Analysis

A Piece of America

There’s a predictable cycle to disruptive technologies: First, it appears on the fringes. Then, it picks up (with a considerable delay for Hungary). Finally, the taxman clamps down. Unintended consequences and farcical cat-and-mouse ensues, leaving everyone even deeper in the authoritarian bunker mentality.

Our Uber driver was completely legal. After the January protests when taxi drivers bullied the city into clamping down on Uber, a deal was made that Uber will make sure its drivers give invoices. The way it happened is that Uber made all its drivers to become small (forced) entrepreneurs. From February onward, all Uber drivers were nice and legal – but that doesn’t satisfy the taxmen.

Our driver was wary – but not in the position to decline a ride. If they come to check on him and find any tiny excuse, they will investigate him retroactively. They get access to his bank accounts and prove that he had earned money through Uber before. That would cost him a crippling amount of money in fines – way above anything he made as a driver. He was stuck between a rock and a hard place fighting his own battles with the taxman – while complying with Uber.

Airbnb landlords are next.

A friend bought a flat in downtown Budapest in 2015. He had just finished the paperwork and told me the good news.

“Can I see pics?”

“Sure,” he said and opened up Airbnb.com

When seeing my puzzled look, he explained that he had bought the flat and rented it out the same day, long-term. The lady renting it wants to operate an Airbnb from it and already set up a profile.

“Is it worth it?”

“They seem to think so.”

I wasn’t so sure. The apartment was just quickly refurbished, got a lick of new paint, but most of the old furniture stayed. It was not terrible as far as rental properties go, but definitely not “luxurious”, as the description claimed. The asking price on Airbnb, however, seemed to tell a different story. This was the only way to make it worth despite the already inflated rental price.

Airbnb is a commendable platform that provides amateur landlords with the tools, legal and marketing framework to become semi-professional ones. But it has one major unintended consequence.

Airbnb homogenises the opportunity costs of properties upwards, towards the most expensive ones globally.

No need to point out that a property in downtown London is still more expensive than that in downtown Budapest. But London property prices won’t be pulled down by Airbnb alternatives in Eastern Europe, whereas Eastern European property prices are being dragged up by demand from abroad. While living in Budapest is only necessary for Hungarians working there, holidaying in Budapest is a global commodity.

Another unintended consequence is making the previously black property rental market suddenly visible.

And that could result in further (and permanent) price hikes in rental prices. That can have unforeseen consequences, given the oppressed wage levels in Hungary. To keep things looking rosy, inflation numbers are resourcefully manipulated (cost of living excluded, utility prices centrally controlled, etc.)

By early 2016 the press started to write about the popping of the Airbnb-bubble. The plethora of properties turned into short-term holiday apartments ballooned the last few years, and it was bound to backfire. Renting a home to put it on Airbnb could hardly be a viable business model – especially not when done en masse.

But its impact on Budapest rental prices may prove lasting. After years of subdued demand, government interference managed to confuse home owners as to the price they could sell their houses for. Offer prices have skyrocketed by as much as 30% at places, while demand was reluctant to catch up. Add to that the impact of the Airbnb gold rush and you have a problem.

According to a study approximately 70-80% of Budapest Airbnbs fail to pay taxes. But the ration is rapidly decreasing as Airbnb hosts can get away with relatively low tax levels. The real trouble will befall owners of these properties, who get on the radar of the taxman – and are liable to paying even higher taxes.

Once registered as commercial property, a flat can not shed the interest and suspicion of the tax authority easily. Even when reverted back to long-term rental, taxes are bound to stay and raise the cost of living permanently.

And to make the lives of landlords even less pleasant, the taxman may now start investigating them retroactively. There is always capacity for that.

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Featured photo: Leo Hidalgo

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One thought on “A Piece of America

  1. Pingback: Budapest Property Boom – Part 1. | Meanwhile in Budapest

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