and Richard Sendi
The economic and institutional environment
of the last 25 years
Major policy changes
Impacts
Looking to the Íuture
References
Housing Finance in Spaín: From the Liberalisation
of the MoÍtgage Market to Booms and Busts
Irene Pefia and Baralides Albetdi
The economic and institutional environment oÍ
the last 25 years 359
Finance mílestones 360
The impact oÍ these milestones oveÍ the last 25 years 367
Looking to the Íuture: financing into the future 37z
References 374
aa )
i)Ói')
óóD
1aa
oo/
339
34r
34r
342
ÓJ.]
356
Ó5/
359
z1
22 Milestones in Swedish Housing Finance
Peter Englund
Background
Key milestones
Impacts
Looking to the Íuture
ReÍerences
Housing Finance in Turkey oveÍ the Last 25 Years:
Good, Bad or Ugly?
Yener CoEkun
Introduction
The Turkish housing finance System oveÍ the
last 25 years from a marketisation perspective
Finance milestones: The rise o{ marketisation and
changes in housing finance
Impacts of the transíormatíon o{ the housing finance System
Future trends in housing finance markets
375
375
378
386
389
390
393
393
394
400
402
405
Gated communities and housing ffnance
Conc1usíons
Acknowledgements
References
Milestones in EU Housing and Mortgage Markets
|annifer |ohnson, Lorenzo Isgrö and Sylvain Bouyon
Mílestones in EU housing and mortgage markets
1990-2000 - Milestones: The Single European Market,
dereguiation and consolidation and product innovation
2001-2008 - Mílestones: EU focus on mortgáge credit,
growth of covered bonds and adoption of the Capital
Requírements Directive (CRD)
2008-ZOI4 - Milestones: Restoring ffnancial stability,
consumeÍ protection and unlockíng long-term ffnancing
Conclusion
References
Following On From a Quarter of a Century of Mortgage Debt
lens Lunde and Christine Whitehead
Introduction: 1989 and 2014
Trends in mortgage SyStemS over the quaÍteÍ
centuly
The impact of the GFC
Conclusions: looking back and looking Íorward
ReÍerences
Contents xiii
405
408
409
4r0
413
413
413
418
433
433
436
439
443
446
447
42r
428
430
Index
12
Moving from an Authoritarian State
System to an Authoritarian Market
System: Housing Finance Milestones
in HungaÍy between L979 and 2014
lózseÍ Hegedüs and Eszter Somogyi
Metr op olitan R e s e ar ch I n stitut e, Bu d ap e s t, Hun g ary
From socialism to capitalism: the economic
and institutional environment
In the last three decades, Hungary has undergone a radical social, economic
and political transition. Despite being a small country without sígnificant
natural resources/ Hungary has always been strongly connected to the giobal
economy. The housing finance system in Hungary moved from a state
controlled ar-rthoritarian system in the 1980s to a fully developed liberalised
System in the 1990s. This was Íollowed by a lending surge in the early 2000s
that lasted until 2008 when the full impact of the G1obal Financial Crisis
{GFC) reached Hungary. The GFC 1eÍt the housing finance System in a State
of confusion and regulatory measures were quickly introduced, some of
which were considered'unorthodox'.
Looking over the past 30-35 yearst it is possible to distinguish four main
stages in the development of the housing finance system and the housing
market in Hungary, each characterised by a diÍferent economic and institu-
tional environment. These can be categorised as:
o 1979*1990 Moving towards an authoritarian market society under
socialism.
Milestones in European Hottsing Finance, First Edition.
Edited by jens Lunde and Christine Whlteheacl.
o 20i6 |ohn Wi1ey & Sons, Ltd. Published 2076by |ohn Wíley & Sons' Ltd,
202 Milestones in European Housing Finance
o I99I-2oo0 Transition to a market Society: initial recession and ÍecoveÍy.
o 200I-2008 Dynamic gÍowth and irresponsible fisca1 policy: state and
market failures.
o 2009-present Crisis management: from 'orthodox' to an ,unorthodox,
approach.
The first stage lies technically outside the remit of this book, which starts
in the late 19B0s. F{owever, because oÍ the very radical changes that took
place both before and after that date it seems appropriate in the Hungarian
context to StaÍt with the decade before the fall of the Berlin Wall' Without
understandíng the ple-tÍansition housing finance System/ especíally the
house-price bubble, economic recession and housing loan crises prior to
transition, it would be difficuit to explain the main trends in the 1990s. The
economic hardships faced by Eastern European socialist socíeties in
the 1980s were rooted in the inefficiency of state socialism. However, the
pÍocess of their economic decline was exacerbated by the oi1 price crisis of
1973. HungaÍy Car:.;re very close to State bankruptcy in the early 1980s and'
as a last ÍesoÍt
(with the implicit Consent of the Soviet Union), joined the
IMF in 1982, gaining access to the financial resources of the international
capital market. The government introduced several measures to support the
decentralisation of the state sector (e.g. local councils and state companies
gained more independence, the second economy was partially acknowl-
edged, foreign investments Were íntensiíied and a two-tier bank System was
introduced). By the end of the 19B0s Íoreign debt and debt service had
increased, íncreasing the budget deficit as palt of an aggravated fisca1 crisis.
Concurrently, economic productivity was stagnating, forcing the political
elite to eventua1ly accept the inevitability oÍ a regime change as the Soviet
Union dissolved.
From 1990 to 2000, Hungary moved from a state controlled planned
economy toward a liberal market economy through relevant economic
StÍategies such as price 1iberalisation, privatisation of state-owned enter-
prises and the consolidatíon and privatisation of banks. As a result oí the
transitional recession GDP fellby 15 percent in the first part of the 1990s.
After introducing a strict austerity programme in 1996 (the so-called Bokros
pÍogÍamme) the economy started to ÍecoveÍ
and by the end of the decade the
GDP gradually returned to its pre,transition level. The informal economy
remained vast, estimated to account Íor 25{,3 pelcent of the GDP between
1990 and 1997 (LacI<ó 2000). Poverty also became an important problem as
social and regional inequalities continued to grow, albeit at a slower pace
than during the previous decade.
Beginning in 2000, economic policy became more optimistic and shifted
íts focus from austerity to a demand-oriented model (in which housing
finance played an important role). Global economic prosperity and the
money market boom only Íuelled irresponsible government po1icies. InZOO4
Hungary ZO3
Hungary joined the European lJnion, {urther fostering the belief in economic
gÍowth. A major element of the development during this period was the
intensive growth of the residential mortgage market, initially supported by
huge state subsidies (until 2004) and later through foreign resouÍces/
especia1ly noÍtgage loans denominated in foreign curlency with 1ow variable
interest rates and high risk factors for the borrowing households.
Foreign Direct Investments continued to flow into Hungary, which,
thanks to the increase in EU Structura1 Funds, contríbuted to growth in the
economy. Household consumption funded by loans continued to increase
until September 2008, while industrial production, employment and exports
fell. The irresponsible fiscal and monetary policy leÍt Hungary with a fragtle
and vulnerable economy, weakened even further by the detrimental effects
of the GFC in 2008.
Between 2008 and 2010, the government followed traditional crísis
management policies by taking an IMF loan of $25 bn, introducing austerity
measures such as goveÍnment expenditule cuts (afÍecting housing subsidies,
pensions, salaries in the public sector and more) and levying special taxes on
banks and energy service companies. The government successfully decreased
the budget deficit fuorl;.9.2 percent of the GDP in 2006 to 3.3 percent in 2010
and kept inÍlation under control at 4.z peÍcent in 2009 (as opposed to
ó.1 percent in 2008). Nevertheless, the Hungarian economy grew by
only 1 peÍcent ínZo07 and contracted by 6.3 percent in2oo9.
After 2010, the new conservative goveÍnment (which was elected in 2010
and re-elected in 2014 with a two-thirds maiority) introduced an unorthodox
economic (and polítical) regíme, which deployed populist measules to move
toward an authoritarian political system. As a method of crisis manage-
ment, this policy tried to avoid the economically necessary direct austedty
measuIes and instead utilised economic IeSerVeS (like the pÍivate pension
funds) and imposed special taxes on foreígn owned companies (banks, eneÍgy
companies and commercíal companies). At the same time, it froze uttllty
prices (a subsidy to all activities), introduced a regressive Í).at rate income
tax and cut social expenditures. These developments weÍe considered by
some observers as a step toward building up 'crony capitalism'. However,
long term Íecovery necessitates austerity measuÍes/ either by cutting expen-
ditures (decreasing salaries etc.), by imposing taxes/ or by allowing inflation
(through devaluation oÍ the national currency) to decrease living standards
and increase productivity through lower wages. The government did not
have a master plan to restÍuctule the economy and the measures taken
appeared more like a series oÍ ad hoc, trial-and-error decisions. These politi-
cal changes had an impact on housing finance in two main ways: they placed
the blame on banks for the crisis and they eliminated the foreign exchange
(FX) loan port{olio, which set a political constraint on devaluation.
Consecluently, the new government's very different approach was dubbed
an unorthodox policy in the media. Thanks to its strong political support,
ZO4 Milestones in European Housing Finance
the government was able to expand its powers so that when its ffscal plan to
increase the deficit was rejected by the EU, the goveÍnment started a,Íree-
dom fight' against foreign-owned banks and international companies.
Finance milestones in the housing system
Although there have always been time-lags between major polícy deci-
sions and the ensuing change in the institutional legislation and market
processes/ the development of the housing finance system has remained
closely connected to larger political and economic periods in Hungary (See
Figure 12.1).
1980-1989: lntroducing market elements in the housing
System under budgetary pÍessuÍe
Hungary represented one oÍ the most lilrera1 models of the centrally planned
economy, which could partly be explained by the political consolidation of
the Kádár administration {the first secretary of the communist party from
1956 to 198B) followíng the 1956 Revolution. The introduction of the 'new
economic mechanism' tn 1968 illustrated the desire for a more decentral-
ised and more efficient economic System/ which was Vastly curtaíled by the
collapse of the Prague Spring in 1968. The housing system had a dual
'market' StÍuctule. In the State sectoÍ, there were different, directly
controlled allocation channels (typically affecting not only the council
housing stock, but the privately owned urban prefabricated housing stock as
well) where income and need factors helped determine who obtained that
housing. In the private sector, household income and informal social
networks played determiníng roles. Both sectors worked within the limits
of the centrai planníng System/ which regulated the supp1y oÍ building mate-
ria1, accessibility of labour for private construction, the construction indus-
try and access to finance' Moteover, the amount oÍ property owned by
individual families was also controlled: one family was legally ailowed to
own only one primary housing unit and one secondary unit.
The housing finance system in the socialist housing model was based on
the centrally controlled state-owned bank (National Saving Banks - referred
as 'OTP' in this article, based on its Hungarian acronym), appropriations
from the state budget and, as a supplement, contributions from state-owned
companíes. The typica1 Ioan product |3í-year,low fixed inteÍest rate loans
at around 1.5-3 percent) can aiso be considered as involving subsidy. There
was no proper underwriting procedure in place; instead, eligible households
assigned by the state housing agencies (councils, large state-owned enter-
prises, oTP and housíng cooperatives) as potential buyers had automatic
rights to the subsidy and the loan. In 1973, Íot example,35 percent of the
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206 Milestones in European Housing Finance
total investment in the state contÍolled Sector was financed through loans'
53 percent through budget subsidies and 12 pelcent Írom households'
SaVingS/ while in the private SectoÍ the respective contributions were
24percent,1 percent and75 peÍcent respectively (Hegedüs and Tosics 1996:
249). An officíal salary requirement provided a safeguard against the risk of
non-páyment or default and, thanks to Wage security and fu1l employment
policies, lending did not present any significant risk to OTP.
As the macroeconomic conditions of Hungary worsened at the turn of
1980, housing policy became moÍe open to the market in the hope that
increasing the incentives for private actors to invest in housing could ease
the budgetary burden while maintaining the volume of the output (See
Figures I2.2 and 12.3). Financial disadvantages faced by the private sector
300
250
200
150
100
50
0
lvloving towards authoratarian
market societV
lvloving towards authoratarian
market society
Transition to the
liberal market system Unbalanced economic Crisis
growth management
30%
257Ó
2oa/Ó
10%
5%
0%
- Real house price (1980- 100) - left axis - - - Ratio of housing loan to GDP - right axis
Figure'12.2 House price and loan to GDP ratio in Hungary, 1980-2013.
Sources: House price data from 1980 to 1998 are expert estimates based on OTP price data,
surveys and otheÍ sources; from 199B, FHB (2014).
Data on new construction are Írom Central Statistical oÍÍice
(various years).
Data on the housing loan portfolio between 19B0 and 19B5 are Írom oTP (1986).
Housing loan portfolio data between 1986 and 20'l4 is Írom Hungarian Nationa| Bank statistics
(various years).
1990 1992 1996 1998 2000 2002 2004 2006 2008 2010 2012
Transition to the
liberal market system
100
90
BO
70
60
50
40
30
2A
10
0
135
130
125
120
115
110
105
100
95
90
85
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NO
Óo
NN
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oooooÓooÓooo--
orooooooooooo9
--NNNNNNNNNNN(\
* * . New housing construction (in ihousand) - left axls - Real income (1980= 100) - right axis
Figure 12.3 Housing construction and real income in Hungary 1980-2013.
Source-. Central Statistical Office (various years).
Hungary ZO7
Table 12.1 Tenure structure, 1970-2011.
1970 1980 201'l
Owner Occupied
Municipal housing
Corporate housing
Private rental and other
Total
Source: Central Statistical Office (various years).
Were diminished by making private sing1e-family house building (selÍ_help
constÍuction) eligible for construction subsidies, increasing the upper ceil-
ing of the OTP loan, permitting the use of an employers' credit and even
offering local counci1 housing gÍants. As a result, the proportion of owner-
occupation increased {Tabie 12.1). otheÍ measules to plomote private
investment involved increasing the supply of available land (Hegedüs 1992).
From 1985 small savings cooperatives had the right to issue housing loans,
which in principle introduced competition within the sector. Despite this,
OTP retained its monopoly position in the housing finance system (it con-
trolied 85 percent of the loan portfolio in 1989).
In spite oÍ the policy changes, housing output decreased in the late 1980s
(Figure 12.3). Market house prices increased by 150 peÍcent between 1980
and 1989 (Figure 12.2) and OTP had difficulty selling new subsidised apart-
ments in multi-unit buildings in some cities because of their high cost and
a shift in preÍerences (as we11 as the subsidisation oÍ single family home
construction).
The other - and mole important - signs of the crisis were the increase in
interest rates and the technícal bankruptcy oÍ the oTP. The outstanding
housing loan portÍolio increased rapidly ín the 19B0s, from 3 peÍcent to
14 percent of the GDP between 19B0 and 19B9. The poÍtÍolio
of long maturity
and fixed low rate loans (1-3 percent) in the books o{ OTP and other saving
cooperatives led to a huge increase in budgetary outlay as the nominal interest
rate increased.
1989-1999: Transition to a market'based housing finance system
The housing finance system technically went bankrupt in l9BB. Housing
subsidy reached 3.3 percent of GDP in 1989 (World Bank 1991), which was
unmanageab1e. Consequently/ the housing finance System _ oÍ mole
precisely the housing finance subsidy scheme - was changed in 1989. The
intelest tate Íot housing loans was increased from 3 pelcent to 18.B percent
(still not market rate; the rate o{ inflation was 17 pelcent in the same year)
and adjustable-rate moÍtgages were introduced as a standard 1oan product
where the interest Íate was subject to negotiation between oTl the Central
Bank (MNB) and the Ministry of Finance.
66.5%
33.3%
0.3%
100.0%
I 1.3-/o
28.3o/"
02%
'100.0%
72.3%
19.0%
3.7%
5.0%
100.0%
90.0%
ó- / -/o
1.0%
5.3%
100.0%
88.0%
2,7%"
1.0%
8.3%
100.0%
208 Milestones in European Housing Finance
To decrease the budget burden, the new goveÍnment tn l99o levied a
'special tax' on persons who borrowed in the 1980s. It offered two options to
the borrowers: (i) either half of the loan would be discharged and the remain-
ing part would be paid back at market rate or (ii) the total outstanding loan
would henceforth caÍÍy a fixed 15 pelcent interest rate. By 1997, 83 pelcent
oÍ the 1oans had been paid back using the first option, amounting to 6 percent
of the average GDP between 1989 and 1996. Even with this reduced burden,
subsidies related to these old loans represented a huge share of the housing
budget (49 percent and29 percent of the housing subsidies in 1992 arrd 1994
respectively) (Hegedüs and Tosics 1996: BB).
The other major change in the housing sector was the drastic 'give-away'
privatisation pÍogramme, which had started at the end of the 1980s but
gained real momentum with the Housing Law oÍ 1993, which gave sitting
tenants the Right to Buy (or to purchase their rental home at a discount).
From 1990 until 2001, the municipally owned public rental stock decreased
by 74 percent, from 721000 to 189000. Sitting tenants typically paid l0-15
percent of the market price. This resulted in grave consequences for social
housing policy after the transitíon, but it also meant an immediate relief for
the budget, partly in the form of revenue from the sold housing stock and
partly from the redemption of state subsidy frorn the rehabí1itation of
municipal stock.
In the second half of the 1990s two new housing finance institutions were
set up: contract savings banks and mortgage banks. State subsidised con-
tract savings became very popular and by 2000, 8 percent of the households
had contract savings accounts. These were far moÍe a savings product than
a housing loan. The popularity of the contÍact savings schemes was partly
because loan conditions became far less Íavourable with the introductíon oÍ
the new interest rate subsidy system.
The housing subsidy system was very volatile in the 1990s. Changes to
the subsidy system to compensate for the introduction o{ VAT on housing
investment in 1994 had a tempoÍary effect on housing output {see
Figure 12.3). Interestingly, this was the result of a regulatory mistake. The
construction subsidy for families with three or more children was increased
by so much that it covered the tota] cost of the construction ín less devel-
oped regions. Smal1 entlepÍeneurs entered the market and took advantage of
this subsidy scheme, which had a veÍy contIoversial social impact. The
goveInment's housing policy papeÍS adopted the recommendations of the
Wor1d Bank and other internatíonal agencies; they Iaid down the princip1es
for separating the subsidy System from housing finance ancl for taÍgeting
subsidies to households in need.
The housing moÍtgage market and housing output shrank during periods
of high inflation' despite attempts to introduce deferred payment moÍtgages
{DPM) and other housing ConstÍuction subsidies. The proportion of GDP
going to housing decreased from 13 percent to 2 percent and new construction
Httngary
dropped from 50000 to 20000 between 1989 and 1999. The typical loan
product was a variable rate loan ín HUF (Hungarian Forint) with a small
inteÍest rate subsidy and limited size tax exenption for mortgage lepayment
(Hegedüs and Várhegyi 2000)' At the end of the 1990s, the positive macÍoeco-
nomic changes had an effect on households'behaviour; house prices increased
by 150 percent in the three years beÍore moltgage expansion started in 2000.
2OOO_2aaB: Emergence oÍ the mottga1e market
The period between 2000 and 2008 was characterised by the emergence and
rapid expansion oÍ moÍtgage lending in Hungary. By 2000 the overall eco-
nomic períormance of the country had irnproved considerably; the GDP
grew by 4 percent in 2000 and the fiscal deficit had decreased to 2.9 percent.
Furthermore, the unemployment rate fell to around 5-7 percent and after a
1ong period of dec1ine house prices increased by 150 percent in real teÍms
between 199B and 2000. Residential real estate prices decreased by 40% ín
real terms between 1990 and 1998. This context paved the way for new
policy measuÍes and also had a positive effect on housing demand. The
goveÍnÍIent
started to introduce a moÍe intensive housing policy Íocused on
the stimulation oÍ housing constÍuction, which was considered to be a main
driver of economic growth. The most significant element of this policy was
the support for housing n1oÍtgage introduced in 2000 to make mortgages
more affordable (Hegedüs and Somogyi 2005)' An additional element in the
subsidy ploglámme was the Personal Income Tax {PIT) moItgage payment
allowance. Although this had existed since 1994, use of the allowance was
increased substantially during the early 2000s.
Originally the level o{ interest rate subsidies was modest and eligibility
criteria were restricted. Political pressure claiming that only the upper-
middle class was supported by the subsidy scheme and strong lobby activity
backed by the construction industry and later by banks resulted in increased
subsidisation levels and extended eligibility between 2000 and mid-2003.
The interest rate of subsidised ioans Íel1 to around 4_6 percent by 2oo2,
while market interest Íates o{ housing 1oans remained at around 14 percent.
Moreover, in 2002 the government inCreaSed the subsidy Íor cotrtract savings
and the housing construction gÍant/ which was introduced in 1971 to help
families with children to enter the homeownership market by contributing
to their downpayment.
As a corrsequence oi these heavily subsidised moÍtgage loans, the loan
portÍolio rapídly increased {rom a 1evel oÍ HUF 190 bn in 1999 to HUF
1500 bn by 2003 (8 percent of the GDP ín 2003). The net value o{ the mort-
gage subsidy was 50-70 peÍcent of the loan (taking into áccolrnt the two
inteÍest rate subsidies and the PIT al1owance), the same level as in the late
19B0s {Hegedüs and Várhegyi 2000 1637). It became clear that the 1evel of
subsidisation was not Sustainable. Fr-rrtheÍmoÍe/
the social equity effect of
2I0 Milestones in European Housing Finance
the mortgage pÍogramme was Strong1y regressive/ with the upper 20 percent
of households by income distribution receiving 60 percent of the total sub-
sidy and the upper 40 percent oÍ households receiving 80 percent (Hegedüs
and Somogyi 2005: 199-2OZ).
AÍter a long political discussion the government substantially decreased
subsidies for the newly issued mortgage loans at the end of 2003. PIT exemp-
tions for moÍtgage Íepayment were phased out gradual1y and were even-
tually abolished in ZOOT .
The cut in subsidies did not Stop the expansion oÍ the market aS new
foreign exchange (FX) mortgage loans were introduced, which seemed more
afÍordable than the HUF loans with reduced subsidy. The growth in the
stock of outstanding FX housing moÍtgage and home equity 1oans is shown
in Table 12.2. Annual new 1ending in foreign cuÍrency went from a1most
zeto ín 2004 to 90 percent oÍ the moÍtgage portfolio in 2007 ' The interest
rate of Swiss Íranc (CHF) 1oans was around 6 percent, whi1e the market
interest rate for HUF loans was above 10 percent. As Hungary was an EIJ
member and most banks operating in the country were in European owner-
ship, concerns about financing were dismissed. Valkovszky (2000), an
analyst of the Hungarian National Bank, argued that the growth oÍ housing
credit will increase the vulnerability of the Hungarian economy, even if
households borrow in HUF instead of FX, as the source of the loans has to be
financed {rom foreign markets due to the low level of savings in the econ-
omy. Until 2008, it was considered very improbable that the value o{ the
HUF would decrease so much that the financial advantages of the FX loan
would be 1ost. Even in early 2008, there were plans to introduce an incentive
Table 12.2 The stock of outstanding mortgage backed housing loans and equity
loans, 2000-2013.
HUF housing FX housing FX home
mortgage mortgage equity loan
loans loan
Total (in billion HUF/CHF HUF/EUR
HUF)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
98% 2%
98% 2%
98% 2%
99% 1%
84% 77o
67% 190/"
51%" 28o/"
38%o 35o/o
26% 41y"
24% 42%
21"k 42"k
22% 39%
27o/" 34%
28"/" 34"/"
100% 190.8
100% 327.2
1007" 794-6
100% 1531.9
100% 2140.2
100% 2731.6
1000/" 3544.5
100% 4548.4
100% 6156.3
100% 6303"9
100% 6681.6
100% 6677.4
100% 5579.7
10070 5370.9
173.9 264.9
166.2 246.3
162.4 235.9
168.3 262.2
159.3 245.9
162.3 252.7
1570 254.3
152.4 253.4
177.8 264.8
182.3 270.8
222.7 278.8
255.9 311. 1
241.1 291.3
242.1 296.9
0%
o%
9%
14%
21%
2B7o
33%
33o/"
37%
'7ó-/o
39%
39%
Source: Hungarian National Bank (various years)
Hungary 2II
to conveÍt HUF subsidised loans to FX loans in order to decrease the fiscal
pressule on the goveInment (Hegedüs 2010).
Another impoÍtant change in the moltgage lending System began íg2oo4
when the Volume oÍ equity loans surpassed housing loans. The equity loans
also had low interest lates/ but the related underwriting procedures weÍe
much looser as they were backed by one oI moÍe real estate units. The loosened
underwriting conditions (e'g. no pIopeÍ income checking) and irresponsible
lending practices were a result of both the competition among banks and the
poor performance oÍ the Bank Supervision Authority. This meant that
competition among banks developed in the ffe1d of risk taking rather than in
price reduction.
20 0 B-20 1 4 : C tisis m an agem ent
The consequences of the financial crisis on the housing SectoÍ in Hungary
wele veÍy much like those experienced elsewhere (Scanlon et al.2012). Annual
new housing construction decÍeased from an annual output of 36 200 units to
7300 units between 2008 and 2013; real house prices weÍe mole than 30 percent
lower in iate 2013 than in early 2008; housing transactions decreased by
40 percent in the same period and the share o{ non-perÍorming Ioans increased
from 5 percent to 20 percent between 2008 and 2014.
The initial response by the interim govelnment (2009-2010) to the crisis
focused on managing the fisca1 deficit, which was one of the conditions of
the IMF loan (see Figure 12.1). An important element oÍ the fiscal adjust-
ment progÍamme was the drastíc cut oÍ housing subsidies; two moltgage
interest subsidies and the housing constÍuction glant were abolished.
The government introduced an 'orthodox'policy to manage the housing
finance crisis. It launched gradual, Step-by-Step ÍeScue plogÍammes targeted
at households who faced hardships in paying the mortgage (e.g. because of
unemployment, health issues) and negotiated with banks and construction
companies. Such measures introduced included options to ÍeStÍucture
moÍt-
gage loans including an optional tempoÍaÍy decrease of month1y payments
and a moÍtgage-to-rent scheme that offered preferential loans to local
authorities to buy repossessed homes and let the original owneÍ temain as a
tenant in the pÍopeÍty' However, these programmes WeIe approached
cautiously for fear of possible uncontlolled ffsca1 effects; consequently, they
had no e{fect on the stock of nonperforming loans.
Another important measure was the introduction of a moratoÍium on
Íoreclosures up to 1 September 2009, which was later extended until 1 |uly
2012. The rnoratorium was meant to provide protection for defaulting
borrowers untíl a moÍe complex rescue pÍoglamme could be launched.
Flowever, the two yeaÍ moÍatorium posed a risk to the stability of the ffnancial
system because the expectation that defaulting households could rely
on help from the goveÍnment íncreased the share of nonperforming 1oans
2I2 Milestones in European Housing Finance
(HNB 2010). The moratorium has remained an issue of public debate: radi-
ca1 civi1gÍoups have demanded that the moratorium remain, but in 2011 the
goveÍnment made a complomise, phasing out the forec1osure moratorium
through a yearly quota. The quota applied to properties worth below HUF
30 million with a rate of 3 percent rn 2OI2i these standards gradually rose to
5 percent by 2OI4 (that is that amaximum 3 percent and 5 percent of proper-
ties with non-performing loans can be foreclosed). The actual number of
foreclosures, however, reached only 75-85 percent of the quota due to the
weak housing market and the banks choosing other solutions rather than
foreclosing. Nevertheless, right after the last election, in May 2014, the new
parliament introduced a moratorium again {or an undefined period, until a
final solution for the defaulted FX mortgage borrowers is agreed upon.
The government housing policy was focused on the problem of the FX
loan portfolio. In 2011, the goveÍnment launched the so-called Home
Protection Programme, which introduced three main measuÍes to 'rescue'
the FX borrowers (ear1y FX loan repayment scheme, FX loan rate cap scheme
and rent-to-own scheme). No other housing po1icy táÍgets were given atten-
tion by the government housing programme. One possible explanation is
that FX borrowers represented a political threat in the case of the devalua-
tion, which seemed a possible stÍategy for economic recovery. Nevertheless,
there was no initial 'master plan' and the diÍÍerent measuÍes were intro-
duced in an ad hoc way, frequently modified by fine-tuning political and
administrati ve interventions.
The eaily FX ]oan Íepayment scheme was the first important measuÍe
introduced, which ran Írom September 20l1 until the end of February 2012.
It allowed borrowers to repay their FX mortgages in full at only HUF 180 to
the Swiss franc when the franc was trading at HUF 235-250. As a result,
almost a quaÍter (23.3 percent) of mortgage loans were repaid, amounting to
HUF 984 bn at the discounted exchange rate (PSZAF Z}fZ). |ust under a
third of the ear1y Íepayments weÍe coveÍed by new loans and 70 percent oÍ
the repayments weÍe financed through households' savings. According to
analyses, 15 percent oÍ the repaid Sum was connected to the inÍormal econ-
omy. The gross loss oÍ the pÍogÍamme
was close to HUF 400 bn (0.5 percent
of GDP), which was shared between the banks and the government at aratio
of 70 percent to 30 peÍcent. As a consec1uence of the pÍogÍammes,
wealthier
families could afford to pay off their FX loans resultíng in the banks losing
their best customers; the share of the nonperforming loans increased from
6 percent to 19 percent.
The FX loan rate cap scheme was introduced in Z)IZ.II put an exchange
Íate cap on repayments and opened a special account for the exchange rate
difÍerential. Due to the number of low applicants, the e1ígibility criteria
were eased several times to make it moÍe accessible and attractive for
borrowers. Cnce qualiffed, interest components above the exchange rate
limit were paid by the bank and the goveInment (at a ratio oÍ I:2|; borrowers
Hungary 2I3
had to repay only the principalpart, including the interest on the latter.
The preferential rate period will last until |une 2017 at the latest, but there
has been uncertainty surrounding the accumulated debt on the special
account at the end of the programme. Despite the government's active
encouÍagelnent to enter this pÍogÍamme' it never gained much popularity:
between 2011 and 2013 around 40 percent of e1igíble households chose this
option (178 thousands 178 000 borrowers in total). The somewhat contradic-
tory goveÍnment communication led borroweÍS to expect moIe ádvanta-
geous progÍammes in the future.
A rent-to-own scheme was introduced in 2012, nanaged by the newly
established National Asset Management Company (NAMC). NAMC can
buy a limited number of deiincluent loans and offer a renting option to
the former debtor. By mid-2014, NAMC had purchased almost all of the
25 000 units that they had planned to buy. The NAMC wíll pay the banks
35-55 peÍcent o{ the value given in the original moltgage contract. The
scheme targets the most vulnerable of borrowers who have children. Despite
its good intention, this programme cannot solve the deep insolvency oÍ most
ímpoverished families. A signiÍicant problem of the scheme is that a
substantial proportion of the families targeted by the scheme cannot even
afÍord the low Ient Set by the law due to pre-existing debt (e.g. Íor public
utility fees). The scheme does not provide a private insolvency solution to
the former debtor. While the programme may be the largest social housing
pÍogramme since 1989, problems surrounding the financing and mainte-
nance o{ the sectoÍ remain unsolved.
Reacting to the existing social problems created by the mortgage crisis,
spontaneous civil, self-organised movements have emerged to heip the vic-
tims of the FX moÍtgage loans. These movements have been responsible for
organising demonstrations, protesting against banks and the government and
launching couIt pÍocedures against banks, typicaIly with the Support oÍ the
extÍeme dght-wing political parties. The government from time to time
attempted to integÍate them into public administration, but they remained
quite independent. By 2U'3, the various couÍt cases launched by the move-
ments were brought to the Hungarian Supreme Court (Curia), which ruled in
favour of the banks. The politicians (the prime minister among them) criti-
cised the Curia, claiming it was biased towards the banks. On 16 lune 2014,
the Curia's ruling was modified: first1y, the court concluded that the practice
oÍ'rate spreads' (using different Íates foÍ buying and selling currencies) was
unÍair and that the banks should have to use the Hungarian National Bank
central rate; secondly, the Curia declared that the unilateral modiÍication o{
the 1oan contÍact (e .g. ínterest Íate) by the banks was unfair and the monthly
instalment should be recalculated compensating the borrowers; thirdly, the
Curia declared that the exchange rate risk should be borne exclusively by the
borrower. The fina1 meásuÍe of the Íescue proglamme was the introduction
o{ a governmental mandate for FX moÍtgage borrowers to conveÍt their FX
214 Milestones in European Housing Finance
loans to HUF based loans at a cuÍÍent maÍket based FX - HUF exchange rate
(1 CHF :256.47 HU| 1 Euro : 308.97 HUF). The future initial interest rate
of the converted FX mortgage loans is also regulated and cannot be changed
Íor three yeals.
The radical wing of the civil movement was not pleased with the decision
as they wanted to nullify the original contract, placing the cost of the
exchange rate rísk on the banks. The government (and the ruling patty|
exploited the disappointment of borrowers and anti-bank sentiment and
even encouraged the popular blaming of banks
Impacts
The deve1opment of the housing finance System in the last decades Íaced
several crises. Nevertheless, housing conditions have improved faster than
in comparable countries in the regíon. one element o{ the housing financia1
crisis was the over-investment in housing both in the 1980s and 2000s,
which was not justiffed by the economic fundamentals.
Beginníng ín 2000' the housing finance market started to develop with
the help of a contradictory moÍtgage subsidy System. In 2004 the mortgage
subsidy ploglamme was severely cut, but the development oí the mortgage
market did not stop as low cost and high risk FX loans replaced the sub-
sidised HUF 1oans. The potential risks (HUF exchange risk and interest rate
risk) were underestimated by all stakeholders. The government controlled
institutions (Financial Supervisory Authority, Hungarian National Bank)
and pro-goveÍnment politicians weIe content with the development
contributing to the economic gÍowth. The opposition who argued that the
cut in subsidies in2oo4 would hold back the potentialgrowth oÍ the market
did not demand contÍol over the expanding FX loan poltfolio. Households
who did not understand the risks of FX ec1uity loans were eager to SecuÍe
them, while the banks followed a logic of moral hazard and introduced less
careful underwriting procedures under the assumption that the government
would step in i{ the macÍoeconomic conditions worsened. Nevertheless
the rapid growth oÍ mortgage lending resulted in the construction of
340000 units, which was a 40 percent more than in the 1990s.
While the mortgage portfolio increased rapidly, competition did not result
in a decrease in interest rates (the spread remained very high for HUF loans),
which hints at collusive behaviour. By the time the GFC hit the country, the
economy had already been weakened by fiscal irresponsibiiity (a large deficit
and increasing debt) and macro-economic failure (low growth). The housing
finance System was extÍemely un-regulated and the banks had extreme poweÍ
to set the cost of the loans, change the interest rates, regulate the exchange
rates and mole/ powers that weÍe not visible at the time of the growth but
became evident during the crises and became the source of popular conflicts.
Hungary 215
AÍter 2OO9, the management oÍ the crisis largely Íollowed international
trends, which meant the introduction of macroeconomic austedty
programmes, changes to the regulatory environment of the banks and
improvements in consumer pÍotection (these are Summalised in Table 12.3).
In the meantime, the banks gradually changed their behaviour, accepted a
common code oÍ conduct and introduced refinancing schemes to help
borrowers facing hardship in paying their instalments. Nevertheless, they
still depended on government intervention to help borrowers in ffnancial
Table 12.3 lmpact of the main measures after the GFC in Hungary.
Programme
name Measures lmpact on
BoÍrowers Banks Government
Early FX loan
repayment
scheme
FX loan cap
scheme
Rent{o-own
schemes -
National
Asset
Management
Company
ReguIation oÍ
banks to
compensate
borÍowerS
Law on
compulsory
conversion of
FX loans to
HUF loans
and
maximised
interest rate
Possibility to
repay FX loan
at a discounted
rate.
lntroduced a cap
on the
exchange rate
and deferred
the capital
payment.
The state buys a
certain part oÍ
deÍaulted loans
and property
and use the
latter as public
housing.
compensation oÍ
the borrowers
for banks"rate
spread'practice
and unilateral
modification oÍ
the interest rates"
With very Íew
exception
borrowers are
obliged to
convert their
FX loans to
HUF loans on
current market
exchange rate.
The programme
had a huge
regressive effect
socially.
The borrowers had
no conÍidence in
the programme
as the future cost
was not clear.
The eligible
foreclosed
borrower can stay
in the property as
a tenant paying
very low rent.
The payment
burden of the
borrowers will
decrease.
Borrowers are
Íorced to cIose
their position at
the cuÍrent market
exchange rate.
Most of the costs
were borne by
the banks (HUF
300 billion) and
their portfolio
worsened.
This pÍogramme
was quite
accepiable Íor
the banks, their
losses were
manageable.
It allows banks to
sell their worst
portÍolios to the
government.
Banks must pay
an estimated
cost of HUF
900-1000 bn.
The conversion
on market
exchange rate
is favourable for
the banks but
their loss can
be increased
because oÍ the
maximised
interest rates.
Government gave
tax exemption for
banks up to 30%
oÍ the cosi (less
tax revenue).
Government's
attempts to
persuade
borrowers to join
the programme
result in
continuously
changing
conditions.
Most of the cost
was paid by the
state.
Government hopes
that reducing
borrowers' burden
will boost demand
in the household
sector without
bank insolvency.
National Bank
makes profit on
the conversion oÍ
FX to HUF.
216 Milestones in European Housing Finance
dífficulties. This 'organic'development, which in reality cou1d not improve
the situation of the defaulting borrowers on a large scale, was stopped by the
second orban goveÍnment in 2010. The government radica11y changed its
policy toward the banking SectoÍ and introduced a series of political meaSuIeS
{ca1led the 'FX 1oan rescue plogÍamme') to re_allocate the cost oÍ the mort-
gage crisis among stakeholders. Orban's unorthodox policies have been
directed against the banks and an approach which has proven popular in the
po1itical rhetoríc.
The mortgage Íescue pÍoglamme in Hungary, interestingly, benefitted rich
households first (thanks to the prepayment scheme) at the cost of the banks
and the majority of the costs of the other pÍoglammes weÍe placed on the bank
sectol as well. There are only estimates about the final cost of the moÍtgáge
rescue ploglammes: the cost of the early prepayment pÍoglamme was HUF
300 bn; corrections made on the bases of the Curia decision are estimated to
ámount to an additionalHUF 900-1000 bn Íor the banking sectoÍ above the
extta tax introduced in 201 1. The cost of the inteÍest rate Cap is estimated to
have resulted in a yearly loss of HUF 100 bn Íor the sector' The financial
advantages on the FX borrowers' side includes an estimated decrease in
monthly payments of around 25-30 percent and a projected decrease in out-
standing debt of around 1ó percent. The government/S contribution is the
paTtial forgiveness of the State tax on banks. These Íescue pÍogÍammes
seem
to display a larger trend of the economy and society movíng again toward a
centralised and authori tarian market economy.
The future of the housing finance system
The mortgage crísis and the postponed, 1ong-lasting rescue proglammes
created a 1Íeat uncertainty in the market' After 2008, there was a Steep
decline in mortgage finance, new construction decreased to a 100 year
minimum and the rate of housing transactions feil to a third of what it had
been thus far in the 2000s. A main policy of the Hungarian National Bank
was to reduce the base Íate to stimu1ate economic growth and, consequently,
the interest rate of the mortgage loans substantially decreased to a level of
5-9 percent by 2014. Although the trend of decreasing housing transactions,
housing constluctions and moltgage lending seemed to Stop in2014, Íore-
casts are still cautious about the Íate of future increase.
According to the goveÍnment's plans, a bi11 is currently being negotiated
on the conversion of FX loans, though it remains unclear what exchange
rate will be forced on the banks by the parliament. Additionally, the prime
minister has expressed his preÍerence of increased Hungarian ownership in
the banking sector. The logic of this unorthodox economic policy dictates a
scenario where most banks that are active in the moÍtgage market will be
closely regulated by the government, in a very similar way to how they were
Hungary Zf7
regulated before 1990. The typical loan product, the total amount of the loan
issued, the underwriting rules and more will be determined by the govern-
ment and the Hungarian National Bank. The extra tax on banks, the central
regulation oÍ 1oan products and the provisional mannel of converting the FX
1oan portfolio ínto HUF-based loans indicate the goYeÍnment's intention to
IecÍeate a State controlled System' We cannot predict how 'successÍul' the
goveÍnment will be in clearing up the market and achieving this aim.
There is no clear sign that the economy is recovering. One scenario is that
the government will have to devalue the Hungarian currency in order to
make the Hungarían economy competitive in the g1obalmarket. If this is the
case/ then any plan to reinstate a fully controlled authoritarian economy will
have to be sacrificed and there may be a chance for a return to a more main-
stream economic policy with the normalisation of the economic system (that
is, a withdrawal of the extreme State contÍol over the economy). Even under
this scenario, F{ungary's future housing finance system is likely to be a more
conservative and highly regulated one. Several new regulative elements have
already appeared in the system. These are partly consistent with the European/
international eÍforts towards a more prudent lending system. Foreign banks
probably wil1 p1ay a mole limited role, although they aÍe Still committed to
staying in the Hungarian market, and FX loans will become marginal.
As a consequence of the recent developments, cash-based transactions
have become moÍe common in the housing market (as they were in the
1990s), at least for a while. The government and the banks must rebuild
trust in the financial institutions as it was lost in the process of the mortgage
Íescue plogramme. One possibility is that aÍter experiencing the negative
effects of the high risks associated with homeownership, households will
prefer to shift toward a rental solution. However, this shift will not be
possible without a major change to the subsidy system/ the tax treatment of
housing and the legal regulation oÍ the different tenuÍes.
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