The general consensus of the opinion in the national real estate trade is that 2011 will be a good year.
What of course had been expected by the trade (at least what had been included in consensus surveys or authoritative experts’ statements) did not proved right.
It was thought 2008 and 2009 were to be a difficult period, while 2010 a good year with everything going as well as before. Or rather fairly well...
It happened in another way.
Actually, it is bad news that – while things are going still badly – many people think it is the bottom of the pit, we cannot fall further down. Nothing, however, has been practically solved. Bank portfolios have not been cleaned out and the distressed market has not evolved so the processes thereof could not taken place. Big portfolios have not changed hands at new prices and not a large number of developers declared bankruptcy. Furthermore, either negative equity situations have not been disentangled or the real estate elements of no value – accordingly, which might be thrown away – have not been re-priced.
Everything that has happened so far was only the overture.
Meanwhile, the international situation is getting worse. Keeping our eyes open, beside all of our hopes, endurance and confidence, we can say there are not any favourable tendencies. As far as either macroeconomics, politics or global economy are concerned, nothing indicates a remarkable new year.
Let it be admitted, one needs to be quite bold to fantasize about a good year – with the situation of Eurozone being so insecure. Let’s have a quick look at the scenarios for the Hungarian and international tendencies:
“Worst case scenario”:
At the international level:
Problems in the Irish and Greek financial system will not be worked out. Budget deficit cannot be reduced to a large extent by reason of internal politics. None of the other countries in trouble (Spain, Portugal, Italy) cannot be given powerful help any more as the economically potent countries (e.g.: Germany) will deny to contribute to further help, due to their internal politics. In the countries having big commercial bank systems (Germany, Great-Britain, Italy, Ireland, France, etc.) stress tests turn out to be too euphemistic, consequently, the situation of banks are worse than expected. Greater part of bank portfolios has to be written off. Nevertheless, banks need more governmental support or else they will go bankrupt. The EU will become ungovernable, so more and more countries will secede from the Eurozone while investors escaping to havens to dollar and gold. As far as other financial undertakings – property funds, private equities – are concerned, - it will turn out that most of the invested money has been burned into the air...
In Hungary:
A very long and distressing period will set in, with a great deal of problems and very little increase. In the international chaos – even owing to the failure of its revolutionary activities – is going to slip further into disinterest. The national property market will basically just freeze up for a long time – even for a decade. There will not be yield based transactions p and the housing market will not get under way, either.
“Best case scenario”: - With much luck
At the international level:
There will not be panic. Owing to the European politics, the financing problems of the countries in difficult position will be worked out, even by such countries cutting back their deficit to a large extent, defying their own internal political standing. Making money from dollar and gold investments, investors will take to high-yield investments. The winners thereof might even be the state securities of the developing countries. Dollar is weakening, stimulating the US export activities. China, India and other big developing countries will turn to their own market. German export will start up, helping the growth of the countries concerned (e.g.: the Czech Republic and Hungary). Inflation will rise to a lesser extent in the Eurozone.
Tendency in Hungary:
The Hungarian economy will start growing, first slowly then steadily. Crisis management will turn out to have been successful according to the revolutionary acts. Gaining space and time by special taxes and money from pension funds, the government will start aggressive reforms. Consequently, we would have extremely generous budget for 2012-13.
Housing market will find its legs within a few years and after the bankruptcy of most of the housing developers, gradual increase would be experienced also in the housing development market. Transactions will start up in the investment market but there will be demand only for premium products, resulting in more yields than in Western Europe (do not hope, it may be only at least 8-9%, due to the pressure of inflation). The CF producers will survive with some kind of help, and the negative equity situation will be solved in such a way that the owners do not take out the realised profit for some years but use it for reloading their own equity.
Probable middle course
At the international level:
The situation in Ireland and Greece (even if it is temporarily worsening again) will become stable, owing to the help offered by IMF and Brussels. Countries in difficult position will declare great reforms reassuring investors – even if they aware of the fact that only a small portion of such reforms are going to be implemented. The other southern countries will be assisted by the European Union, even if it is enough for Germany...
Big bank portfolios will be continued to be settled (cleaning) from yearly profits. Therefore, restrained financing market may be expected for quite a few years. As a result of further portfolio devaluation, more local rescue packages will probably be needed. Trust in the common European management and the Euro will waver but the Union and the common monetary policy may be treated as a whole. The Euro will weaken drastically against dollar (despites, the strengthening of dollar might lead into further problems in the global economy). In Brussels, several political questions will fail to be resolved and the member states hardly reach an understanding in economic issues - most of the nations will start a more national (local patriot) politics. The European economy will stagnate for a long time.
Owing to the huge debts having been resulted from the rescue packages, the Eurozone will be under great inflation pressure, even leading to a two-digit price index. Therefore, the international investors would stay in their countries (where they are more familiar with the economic and legal environment), spend less and carry out investments in more sophisticated ways and with fewer risks but resulting in higher reimbursement. The bolder companies will invest (or keep investing) in the big developing markets and spend in – for example – Asia.
The existing problems of the global economy would not be worked out after the political decisions outlined herein above. What is more, further problems would arise in such a case. The expected boom might keep us waiting even for a further decade.
Tendency in Hungary:
The small and problematic developing countries (including Hungary) may be the losers of the international situation. Inflation and the yield growth expectations incidental thereto as well as the investors avoiding risks will erase the countries having insecure legal and political environment from the international investment map.
I personally believe (hope) that the politics of the government ‘swimming’ against the main stream may achieve success, there will be great reforms in spring and the Hungarian budget policy will also have success (3% budget deficit in 2011 and a very deep decrease in national debt). Consequently, confidence may be given back to us in the market. In this case premium products might have a chance to be sold at over 9-10% (inflation!!!).
Fundamentally changed housing market and – incidentally – housing developments might get under way in 2-3 years’ time, with completely new market players, products and pricing. First there will probably be a narrow market with thin margins, small projects and a lot of work to carry them out.
One thing is for sure, we should go to church and breathe prayers more frequently...
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