ITDP's latest TransportActions

[SUSTRAN Network Secretariat]

A number of people got only a blank message instead of the ITDP
TransportActions newsletter sent to the list a few days ago. I suspect the
problem might be that the message was VERY long. For that reason, it
initially bounced from the list and I had to explicitly "pass" it. However,
this has not worked completely apparently. 

Can I suggest that anyone who got a blank message from ITDP please visit
the ITDP web site (http://www.ITDP.org) to see the full TransportActions.
It is well worth a look.

Here is a contents list of TransportActions, "Winter" 2000 (sic - it's not
winter here...),  

* Saving Sustainable Livelihoods:  The Fight for Jakarta's Becaks 
* Afribike Scales Up: Project Updates 
* US Bike Industry/Community Bike Programs Mobilize Haitian Youth 
* Marshaling Support for Global Cycling in Washington, DC 
* High Rollers Threaten Coastal Ecosystem:  Corredor Sur Update 
* Hungarian Sprawl:  Another S & L Crisis in the Making? 

 

In addition, I am including the item on Hungary below, since it has
generated some discussion. 

Paul 
---------------------------

HUNGARIAN SPRAWL: Another S & L Crisis? 

Alarming Trends in Hungarian Commercial Real Estate 

 Hungary is currently experiencing a boom in speculative real estate
construction that is encouraging auto use and sprawl in areas already
suffering from congestion and air pollution--much of it in the ecologically
sensitive Buda hills.   The boom is not a purely market-driven process
because bankers and developers know that if the loans go bad, they will be
bailed out by the Hungarian taxpayers.  Sound familiar?  The situation in
Hungary today is similar to the U.S. in the mid-1980s, when weak banking
regulation and irresponsible real estate lending led to the Savings and
Loan Crisis that cost U.S. taxpayers $500 billion, or $2000 per every U.S.
man, woman and child. 

Cars and trucks are subsidized in Hungary and the U.S. because they don't
have to pay the full social costs of making their trip.  But taxpayers all
over the U.S. not only subsidized car owners by building highways in Texas
and California, they also ended up paying for all of the speculative real
estate developments that sprawled out along these highways in the 1980s
when they bailed out the Savings and Loan industry.   Today, Hungarian
taxpayers are facing the same risk: banks are making irresponsible loans to
real estate speculators building shopping malls, knowing that if the malls
fail, the taxpayers will bail them out.   In Hungary, the problem is made
worse by the fact that real estate developers also receive large subsidies
from the Unemployment Fund and various tax breaks, regardless of whether or
not the projects make any economic sense. 

In 1992, virtually all of Hungary's banks (all of them State owned) were in
default due to the collapse of the Eastern economies.  Between 1992 and
1996, the Hungarian government covered this with US$3 billion in funds from
the sale of bonds which ultimately will be paid by Hungarian taxpayers, and
an influx of foreign capital.  The banks were sold to private investors,
many of them foreign, and foreigners now own approximately 60% of all
banking assets in Hungary.   The bank failures did not end there.   In
1998, Postabank, one of the largest banks involved in real estate
speculation, had to be rescued with a $1 billion bailout, and 1999 another
major bank was bailed out by the state for about the same amount.  OTP,
Hungary's largest bank, responsible for 50% of retail banking and 90% of
home mortgages, remains in trouble. 
Over 35% of  OTP's pre-1989 loans are in default, roughly 30% of the loans
it made after 1993 are in default, and even about 10% of its new 'market
rate' loans are also in default. While some analysts say the overall health
of the Hungarian banking system is improving, the level of exposure to a
major downturn in the real estate market has increased significantly.   And
the risk is very real. 

 One sure indicator that Hungary's banks are in trouble and the real estate
market is about to collapse is that virtually all of them have recently
sold and leased back to themselves the buildings which they own.  Citibank
did the same thing in the late 1980s when it was trying to cover a $100
million loss on bad Latin American debt.  Because real estate enters a
bank's balance sheets at its historical value rather than the current
market price, selling your own building and then leasing it immediately
increases the value of the capital assets dramatically.  As banks are also
regulated in Hungary as elsewhere by requiring the bank to have 5% of its
total lending in capital assets, this accounting maneuver allows banks to
make more loans relative to their net worth.   Of course, if the property
market is about to collapse, this maneuver makes even more sense: the loss
in capital value would be absorbed by the purchaser, rather than by the
bank itself. 

The other evidence that more banking troubles are in store was reported by
Jones, Lange and LaSalle, an international real estate company.   There was
a real shortage of commercial real estate in Hungary in the mid-1990s,
allowing some firms to earn a return on their initial investment in a
remarkable 5 to 8 years no matter how poorly managed or maintained.  Given
the lack of planning controls and weak local government oversight, local
government subsidies, lack of any property taxes, and loose credit
available, the Budapest metro area was a veritable Shangri La for real
estate speculators.  Today, however, according to Jones, Lange, and
LaSalle, Budapest is already overbuilt, with current vacancy rates at
13.5%.   Hungary has recently built an additional 530,000 square meters of
shopping facilities, giving the country already as many square feet of
shopping facilities per capita as the U.S., and more than Holland.   This
in a country where the population is falling and per capita incomes have
yet to rise back to their pre-1989 levels.  While the recovery of incomes
since 1996 stimulated the current boom, it is now out of control.  Today
there is another 350,000 square meters either under construction or planned
that have been given the go-ahead from government authorities.   Only 29%
of this new construction has secure tenants, meaning that the vast majority
of it is being built on pure speculation.   When all of these new shopping
facilities become available, it is almost inevitable that real estate
prices will collapse. 

There is extensive evidence that the current real estate values cannot be
sustained.  According to real estate industry experts, the rental cost of
the shops in the new West End City Center is roughly 70DM/square meter.  It
is impossible to make a profit as a bank in Budapest at this price, and
banks are one of the most profitable businesses.  How can small shops
selling soft pretzels possibly make a profit? 

Unlike in the West, where shopping center developers tend to retain
ownership of the facility and rent the individual units to tenants in order
to ensure the 'tenant-mix' necessary for commercial success, in Budapest
most of the shopping centers are turned into condominiums and the
individual shops sold off to the shop keepers.  Not only does this mean
that there is no control over the tenant mix, it also means that the
initial developer has often 'cashed-out' of the project.  In other words,
they have dramatically minimized their own financial exposure from any
default by the shop keepers.  Left at risk are the shop keepers, the banks,
and the taxpayers.  The banks, particularly those without foreign
management experience, have little experience in assessing commercial real
estate risks, since commercial real estate development is a relatively new
phenomenon in Hungary. 
  
Most of the new spaces are being bought by the existing shop owners along
the Grand Boulevard are hedging their bets.  Fearing that the new malls
will take away all their business, the same shop owners have used their
existing shop and the new shop as collateral to borrow money from a bank,
frequently from OTP or Postabank.  They plan to see what happens to the
customer traffic, and then sell the shop with the lower levels of traffic.
When this sell-off begins, commercial real estate prices are likely to
collapse.  Either the shopping centers will go bankrupt or large sections
of the Grand Boulevard will be boarded up, or both.  Already there are a
large number of vacant, boarded up shops in the VII and VIII districts.
When they do, the value of the collateral backing these bank loans will
also collapse.  When a large number of these businesses fail, as they
inevitably will, the banks will have collateral worth far less than the
total value of their loans.  Many predict that thousands of retailers are
likely to go bankrupt.  The best ones will renegotiate their leases.   The
banks, already in trouble, will need to be bailed out yet again by the
taxpayers. 

Fueling the speculative real estate frenzy, according to industry insiders,
is the fact that many of the firms involved are using the real estate
developments for money laundering.  Spending cash on bricks and mortar is a
way of converting illegally-earned cash in to legal capital assets.   These
investors don’t really care as much how profitable or well managed their
assets are, as the main value comes from the laundering of money. 

 All of this speculative real estate development is an indirect way for the
taxpayers to subsidize automobile-dependent suburban sprawl in Hungary
which will lock the country into a permanent dependence on private cars,
virtually all of which are produced primarily by foreign companies.  The
majority of these new shopping centers are originally located in suburban
areas, where land was cheap, local governments were offering generous tax
breaks, and there were few if any planning guidelines.  Almost all of these
are located in the higher income Buda suburbs.  The largest cluster are at
the junction between the M0 ring road, the M1, and the M7 highways, known
as the Western Gateway, near the affluent suburb of Budaors.  Other
clusters are in North Buda near the intersection between the M0 and Road #2
and on to the North towards Szentendre, and South Buda.  These developments
are very all heavily auto-dependent. 

 Though many of the new mega-malls are being built in transit-friendly
locations--like those near Moskva Ter. and the West-End City Center, and
planned East-End City Center--they are undermining locally accessible
shopping facilities and degrading the quality of life downtown.   By
concentrating commercial activity in specific nodes of the city, they are
also concentrating traffic.  This concentration of commercial activity is
killing small shops in certain neighborhoods, forcing local residents in
these districts to walk much farther to do their shopping.  This is also
leaving the lower density, transit dependent lower income populations in
outlying parts of Pest with few nearby shopping facilities.  Furthermore,
as even the downtown facilities are built with hundreds of units of
parking, much of the traffic generated is motorized traffic.  Finally, much
of this new commercial activity is being developed on the few remaining
green spaces in the center.  Budapest has a severe shortage of children’s
play grounds and open spaces, which most families sight as the major reason
they wish to relocate to suburban areas.  This concentration of economic
activity in specific commercial nodes also concentrates property values in
very selective ways which benefits those private interests that have the
political influence to control the real estate development process at the
expense of small homeowners and shopkeepers. 

-----Housing Likely to Follow Shopping Malls to the Suburbs 

Housing subsidies in Hungary also continue to encourage suburban sprawl and
do little for the majority of Hungarians who are dissatisfied with their
housing.  Over 91% of Hungarians nominally own their own apartment or home
as a result of a mass privatization scheme initiated before the transition.
  While some low interest loans were made available to finance this
transition to home ownership, with incomes declining rapidly after the
transition, many families were still unable to afford to purchase their own
housing.  As a result, many low income families have defaulted on their
mortgages.  Most of these bad loans are still on the books at OTP, the
largest bank in Hungary.  As Hungary has only a very minimal amount of
'social housing' available, and there has been no addition to the stock of
social housing since the transition, it was first illegal and then
politically difficult to foreclose on these properties and evict the
residents.  Once this situation arose, however, many people who could have
paid their mortgages took advantage of the situation and simply refused to
pay their mortgages, knowing it would be very difficult to evict them.
The result of this de-facto housing policy is that the taxpayers are
subsidizing a lot of people cheating on their mortgages. 

Under such conditions, and with inflation rates over 15% a year, banks have
been extremely reluctant to lend money for either new housing or
rehabilitation.  Interest rates on mortgages rose as high as 25%.   As a
result, most people finance their housing without any participation from
the private banking system. 

With a negligible amount of bank lending, most people finance their housing
using government capital subsidies and through 'self-help,' both of which
tend to encourage suburban sprawl.  Since just prior to the transition,
government housing subsidies have only been available for new housing
construction. Families promising to buy a new house and have two or three
children were eligible for a one-off capital grant of HUF2.2 million, in
addition to which there was an interest rate subsidy that was 4% for 4
years, then 5% for one year, then 1%.  Most of this new housing was
necessarily located in suburban areas where land was more readily available
and cheaper.   Families wishing to buy or renovate the sort of
deteriorating condominiums that typify the housing stock in more central
locations were ineligible for any kind of state aid, and found it virtually
impossible to get bank loans.   On order to get a loan for renovation of
the building, banks had to make a separate loan contract with every
individual family in the building, as well as with the condominium as a
whole, in order to get the loan, creating an almost insurmountable obstacle
to rehabilitation loans on top of the very high interest rates. 

Secondly, the lack of bank financing meant that most people tended to build
their homes piecemeal.   They buy a plot of land on the periphery and build
the house gradually as their incomes permit.   This self-help housing,
which resembles the situation in Latin American megacities, precludes the
construction of higher-density multi-occupant dwelling construction in more
central areas. 

Even with the subsidies above, in the absence of affordable bank financing,
relatively few families could afford to buy new homes or renovate their old
homes.  As a result, most Hungarians still live in dilapidated multi-family
condominiums with little green space for their children.   Most new housing
construction since the transition has been built by the newly rich in the
Buda hills or farther North or West, although northern Pest also has some
new construction. 
  
 What little social housing remains is also manipulated by District
governments to protect special commercial real estate interests at the
expense of average home owners.  District IX, for example (South Pest by
the Danube) is privatizing large, District-owned social-housing apartments
in their district and using the proceeds to buy cheaper, smaller apartments
for the current residents in other districts, particularly the VII and the
VIII districts.  This process seems to be particularly aimed at relocating
the gypsy population out of wealthier districts and concentrating them into
the VII and VIII districts, where currently roughly 50% of the students in
the schools are of gypsy background.   Ironically, this process of
ghettoization of the Gypsies is occurring near the same urban space that
was once the Jewish ghetto in Budapest.   The VII District has an area
called ‘Chicago’, with the connotation of gang-land Chicago.   In this way,
some of the same forces that led to the concentration of low income
minorities in U.S. central cities in order to maximize profits in the real
estate market in other areas are becoming evident in Budapest. 

 This situation is rapidly changing.  Since 1997, the law has changed
making it easier to evict people for non-payment of their mortgages. Almost
all of the private banks are planning to begin large mortgage banking
divisions in the next year or two.  The recent influx of foreign banks with
much more experience in mortgage lending, and the reduction of the
inflation rate have both increased the likelihood of an explosion of
housing finance in the next two years.  Given the rapid loss of green space
in downtown Budapest and the difficulties associated with in-fill
residential development, it is certain that such an explosion of suburban
housing will lead to a hollowing out of at least certain districts of the
old city.  Furthermore, housing policy is very much up in the air as the
Fidesz government has still not decided on many of the most critical
housing subsidy issues.  If the current suburban bias in housing subsidies
is not removed, while at the same time the current obstacles to a properly
functioning mortgage finance system are removed, the possibility of an
explosion of automobile-dependent suburban residential development are
extremely likely. 
  

------Relationship of these Trends with Transport Sector Trends 

 Many of these real estate development trends help to explain otherwise
inexplicable transportation investment priorities in Hungary.  For example,
the Municipality of Budapest has been intent on completing the
North-section of the M0 ring road and the No. 2 road to the North to
Szentendre and Vacs.  This road will do little to relieve downtown Budapest
from truck traffic bypassing Budapest, while the Eastern section of the M0
would connect the M3 to the existing section of the M0, to the M1, the M7,
and the M5.  Because incomes are low in Pest, however, few shopping centers
are being located there.  The Northern section, however, will serve a
mushrooming number of shopping centers to the North of Budapest towards
Szentendre.  There is thus no question that the purpose of constructing
this Northern ring road has everything to do with increasing real estate
values in Buda and subsidizing new shopping centers in that area, and it
has nothing to do with diverting truck traffic.  That the EIB willingly
funded this section makes clear that the justification for EIB lending
actually has little to do with promoting EU integration, and has everything
to do with both promoting shopping centers, many of which are
European-owned, and lax lending oversight at the EIB. 

 The Budapest metro, which was also fought by the CAAG (Clean Air Action
Group) would also mainly have freed up road space for the heavily congested
Bartok Bela Ut. and the Chain Bridge by closing the tram line on this
bridge.  It also would have increased the value of real estate in this
already valuable part of Buda, while draining public transit resources from
the poorer parts of the city.   As the Municipality fights to push forward
with the Metro project (very much in jeopardy), the surface public transit
system continues to deteriorate while driving up the fares, alienating and
antagonizing riders. 

 In summary, it is clear that transportation policy in Hungary is being
driven primarily by powerful real estate interests who use transport
investments to increase the value of certain urban spaces at the expense of
others.   While property taxes are legal in Hungary since 1992, they are
applied at the District level and are either extremely low or non-existent.
 There are also low betterment taxes.  As a result, those political and
economic forces with control over the processes of transportation and real
estate development are able to use the levers of state to capture monopoly
profits for themselves, while returning nothing to the state which made the
profits possible. 

Conclusion 

 In the U.S., lax banking regulation ended up making a lot of disreputable
real estate developers very rich at the expense of the taxpayers, while
locking the American landscape into an automobile dependency that
undermines U.S. economic competitiveness and making areas like Houston and
Los Angeles some of the most polluted cities in the developed world.  Not
only did the taxpayers buy the highways, they bought the shopping malls.  A
similar cast of characters are repeating the process in Hungary today.   If
public officials in Hungary do not use the banking regulatory system to
tighten lending in the real estate sector and cool off this over-heated
market, the risks to the entire banking system will be serious, and the
adverse affect on the Hungarian landscape will last for decades. 

  
  
  

-- 
Access ITDP's New Website: www.ITDP.org 
The Institute for Transportation and Development Policy 
115 W. 30th Street - Suite 1205 - New York, NY 10001 - USA 
tel: (212) 629-8001  fax: (212) 629-8033