Direct numerical simulation is applied to investigate instability and transition to turbulence in the flow of an electrically conducting incompressible fluid between two parallel unbounded insulating walls affected by a wall-normal magnetic field (the Hartmann flow). The linear stability analysis of this flow provided unrealistically high critical Reynolds numbers, about two orders of magnitude higher than those observed in experiments. We propose an explanation based on the streak growth and breakdown mechanism described earlier for other shear flows. The mechanism is investigated using a two-step procedure that includes transient growth of two-dimensional optimal perturbations and the subsequent three-dimensional instability of the modulated streaky flow. In agreement with recent experimental investigations the calculations produce a critical range between 350 and 400 for the Hartmann thickness based Reynolds number, where the transition occurs at realistic amplitudes of two- and three-dimensional perturbations.