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By overtaxing construction companies, Hungary is amplifying the real estate bubble in Eastern Europe

The Hungarian government has announced the profit overtaxing of large manufacturers of construction materials to combat rising domestic prices. The aim of the measure seems to be to supplement budget revenues, but unfortunately it will lead to a reduction in the internal market and an increase in prices in neighboring countries. Under these conditions, prices in real estate markets in Eastern Europe will reach new highs.

The Hungarian government has announced an additional 90% tax to be imposed on the overprofit of  large producers of sand, gravel and cement. Officially, the authorities in the neighboring country are trying to counter the rise in prices for construction materials. In reality, any additional tax will lead to an increase in prices and the measure will cause major imbalances in the construction materials market. Its effects have the potential to further complicate the situation on the real estate market in Hungary and neighboring countries.

This measure involves two components. First of all, maximum prices are set, but they are used only as references for calculating taxes, companies being free to sell at higher prices. Second, a tax of 90% of the profits recorded above these maximum prices will be imposed. Thus, if the selling price does not cover the average cost and profit margin of a firm, it will be forced to raise the price to a higher level. Given that the company is entitled to only 10% of the profit recorded at sales prices that exceed the reference threshold, we can expect a significant increase in sales rates.

The additional pressure on construction material prices will have a cascading effect on the Hungarian and neighboring markets. Rising domestic prices will lead to a reduction in demand and an attempt to make up for the shortfall through direct intra-Community purchases. We expect to see an increase in demand in neighboring countries, especially in border and proximity areas. This pressure from Hungary will lead to an increase in the demand for construction materials from neighboring countries and thus to an increase in prices. Maintaining this tax for a long time will lead to a flight of capital from Hungary and will lead to the development of specialized shops near the borders.

If we analyze the problem in a timely manner, we will notice that the measure has the capacity to generate three major direct trends on the Hungarian market:

First of all, any additional tax is aimed at increasing the budget revenues and will be felt in the selling prices. Manufacturers will be forced to adjust their prices to cover their costs and minimum profit margins. The decrease in domestic demand will be accompanied by an increase in demand in neighboring countries.

Second, importers will avoid making a profit in Hungary. How will they do this? It’s not as complicated as it sounds. For example, they could use shuttle companies, outside Hungary, from which to purchase construction materials at a cost close to the domestic selling price. Thus, the bulk of the profits will be registered in other states and the taxes paid in Hungary will be at most symbolic.

Thirdly, many individuals and legal entities in Hungary will start sourcing from neighboring countries in the European Union, taking advantage of the free  movement of goods and services. Prices are expected to rise in these countries as a result of additional demand.

The Hungarian government has managed to show amateurism and a poor understanding of the mechanisms of the market and the European Union. This hasty decision will lead to the narrowing of the local market and the growth of those in neighboring countries. The pressure will be felt quickly in the real estate area as well. Given that the rest of the factors will remain unchanged, house prices, which have risen rapidly in the last year, will continue to rise.

In the context of increasingly clear signs of a housing bubble, we can expect to see an accelerated explosion. Even if the specialized press is forced to display an improbable optimism, the reality is that the international market is in an extremely fragile situation. The bursting of the housing bubble can prove to be a factor in a prolonged economic crisis.

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