The price hike of recent years had not been justified by fundamentals. There are signs of a reversal in downtown Budapest.
Every couple of years I dive into the Budapest property rental market. I look at prices, quality, and test price rigidity. If my lower offer gets rejected out of hand, I know it’s a sellers market. Today, it is not the case. Downtown 2-3 bedrooms that are advertised between 1200-1800 euros (plus bills) per month can be yours for half of it – if you bother to ask. And the reasons are actually unsurprising.
The market peaked two years ago
There are worse ways to take the temperature of the economy than looking at its property market. Everyone needs to live somewhere, one way or the other. Based on demography, for instance, there should be a serious meltdown. Not only is the birth rate extremely low, the exodus from the country reached dangerous levels, with an estimated one out of 9 people having left since 2011. The extreme emigration of the best and brightest would hurt the property market on more than just the demographic level. The highest earners are gone, and not replaced by influx into the city. As villages also run empty, houses can’t be sold – trapping their owners in high-unemployment regions and without proper infrastructure.
But the property market also responds to exogenous factors, the most spectacular being global capital influx in Budapest – far outweighing any endogenous factors. Hysterical media loves to blame Airbnb (copying the anti-Airbnb outrage in other global cities that may be more justified), but the real reason behind the property boom in Budapest is the influx of hot money, seeking safe haven from the illiberal economies outside of the EU.
The price hike of recent years had not been justified by fundamentals. There was no sizeable middle class with purchasing power to pay the asking prices, pushing locals out of the city, and poor people out of their homes altogether. Wages are stagnant (or worse) in real terms, and the recent statistical increase (duly celebrated by the government media in case people miss it) was not nearly on par with the increase of the cost of living.
There are signs of a reversal.
Firstly, there is the government’s push to get new homes built.
The administration of subsidies is farcical and the consequences are far from clear, but the new developments built on the government’s push for new homes (and new babies) may one day hit the market. And many of these new developments will be owned by unfortunate couples locked down in their purchase because of the contract they sign with the state in exchange for some help. The current mood of the housing market is bullish, but if these developments materialize and the pledged new children pin these families down in their new homes for at least ten years (if they want to avoid penalties), it could dampen the market.
But that’s the vaguest of signals so far.
Scores of Airbnb properties have fallen back on the long-term rental market.
Airbnb has never been the real driver behind price increases. Russian, Chinese and Middle Eastern money was. But the media made sure to scapegoat short-term rentals, even though many of them were not even Airbnb-ready.
Plenty of landlords who participated in the Airbnb gold rush had to learn that grandma’s furniture and the IKEA lamp left behind by the last tenant are not good enough to maintain a holiday rental profile. (I once met an Airbnb host who couldn’t figure out how to wash and dry the bed sheets between check-out and check-in on the same day. It didn’t occur to him to buy a second set.) These people quickly dropped out of the Airbnb gold rush.
The high-end, purpose-renovated Airbnb’s lasted longer, but in the end many of them also suffered. Having a day job and running a second home as an Airbnb only sounds good on paper. People underestimate the costs and expenses of running a one-room hotel, and they tend to count their own time as free.
Many have also invested heavily in marble kitchen counters and Swarowski chandeliers to attract tourists. They have reconstructed prime real estate to be more short-term friendly, with small bathrooms to make room for extra bedrooms and tiny, symbolic kitchens with the ubiquitous Nespresso machines. The investment was sizeable but so were the hopes.
But running only one Airbnb is a disproportionate amount of work for the money it can bring. A 200+ euro per night apartment better has a full-time manager if it is to cope with guest requests. A broken thermostat at 2AM, repairman the next day to fix it before the new guest arrives, bad reviews, and a cleaner that also works for others, so he is very likely not available between check-out and check-in on most days.
Not only that, but you have to manage everyone from guests to cleaners, and the house community. A lady complained that her cleaner didn’t spot a pair of dirty underwear under the table and it cost her her Superhost ranking. Her son (the owner of the apartment) was angry at her, so she was fed up and refused to do it anymore. Another host complained about the silent sabotage of the house community – even though AIrbnb was legal in the house.
I have seen many such high-end apartments, huge, fully equipped, but family-unfriendly, reappearing on the long-term rental market during the last couple of months. Their exasperated owners are really fed up with Airbnb. Some had their ageing parents run it for them, typically expats who left a flat behind, but they had to find out that parents’time isn’t free either. Others juggled guests themselves, while also having day jobs, but figured that running less than 3-4 apartments is not economically feasible. Hiring a management company costs 30%, plus taxes, amortization, etc.
What looked good on paper proved to be exhausting in reality and didn’t bring in much more money than a long-term tenant would with much less hassle.
But are there enough new, long-term, high-end tenants to fill all the new, downtown luxury apartments? (Because a 2-3 bedroom downtown at over 1000 euros does count as a luxury.) And are the potential new tenants okay with the family-unfriendly homes and the bland Airbnb decor? According to the gap between asking prices and the price they are willing to rent, they are not.
While these places cost horrendous amounts to their owners (not to mention the renovations and often a mortgage) they can’t exactly put them on the market for Western European money. So they give it a try in the 1200-1800 euro range (and higher) plus bills. But the phone never rings. So they lower prices for a few months. And when I rang the phone and made an offer at 800, they all agreed. (Plus bills.) It was a surprise, but it shouldn’t be.
The air is thin at such rental price levels. If someone has a thousand euros or more to spend on housing, they would rather spend it on a mortgage. Families look at shower cabins and picture holding up their newborns like the Lion King because that’s the only way to bathe them. Kitchens are equipped to unpack takeouts boxes and make Nespresso. Companies and embassies (who are spending other people’s money) have already found housing for their employees, these homes come on top of that.
The departure of CEU
The lower ranks of Budapest downtown properties might also be in for a nasty shock. With the departure of CEU, its faculty and 1500 students won’t pay just about anything to get a shabby room downtown. The summer of 2019 rush may never happen. And whoever fills up those apartments after the students will have more demands than a bunk bed and a wobbly desk – and be more price sensitive.
If a price correction really happens, would it help the locals?
The logical conclusion would be that surely, this must come to the help of locals struggling to get a foothold on the housing market. Sadly, the benefits might be selective.
Firstly, these changes I’m talking about only affect downtown Budapest. The outer districts that see little international population (and the countryside) will be just as bad in their own way. In fact, as downtown prices went through the roof, outer districts have become investment targets with 20-40% rises in asking prices for the last couple of years.
Also, the poorest have already hit rock bottom. Homelessness hit record high and even those who have a place to stay don’t necessarily have money for food or heating. Soup kitchens are shockingly popular and the authorities have stopped publishing statistics on deaths by starvation and hypothermia after the growing statistics made it into the media a few years ago. And the lower one sank, the less likely it is that they can stand up.
And finally, the real blow to the Budapest property market will be extraneous – just as its boom was. The global economy and geopolitics have always been greater drivers of Hungarian economy and politics than endogenous factors ever were, no matter how Orbán came to believe.
Price changes are also slow to take hold because of the stickiness of expectations. Not everyone accepts a more reasonable offer, even after months of waiting. So maybe you shouldn’t hold your breath for a great deal just yet. And by the time it comes, you might not be able to take advantage.