Budapest is among the prettiest cities in Europe, but is a real estate investment in Budapest a good idea?

It’s a market I know well, having done deals here for a number of years. We’ll have a look at the following:

Ladislas Maurice sitting in front of Budapest parliament, prime real estate
Yours truly enjoying beautiful Budapest

Hungary has had a spectacular run on the economic front

The Hungarian economy crashed hard in 2009. Its GDP fell over 6% and it required a bail-out from the EU and the IMF. This was due to two factors:

  • Economic and social policies by the socialist government at the time. The economy has not been reformed to the same extent as in other Central European countries. Hungary had a massive, creaking bureaucracy and expensive, outdated social policies.
  • A debt binge by the government, companies, and households. Over 60% of household debt at the time was denominated in foreign currency, primarily the Swiss Franc. So when the economy tanked, along with the Hungarian Forint (HUF), people could not pay their mortgages back. This led to a spectacular real estate crash.

In 2010, the opposition led by Victor Orban came to power. He was elected on a free-market and populist platform. He has a notoriously bad reputation in international circles and in the Western press for his anti-immigration stance, but he enacted economic reforms into place that boosted the economy.

On the back of economic reforms and (free) money from European Union cohesion funds, Hungary boomed between 2014 and 2019 and became one of the top-performing economies in Europe. Its real GDP growth was almost 5% in both 2018 and 2019, which is reminiscent of booming South East Asian economies. Since Covid and the Ukraine war, Hungary, along with the rest of Europe, has been stagnating.

The European Union (EU) Played a Large Role

Orban at European Council
Source: Nzz

It’s all too easy to give Orban full credit for the economic boom. While you can’t deny that he played a significant role, the flow of free EU money cannot be underestimated.

In 2018, Hungary contributed €1.1 billion to the EU budget (0.7% of Hungarian GDP), but received a cool €6.3 billion from the EU (5% of Hungarian GDP).

When you drive around Hungary and marvel at all the new highways, stadiums, hospitals, schools, and great infrastructure, rest assured that it is not because Hungarians are so productive, but rather because their populist politicians are very good at leeching off of the EU. German, Austrian, Dutch, and Scandinavian taxpayers have played a disproportionate role in the rebuilding of Hungary.

Nationalistic Hungarians claim it as their own work and proof of their genius. European liberals claim it as a demonstration of their solidarity and moral superiority. In reality, the small business owners of Utrecht and Stuttgart contributed more than their fair share to rebuilding Hungary.

There is now constant haggling between Hungary and the EU to release more funds.

The impact of Covid and the war in Ukraine on real estate in Ukraine

When Covid hit, Hungary was one of the harshest countries in the EU regarding border control, effectively shutting itself off from other EU countries for non-business-related trips. Its internal measures were less harsh than most, but from a real estate point of view, the market took a severe hit in the central areas of Pest.

Pest, unlike the other bank Buda, is where most foreigners tend to live and congregate. It is also where most accommodation for tourists is located.

This meant that thousands of furnished Airbnb apartments were empty, and found their way to the long term rental market, thus depressing yields for all involved. At the same time, less students and people moved to Hungary due to all the restrictions.

The number of Airbnbs in Budapest is lower than what it was before Covid as many owners sold their apartments or switched to long-term rentals, though the number is increasing again.

Conversely, prices boomed in the outskirts of Budapest as Hungarians wanted to buy houses with gardens away from the city center. We saw a similar phenomenon in many other markets in the world, so just to keep in mind, the real estate market in Budapest is not the only example.

Now that tourism is booming again, Airbnb yields are actually up. Tourism has reached pre-covid levels and there has been supply destruction due to Covid and more Airbnb regulations by the various districts. Depending on the district and building you invest in, it may or may not be possible to obtain a short-term let license. This is why using a competent buyer’s agent in Budapest such as Benedek is important, as normal agents will tell you whatever to sell you the apartment you are looking at.

In some districts it is nearly impossible to obtain a license for short term rentals. In others, a license is not even needed.

The war in Ukraine has been a net positive for the Hungarian rental market due to hundreds of thousands of Ukrainians moving to Hungary. Not all are poor. Many are upper middle class and don’t mind paying rents in Budapest that are effectively more affordable than Kyiv before the war (yes, rents in Kyiv before the war were more expensive than in Budapest and Warsaw).

One of my tenants is a Ukrainian IT guy, living with his family, who earns about $4,000 USD per month after tax. This is a higher post-tax salary than that of most Western Europeans’.

The Outlook for the Hungarian Economy Is Negative, but Less Negative Than for Other European Countries

Sure, the outlook for all of Europe is negative. On the one hand:

  • Europe has a serious problem. By boycotting Russian energy and antagonizing Russia in general, the EU has cut itself off from its primary energy source. This is not an article about being pro- or anti-Russia or pro- or anti-Ukraine. I want to look at facts.
  • The fact is that there’s a reason the EU used Russian energy. Why? Because it was cheap and plentiful.
  • Now, the EU must compete in world markets to obtain US LNG or energy from the Middle East, Africa, and South America.
  • The result is that not only will the EU pay way more than before for energy, but its main competitors will now be at a structural advantage. The US produces its energy and will make fat profits exporting energy to Europe, which is now dependent on it. China buys Russian energy at a discount. So Europeans pay more than before and the Chinese less.
  • This situation will invariably hit European industry very hard, mainly German.
  • Hungary is very dependent on industrial exports to Germany and Austria. For instance, exports of vehicles represent 12% of goods exported in 2022. European car-makers are not doing well these days. This reliance on car exports is a critical risk, though it isn’t as bad as in Slovakia, an extreme case (31% of its exports are cars).

BUT

  • Pre-virus, the Hungarian economy was overheating and there were labour shortages. This was unsustainable, so the current situation is less harmful than in Southern European economies which were running way below capacity.
Hungary employment and unemployment rates
  • The Hungarian prime minister Orban managed to negotiate a carve-out for Hungary with regards to EU sanctions on Russian energy. While the rest of the EU will not be getting Russian oil, Hungary will continue getting Russian oil through the Kirill pipeline that goes through Serbia. This is great news for Hungary, will be have access to reliable and more affordable energy than its EU neighbours. The results of such a policy can be seen in the commitment by a large Chinese battery maker to build a 1 billion euro manufacturing facility in Hungary.

Your biggest risk when making a real estate investment in Budapest, Hungary, is the Hungarian Forint

Even during the boom years the Hungarian Forint (HUF) kept dropping.

Chart of euro to hungarian forint exchange rate
Source: www.xe.com

And this is in spite of improving fundamentals.

The reality is simply that the government and central bank are very happy to let the currency devalue. It’s an easy way for the export and tourism dependent economy to remain competitive, while allowing substantial nominal wage increases, which voters love.

The external shock that is the virus hit two key forex earners – tourism and car manufacturing. This increased pressure on the HUF. Expect the HUF to continue its overall downward slide in spite of recent strengthening, with volatility. A key question for any astute real estate investment in Budapest Hungary, is therefore “will the HUF depreciate faster than my investment increases in nominal value?”

Having said this, the fact that the Hungarian Central Bank CAN devalue its currency is one of the main points that makes Hungary attractive from a macro point of view. This gives the country flexibility to choose its monetary policy in a highly volatile and uncertain world, as opposed to depending on bureaucrats sitting at the European Central Bank in Frankfurt who think of Germany and France first, not Hungary.

Personally, I see this as a positive. It allows for solid entry points into the Hungarian real estate market. Budapest offers great value compered to other EU capitals. Additionally, most rental income can be set in Euros. All of my tenants pay in Euros, or in HUF but indexed to the Euro, so my yields are not impacted.

The price history of the Budapest real estate market

The real estate investment market in Budapest, Hungary, absolutely boomed from 2015 to 2019 before stagnating in real terms and then stagnating from 2022 onwards. These numbers are in HUF, so in EUR or USD terms prices are down.

price index real estate budapest and hungary

The volume of real estate transactions in Budapest is cratering

volume of real estate transactions budapest

As in most of Europe, the real estate market is slowing down in Budapest. Liquidity has been reduced, which means opportunities for patient investors.

Why are real estate prices and transactions dropping in Budapest?

1. Though affordable in absolute terms, prices are stretched for locals

Real estate prices in Budapest are cheap in absolute terms but became are a bit disconnected from the local purchasing power, though there has been an improvement is the last 3 years as incomes have grown and price stagnated.

price to income ratios in european capitals real estate

As an investor, this is not the only factor to consider. Much of the housing stock in downtown Pest, for example, targets higher-income foreigners who stay short and/or long-term in Budapest. Also, the low regulatory and tax environments make Budapest attractive to investors.

For example, for my 2-bedroom apartment in the 5th district right next to parliament, I pay yearly property taxes of about 150 euros. This amount is fixed in HUF and hasn’t changed for a few years.

So sure, Brussels may have a better price-to-income ratio, but good luck with property taxes, income taxes, kicking tenants out when they don’t pay, and with all the Green policies that can be very expensive for landlords.

2. Rising interest rates are bearish for the real estate investment market in Hungary

Interest rates shot up substantial in the past two years. Mortgage rates are now north of 10%, up from 4% just two years ago. Needless to say, lending is down in the local market.

interest rates housing hungary

The line that matters in this graph is the one in black as it is the real rate. The other ones are subsidized rates. About subsidized mortgages:

  • They are for lower income Hungarians or families and typically do not impact the markets where foreigners invest (core Budapest)
  • The government is gradually decreasing the number of such loans as it is proving to be fiscally challenging.

With interest rates at such a level, don’t expect locals to be using leverage to outbid you in core Budapest. Effectively, core Budapest real estate has become a cash market, with a regular stream of borrowers liquidating their positions.

But the stream of such distressed sellers is far from massive. The reality is that Hungary still has an severely under-levered real estate market. As mentioned, most leverage is in outer areas where foreigners would not invest. Those areas generally have low gross yields, and only local tenants.

Housing credit to GDP graphic europe

If the interest rates were to go down to manageable levels, this would be a catalyst. They have started going down, which points to a positive trend, but they remain elevated.

3. Much less foreign investment than before

ratio of foreign buyers in hungary real estate

Looking at this graph, you’d think the level of foreign investment into real estate is stable.

It’s not. Why?

This stability is just a ratio, in a context of the number of transactions having cratered by 35%.

Why?

  • Russian buyers are completely gone. They were a big market. Due to EU sanctions they are forced to stay away.
  • Though the Chinese are back after their lock-down period, they are less so than in the past. Though they understand that the Hungarian government is China-friendly, they fear potential future sanctions as the EU did against individual Russians.
  • North Americans are turned off by Central Europe seeing the war next door in Ukraine.
  • Europeans have generally become 10%-15% poorer in the past two years due to inflation and stagnating wages. They have less cash to invest.

But not enough supply is coming online

On the other hand, Hungary has a very low new housing construction rate by European standards.

annual renewal rate of housing stock europe

This is one of the core advantages of investing in the center of a city such as Budapest. Because of extremely strict zoning laws to preserve the gorgeous historical character of the city, supply is inherently limited. This contrasts with cities such as Warsaw where high-rises keep popping up everywhere.

Not only is supply low, but supply is likely to continue to stay low seeing how construction costs are going up amongst the fastest in Europe.

change in eu home construction costs

Limited supply is inherently bullish for real estate investors in Budapest.

Budapest is middle of the range in terms of rent affordability in Europe

Rent eats a large chunk of locals’ incomes. Having said this, when you buy in the center of Budapest and target foreigners, you live in a different reality. International people moving to Budapest generally have higher incomes.

In my 7 years of owning real estate in Budapest, I never had Hungarian tenants. I had Westerners, Koreans, well-off Eastern-block people, wealthy Africans and Middle Easterners.

rent to income ratio in european capitals

New Airbnb restrictions

The reality is that Budapest lacked adequate hotel capacity to satisfy international arrivals, so the government let the Airbnb boom take place. However, as capacity increased and housing affordability became an issue for locals, it became politically wise to implement Airbnb restrictions. Anti-Airbnb laws of various degrees were passed.

It varies based on the districts. Some districts are strict, and others are not. Some require a permit, and others require that your homeowner’s association allows short-term lets in your building.

Gone are the days when you could just show up in Budapest, buy an apartment, and put it on Airbnb. This is one of the biggest pitfalls to avoid when making a real estate investment in Budapest.

Again, this is why you need a good agent in Budapest. Most agents will tell you Airbnb is fine when in fact it’s not. A good agent will know the restrictions per district, know how to handle the home owners association, and how to get the municipal approval if required. This is why I work with Benedek my Budapest real estate buyer’s agent.

Key lock boxes
Airbnbs in the Jewish district

In which districts should you make a real estate investment in Budapest, Hungary?

If you were to make a real estate investment in Budapest, Hungary, it is important to have an understanding of the overall dynamics.

Map of Budapest neighborhoods
Budapest real estate investment heatmap

The Danube divides the city into two – Buda on the left and Pest on the right.

  • “Magyar”: This is where Hungarians aspire to live. Proportionately fewer foreigners live on this side of the Danube though this is where international schools are located. Overall, you’d tap into the local market here. It’s a good thing if you are bullish on Hungary in the long run. However, the Corona crisis did not impact this area as much as there were few short-term lets, and it was not dependent on foreigners.
  • “Core center”: I am referring to the 5th, 6th, and 7th districts within the ring road. This is where you’ll find the Parliament, the Basilica, all the shopping areas, bars, clubs, Opera, Synagogues, etc. It’s generally where tourists spend most of their time sightseeing, eating, and drinking. This area has the highest concentration of Airbnb lets and foreigners living there to study, work and play. I firmly believe this is where the best opportunities are to be found, especially in the 6th district.

A warning about the 8th district

“Be very careful”: The 8th district is controversial and hugely speculative. To be fair, it’s a speculation I missed out on. Had I invested there when I took my first positions in Budapest, I would have made an absolute killing. It’s known locally as the “dangerous” area mostly due to a higher concentration of the Roma people minority. Various government initiatives were put into place to “renovate” and “gentrify” the area. Parks and roads were rebuilt, street lighting was improved, cameras installed, etc. The area became nicer, and students from universities in the nearby districts moved in. Prices doubled and even tripled after a few years.

HOWEVER, I believe there is less upside here than in the “Core city” area because of recent developments. The 8th district is now the landing spot for immigrants from Africa, the Middle East and South Asia. Immigration from these countries is fast accelerating, albeit from a low base. Their numbers have been increasing lately, in spite of official government policy against immigration. In reality, there are probably backroom deals with the EU for refugee intake. Looking back, if you take the example of Western European capital cities, would you have wanted to invest in the beautiful core center districts 20 years ago, or in the districts that would become the first base for refugees and developing world immigration?

hair shop in Budapest
Not good for property values

If you are offended by this analysis, then go ahead and invest in the 8th district. I’m observing facts and trends.

With that said, I must add that some specific streets in the 8th district are fine to invest in. But you really need local, unbiased insight to play this game, which you won’t get from a normal real estate agent in Budapest.

Case study: An example of a real estate investment in Budapest, Hungary

This apartment is located on Paulay Ede utca in the Jewish quarter, close to the Opera, and one street behind Andrassy ut, the Champs-Elysees of Budapest. It is a 74m2 two-bedroom apartment on the first floor (not the ground floor) of a gorgeous historical building. It’s a triple-A location. I owned this apartment for a few years and sold it last it to increase my allocation to Latin America.

This apartment was sold for ~ €223,000, including furniture, in April 2023, which was probably 3% below market price.

The market value of the rent is €950 per month + utilities and standard charges. Tenants pay the common charges of HUF 19,500 per month (b), which include water. They also pay for gas, internet, and electricity. The owner is liable for a yearly property tax of HUF 111,000 (~€280).

Here’s the breakdown of the yield calculation.

Price of apartment€223,000
Price of apartment with closing costs (4% stamp duty +1.2% legal fees)€234,596
Rent of €950 x 12€11,400
Gross yield INCLUDING buying costs (4% stamp duty +1.2% legal fees)4.8%
Yearly rent at 95% occupancy€10,830
Management + finders fees 15%€1,625
Maintenance 5%€541
Property tax€280
Net income before income tax€8,384
Net yield 3.6%

A net yield of 3.6% for historical, core property in a European capital city is actually a decent yield these days. If you were to put it on Airbnb, which is possible in this district, you could expect a net yield of about 5%-6%.

This is a real case study as it is an apartment that I owned that I sold. More information in this video.

I was quite sad to sell this apartment

Don’t trust agents promising you net yields of 6-7%

Once you take into account ALL real costs (maintenance, taxes, vacancy, etc) as well as the REAL purchasing costs (with taxes, legal fees, stamp duty, etc) the real returns on your investment are lower.

You can get such numbers on Airbnb, but not on the long-term market.

How much to negotiate when buying real estate in Hungary

bargaining for real estate in Budapest, average discount

On average listings go down 4% during their lifecycle, and people negotiate an extra 4% off. Speaking to Benedek, as he helps people find special opportunities, he generally gets 5%-10% off for his clients as he hunts for deals as a buyer’s agent, more than offsetting his fee.

Video case study: An example of a real estate investment in Budapest, Hungary

In this video Benedek shows one of his renovation projects, in which he chopped an apartment into multiple tiny studios to maximize yields and capitalization rates.

So what is the outlook for the real estate investment market in Budapest, Hungary

To recap:

  • There are dark clouds in the EU due to its foreign policy, but the situation is likely to be better in Hungary than in the rest of the block thanks to an independent foreign policy and more flexibility due to having its own currency.
  • Interest rates are starting to go down, but they are doing so from a high base.
  • Budapest offers tremendous absolute value for gorgeous historical real estate in the heart of a European capital city. The ongoing HUF weakness offers foreign investors a great entry point.
  • Long term gross rental yields of 4%-5% are not exciting, but the underlying asset will withstand the test of time due to the inherent historical value of real estate in Budapest.
  • Net yields of 6%-7% on Airbnb can be achieved due to a decrease in supply and increased regulations. To play this game, you absolutely need a good buyer’s agent to guide you through and manage the bureaucracy.
  • Overall, along with Sofia and Bucharest, which are not particularly beautiful, Budapest is the cheapest capital city in the European Union. Prices are lower than in tiny Bratislava in nearby Slovakia, and half the price of Prague in the Czech Republic. Budapest does NOT warrant such a discount.

Overall, I feel that Budapest is one of the most investible markets in Europe. It is far from perfect, but it is a very decent long-term investment. In spite of having reduced my exposure, I still own real estate in Budapest, and do not plan on selling.

If you have cash in your bank account, with the proper due diligence, you can find great deals by throwing low-balls around. It’s a buyer’s market.

When you are ready to pull the trigger, feel free to get in touch with Benedek my buyer’s agent and property manager in Budapest. He works with a number of agencies across Budapest and can help you source a property based on your requirements. It’s much easier to use him than going to different agencies who just try to sell the properties on their books.

Additionally, he and his partners do renovations and rental management. So he can offer you a turnkey solution.

You can find out more about Benedek’s real estate buyer’s agent services in Budapest.

It’s essential to use a good lawyer in Hungary. There can be quite a few issues with buildings, such as debt and failed rooftop projects. Also, the apartment can have a number of claims and liens against it.

The purchase contract is typically signed at a lawyer’s office, and preferably, the contract should be bilingual in English/Hungarian so that you are not only not clueless, but you have the proper paperwork to present to your bank back home to make the transfer. The first step is typically to deposit 10% in an escrow account following the signature of a pre-contract and a few weeks later to wire the final 90% once the lawyers have cleared the paperwork.

Be sure to negotiate 4-5 weeks in between payments, as sometimes your bank can cause you problems. There are many instances of banks’ compliance departments delaying the transfer, thus resulting in the 90% arriving late. Some Hungarian sellers then keep the 10% for themselves because they can (you were late contractually).

I’ve done a number of successful real estate transactions in Budapest. Feel free to get in touch with my real estate lawyer in Budapest. He is fluent in English, and has a flawless reputation in the industry. He specializes in commercial and residential real estate transactions in Hungary.

More details on the purchasing process and purchase related taxes in Hungary.

As for ongoing taxes, once you own your real estate investment in Budapest, Hungary, you’ll have to pay property taxes IF you rent the apartment out. If you live there or if the property remains empty, there is no property tax to be paid. To receive your property tax bill, you must go register the property at the local district office.

The tax rate on rental income is a flat 15%, and almost all expenses can be deducted (even your trips to Hungary!). There is also a capital gains tax of 15%, which decreases by the year. After year 5, no capital gains taxes are due.

Whether you want to buy real estate or not, go to Budapest

Ladislas Maurice near Budapest
Amazing cycling along the Danube near Budapest

Budapest has been one of my part-time bases in Europe for a few years now. I absolutely love it. It’s a stunning city, it’s cheap, the beer and wine are plentiful, the weather is surprisingly good, its history is rich, and there are amazing bicycle trips to be done along the Danube and around Lake Balaton. So, If you are asking yourself if real estate investment in Budapest is a good idea, I highly recommend it.

Make sure to get in touch with Benedek, my real estate buyer’s agent in Budapest

It’s easy to overpay for Budapest real estate if you don’t understand all the subtleties of the market. 99.5% of agents in Hungary just sell what is on their books, so they are inherently biased. Benedek operates a unique business model. He searches across the whole market for the best deals, acting as a buyer’s agent representing the best interests of the real estate purchasers in Budapest.

Ladislas and budapest real estate buyer's agent Benedek
me with Benedek (black shirt)

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