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THE OVERSEAS MARKET

FINANCIAL DATA

THE EARNINGS RECORD

RATIOS

CASH FLOW

Forex Demo Accounts Explained

BALANCE SHEET

COST OF CAPITAL

MODERN PORTFOLIO THEORY

RULES FOR WORKING WITH THE FINANCIAL MEDIA

AIMS OF FINANCIAL PUBLICITY

CATEGORIES OF BUSINESS NEWS

Orchestrated Assault on the Dollar

ISLAMIC FINANCE AND STANDARD SETTING

Korean Credit Card Market

Hungary's accession to the EU in May 2004 had a positive effect on the continued growth of the economy, leading to a rapid increase in incomes and infrastructure investment.

Owing to the increase in private investment the economic growth reached 4.2% in 2004, up from 2.9% in 2003. Table 6.7 shows the economic profile of Hungary. Hungary's main macroeconomic problem was fiscal deficit due to insufficient revenues and weak expenditure discipline, which persisted in the first half of 2005. There has been some progress in structural and institutional reforms including privatization, which was completed and finalized in 2005.

In Central Europe, Hungary has been the first pioneering country to embrace private market principles since the 1970s. By following such principles over two decades, the proportion of privately owned homes reached 70%. The large state-owned bank (OTP), supported the early move towards housing privatization by issuing mortgages, albeit heavily subsidized, which placed a heavy burden on the state budget.

Despite the continuous contribution of the government's direct and indirect subsidies, there were positive signs that a more active and competitive private lending market was emerging. Several banks entered the mortgage market, providing both their own product and that subsidized through the enacted mortgage bank system. New products such as condominium rehabilitation loans were introduced. Renovation became an increasing niche market for finance and, of course, construction work.

Over the past years, the government enacted laws and regulations intended to decrease credit risk and thereby to increase lenders' security. Blood suggests that mortgage default insurance could play a fundamental role in sharing risk across the system. To avoid moral hazard he suggested that 'only the top slice of the eligible loans should be guaranteed and the program should be well targeted'.

He also views the private mortgage insurance would follow quickly if a publicly sponsored program were developed. Since the beginning of the privatization process, property values have surged and new construction has begun to increase.

Housing finance systemin Hungary Commercial banks, mortgage banks, and contract savings banks are the three main types of financial institution that have participated in housing finance since the 1990s. The mortgage lending activity started to grow significantly as a result of the increased number of banks and the institutional development in the 1990s. The idea was to make mortgage loans more available for households by establishing a suitable interest rate subsidy.

The decline of the subsidy scheme was designed to be parallel to the fall in inflation (Mark and Tabler, 1999). To achieve these objectives, two different types of interest rate subsidies were introduced. The programme was launched in January 2000, by providing loans connected to mortgage bond subsidies.

Due to their subsidization the mortgage bonds have become the primary resource for mortgage loans. With over 40 banks serving 10 million people, Hungary is considered 'over banked' (BCE, 1999). The number of commercial banks and financial institutions on the housing lending market has grown considerably due to the new subsidy policy introduced in 2000, according to the Hungarian Central Statistics Office (HCSO) data.

There were 16 commercial banks, 3 mortgage banks and 179 savings cooperatives which operated in the market, which resulted in a less concentrated market in 2002 (Kiss, 2002). The increased number of mortgage allocations coupled with government deficit made the introduction of changes inevitable by the end of 2003.

The mortgage programme became more expensive due to the increase in the government bond rate, which soared above 12%. The 'construction lobby' have exerted their influence to change the subsidy programmes, as they argued that subsidies had not helped the housing investments but rather used in the existing housing market.

Nevertheless, the allocation of mortgage loans decreased as a result of the decrease in subsidy. The introduction of a new foreign-exchange-dominated mortgage loan made the total decrease less than was expected.

Foreignexchange-dominated mortgage loans constituted 50% of the total (HUF 100 billion) new loans issued in the last quarter of 2004. The government's fiscal burdens, however, become smaller, as no subsidy was given to these loans (Hegedüs and Struyk, 2005). By 2005, the government initiated a new programme in order to invigorate the mortgage finance system.

The programme was designed to provide households with both subsidized mortgages and the foreign-exchange-dominated mortgage. The housing construction subsidy increased, and its use in the market of the existing units expanded by 50% of the subsidy level. The initiation of the programme was a response to widespread criticism of the mortgage subsidy programme.

As its loan-to-value (LTV) ratio was around 50-60%, the programme was seen to favour the relatively rich, leaving households without inter-generational transfer and substantial savings out of the programme. The argument was that subsidies for existing units led to a rise in prices because of the rigidity of the supply. However, the market of the existing units and new investment cannot be separated. Fifty six percent of the buyers enter the market selling their previous units. Thus the existing market and new market are strongly interrelated.

During the period of rapid expansion of housing loans, household savings decreased substantially, which contributed to macroeconomic problems at the end of 2003 (Palocz, 2003). The OTP (National Savings Bank) has continued to dominate the Hungarian housing finance market, responsible for 90% of loans made. In Poland, while PKO BP still represents around 60% of the value of all loans made, some ten other banks have aggressively pursued the market and are increasing their share as time moves on.

In order to overcome the problem initiated by the elimination of the old interest subsidy and to make mortgages affordable, the government encouraged OTP (and other lenders) to use the USAID-designed Deferred Payment Mortgage (DPM). DPM is an instrument comparable with Poland's DIM, which enabled households to initiate a loan with relatively low payments set through a fixed, low, interest rate. Hungary has also embraced the Housing Savings Banks (HSB), modelled on the German/Austrian Bausparkassen.