Many major cities in central Europe have boasted strong house prices increases since the 2012 bottoming out of the price crash that accompanied the global financial crisis.
Budapest, for example, topped the Knight Frank Global Residential Cities Index tracking house prices across 150 cities in 2018. Hungary’s capital clocked price growth of 23 per cent, ahead of Chinese runner-up Xian.
Conversely major world cities including London, Sydney, Moscow and Geneva saw mainstream prices decline in 2018, a trend that has shown little sign of abating this year.
Anybody who bought property in Budapest four years ago — as this column advised at the time — has done exceedingly well.
Arab investors snapped up many of the leading hotels in the city. Dubai's Khalaf Al Habtoor acquired the Ritz-Carlton and Inter-Continental, while the latest opening is the Parisi Udvar, which opened in June and also has Abu Dhabi owners:
The latest data shows construction output up 18 per cent in Hungary over the past year, and automotive output surging 22 per cent — a quarter of the country's gross domestic product comes from the car sector dominated by Audi, BMW and Mercedes.
Foreign direct investment — mainly huge factories — is running at around 3 per cent of GDP, and infrastructure transfer funds from the European Union contribute a similar amount. But the biggest driver in the booming local economy is a 15 per cent annual surge in salaries.
Typically house price inflation runs at almost double the rate of salary increases, due to the leveraging effect of mortgage finance.
This salary inflation seems unlikely to stop anytime soon. Hungary has the lowest unemployment in Europe and skill shortages are a problem in many sectors, particularly construction where it slows projects — increasing accommodation shortages.
Higher wages are gradually bringing workers home from depressed Western Europe. But they all have to live somewhere, putting another squeeze on the housing supply.
Budapest presently looks like a building site with renovation and infilling projects everywhere. What was a rather rundown city of endless faded grandeur is becoming a much smarter place to live, impressing potential buyers further.
How much longer can this virtuous economic cycle for rising house prices last? It is only fair to warn that articles like this one generally signal a market at or close to a top.
But then consider nearby Prague in the Czech Republic. Its real estate market always seems to be five years or so ahead of Budapest, perhaps because of its proximity to Germany and faster adjustment to a market economy.
Like Budapest there is a booming tourism sector in Prague. In the centre of the city, about 20 per cent of all apartments are listed on the Airbnb website. House prices were up 22 per cent last year, and have reached an eye watering 11.2 times annual salary, according to the Deloitte Property Index.
Planning restrictions in Prague are blamed for a shortage of supply, while the Budapest authorities have been more proactive in promoting development. The salary-to-house price ratio is consequently much lower at 7.1 times annual salary.
Poland, Croatia and Latvia also have higher ratios than Budapest, and so does the UK at 9.4 times annual salary, although Germany trails at 5.1 and Portugal is bottom at 3.8.
So, from a local affordability perspective, Budapest house prices could still have further to go, though Portugal is better value now.
Budapest house prices are also still cheap in absolute terms by comparison to the other two major cities of the former Austro-Hungarian empire: Prague and Vienna. It costs around $100,000 for a modest apartment in Central Budapest, representing better value-for-money and the cost-of-living is lower.
In addition, the Hungarian bank loan-to-deposit ratio of under 50 per cent leaves a lot of room for increased borrowing; in Western Europe the ratio is above 100 per cent.
However, senior economists I know in Budapest are less optimistic about the outlook. Hungary is famous for its conservative, nationalist government. But economically it is another province of Germany. Logic suggests the German recession will also impact Hungary.
Then again production always moves to the lowest cost producer. The easiest way for German multinationals to keep growing profits in a slump is to move production to a cheaper location. Central Europe is the obvious solution, especially with 71 per cent of German companies in China said to be considering relocation, mainly due to rising wage costs.
For the time being, all roads lead to Hungary. European data protection legislation, for example, has resulted in 26 Indian software companies — one employing 2,000 staff — setting up in Hungary over the past year; and there are more than 20,000 recent Chinese expatriates.
Perhaps the central European property market is going through a structural change and not a normal cycle, and that makes it a great buy.
Peter Cooper has been writing about Gulf finance for two decades
