Budapest is among the prettiest cities in Europe, but is it a good real estate investment destination? It’s a market I know well, having done deals there for a number of years. We’ll have a look at the following:
- The economic outlook in Hungary
- The real estate investment market in Budapest, Hungary
- Real estate in Budapest after Covid and the war in Ukraine
- Which neighbourhoods to focus on
- Concrete examples of apartments and their precise yield calculations
- The outlook for the real estate investment market in Budapest, Hungary
- Taxes and legal aspects
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 Hungary had a massive, creaking bureaucracy and expensive, outdated social policies.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.
The European Union (EU) played a large role
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.
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. In fact, 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.
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 in terms of 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 serious hit in the central areas of Pest.
Pest, as opposed to 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 is now half what it was before Covid as many owners sold their apartments or switched to long-term rentals. 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.
Now that tourism is booming again, Airbnb yields are actually up. Not because tourism reached pre-covid levels (it hasn’t) but because of 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 such a Benedek is important, as normal agents will tell you whatever to sell you the apartment you are looking at.
The war is Ukraine has been a net positive for Hungarian real estate 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).
Looking at my own apartments in Budapest, rents plunged about 30% during Covid, then gradually started going up early 2022, and are now back to pre-Covid levels thanks to the influx of Ukrainians and tourism doing well again.
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 main source of energy. 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 needs to compete on world markets to try 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 own energy, and will make fat profits exporting energy to Europe which is now dependent. 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, particularly German industry.
- Hungary is very dependent on industrial exports to Germany and Austria. For instance, exports of vehicles represent 18% of goods exported in 2018. European car-makers are not doing well these days. This reliance on car exports is a key risk, though it isn’t as bad as in Slovakia, an extreme case (32% of its exports are cars).
- 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.
- The Hungarian president 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.
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.
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 will increase pressure on the HUF. Expect the HUF to continue its downward slide, 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 own 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 great 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.
This stagnation is crucial to understand:
- The overall prices in Budapest stagnated since 2018, but during Covid there was a big shift in money from the center to the outskirts. So the outskirts with private detached houses were booming and seeing lots of transactions, while apartments in the historical center were seeing much less volume and overall declining prices. These “total Budapest” prices hide the changes within Budapest.
- Though flat since 2018, the HUF has gone down. In Euro terms for example prices were actually down 10% by the time this graph was published. Since then, the HUF has further devalued, and the housing market gone up.
The signs of market overheating were already quite present before Covid, judging by the % of foreign buyers, which is a proxy for speculation in the Budapest context.
Prices started dropping pre-pandemic in Q4 2019. As of Q2 2022, the average price per m2 of housing in Budapest varied between an average of €1,300 per m2 in the cheaper districts to an average of €2,700 per prime districts such as the 5th district. In absolute terms, this is cheap by European Union standards for a capital city.
Though affordable in absolute terms, prices are stretched for locals
Real estate prices in Budapest are cheap in absolute terms, 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.
As an investor, this is obviously not the only factor to take into account. 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.
Rising interest rates are bearish for the real estate investment market in Hungary
Interest rates have been going up.
Though this is hardly a positive for the real estate investment market in Budapest, the reality is that interest rates were already much higher in Hungary than in other countries in the region, with the typical mortgage rate being around 4%. This rate has been going up, and it will have an impact in a market where about 45% of homes are purchased with the use of credit.
This figure, though significant, is much lower than in many European markets.
The reality is that the real estate market in Hungary is still underlevered compared to its peers in Europe.
There is scope for house credit expansion in the real estate market in Hungary, which could be a significant long-term catalyst.
But not enough supply is coming online
On the other hand, Hungary has a very low new housing construction rate by European standards.
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 the fastest in Europe.
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.
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 as 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 also require that your home owners 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.
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.
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 less 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 is the area that has the highest concentration of Airbnb lets and of foreigners living there to study, work and play. This is the area that has seen the biggest hit and price drops though price have started rising fast again. I firmly believe that this is where the best opportunities are to be found.
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?
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 ground floor) of a gorgeous historical building. It’s a triple A location.
The price is HUF 89 million (~ €220,000) including furniture. You wouldn’t be able to haggle much judging by the latest figures on bargaining. If anything, the strong decline in discounts points to a strengthening market.
In this case, let’s assume 2% off due to the situation, which would mean a price of HUF 87.2 million which would be (~€215,000 / €2,900 per m2).
The apartment is currently tenanted for €800 per month + utilities and common charges. Tenants pay the common charges of HUF 19,500 per month (~€48) which include water. They also pay 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.
|Rent of €800 x 12||€9600|
|Gross yield INCLUDING buying costs (4% stamp duty +1.2% legal fees)||4.5%|
|Vacancy of 5%||€480|
|Management + finders fees 15%||€1368|
|Net income before income tax||€6512|
|Net yield on purchase price of €215,000 +5.2% buying costs (€226,000)||2.9%|
A net yield of 2.9% for historical, core property in a European capital city is actually a decent yield these days.
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.
Video case study: An example of a real estate investment in Budapest, Hungary
So what is the outlook for the real estate investment market in Budapest, Hungary
- 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 going up, but they are going up from a high base and Hungary is one of the least levered real estate markets in Europe, so it will have a limited impact,
- 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%-10% 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.
- The market has been getting much stronger in the past few months, so there is good momentum in the market.
Overall, I feel that Budapest is one of the most investable markets in Europe. It is far from perfect, but it is a very decent long-term investment. I own real estate investments in Budapest, and do not plan on selling them.
When you are ready to pull the trigger, feel free to get in touch with Benedek. He is 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 to renovations and rental management. So he can offer you a turnkey solution.
You can find out more about Benedek’s services here.
Non EU people can obtain residency in Hungary by investing in real estate
Yes, you read this correctly. If you are not from the EU, let’s say you’re from the US or Canada, and you want to live in beautiful Central Europe, then Hungary offers you this opportunity by making a real estate investment there.
It requires a minimum investment of €180,000, good lawyers and the proper structure, but it is very doable. Your family can also obtain residency along with you. More details from my partner Laszlo here.
Legal and Tax aspects to making a real estate investment in Budapest, Hungary
It’s important 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 English/Hungarian so that you are not only not clueless, but so that you have 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 lawyer here. 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 here.
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
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. I highly recommend it.
Available services in Hungary:
- A Real Estate Lawyer in Budapest, Hungary
- My favourite buyer’s agent in Budapest, Hungary
- Residency-by-Investment in Hungary for non-EU people
Other articles on Hungary:
- How to maximize Airbnb yields when you invest in Budapest – up to 10% net yields
- Price drops of 30% in downtown Budapest
- A cheap Plan B in rural Hungary
If you want to read more such articles on other real estate markets in the world, go to the bottom of my International Real Estate Services page.
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.