Poland's growth slowing, amidst weak demand
Lalaine C. Delmendo | April 28, 2020
The average price of existing flats in Poland's 7 big cities (Warsaw, Gdańsk, Gdynia, Kraków, Łódź, Poznań, and Wrocław) rose by 5.6% in 2020 to an average of PLN 8,325 (€1,819) per square metre (sq. m.), according to the Polish central bank, Narodowy Bank Polski (NBP) – only about half the y-o-y growth of 10.84% in 2019 and 10.3% in 2018. When adjusted for inflation, prices increased by a modest 2.78%.
In fact on a quarterly basis, house prices in the 7 big cities fell slightly by 0.8% in Q4 2020 (-1.1% inflation-adjusted).
In Poland's major cities:
- In Warsaw the average price of existing houses rose by a modest 2.7% during 2020 (and actually declined slightly by 0.1% when adjusted for inflation), a sharp slowdown from the prior year's 6.2% rise.
- Łódź saw the highest house price rise among Poland's seven major cities, with a 13.4% (10.3% inflation-adjusted) y-o-y price surge in 2020.It was followed by Kraków and Wrocław, with price rises of 9.5% and 9%, respectively.
- Other Polish major cities also enjoyed high price hikes, including Gdańsk (7.1%) and Gdynia (6.1%).
- Among the 7 big cities, Poznańsaw the lowest price rise of 2.2% during 2020, with prices falling by 0.5% when adjusted for inflation.
Warsaw has Poland's most expensive housing, with an average transaction price for existing homes of PLN 10,072 (€ 2,198) per sq. m. in 2020, according to NBP. Housing is also expensive in Gdańsk, with an average price of PLN 8,874 (€1,936) per sq. m., and in Kraków with PLN 8,118 (€ 1,771) per sq. m. Other cities major cities include Wrocław with PLN 7,973 (€ 1,740) per sq. m., and Gdynia with PLN 7,906 (€1,725) per sq. m.
Łódź has the cheapest houses among the 7 big cities, with an average price of PLN 5,522 (€ 1,205) per sq. m.
Both demand and supply have fallen last year due to the pandemic. In 2020, the total number of new flats sold in the country's six major cities plunged 19% to 53,000 units from a year earlier, in contrast to a slight growth of 0.8% in 2019, according to JLL's Q4 2020 report. New supply also fell by 24% last year.
Foreigners can freely buy condominium units in Poland. Land for commercial purposes can be freely bought by citizens of the European Economic Area (EU + Iceland, Liechtenstein, and Norway).
Yields in Warsaw and Krakow are good, at around 6%
Gross rental yields, i.e., the gross return on investment in an apartment if fully rented out, in the centre of Warsaw, are 6.0% for a 90 square metre (sq. m.) apartment. Such an apartment might cost around EUR 1,200 per month to rent, but around EUR 235,000 to buy. There are similar yields on 120 sq. m. apartments, though prices and rents are obviously higher.
These are good yields. Such good yields are obtainable in all Warsaw's central areas such as Mokotów, Śródmieście, and in other areas too. 6% is the normal yield throughout the city, and very small apartments are likely to yield even more (though we don't have the research to substantiate this).
Surprisingly, the same is true of Krakow. Apartments here are broadly similar in price to the less central areas of Warsaw. They return rents of around EUR 11 - EUR 12 per sq.m. per month. A 90 sq. m. apartment in Krakow will cost you around EUR 200,000, and rent for around EUR 1,100, producing a yield of 6.5%.
The big downside is that round trip transaction costs are high in Poland. See our Poland transaction costs analysis and our Transaction costs in Poland compared to other countries.
Income taxes are high in Poland
Rental Income: Net rental income is taxed at progressive rates, up to 32%.
Capital Gains: Capital gains incurred on properties sold within five years of acquisition are taxed at a flat rate of 19%. Capital gains incurred on properties sold after a 5-year holding period are exempted from capital gains tax.
Inheritance: Gifts and inheritances of Polish property are taxed at progressive
Residents: Residents of Poland pay taxes on their worldwide income at progressive rates, up to 32%.
Buying costs are low in Poland
Roundtrip transaction costs, i.e., the cost of buying and selling a property, are around 5.35% to 8.10%, with all costs falling on the buyer. For residential apartments, real estate agent’s fee is typically 3%.
Law neutral between landlord & tenant, but unstable
Rent: Rents can be freely negotiated between landlord and tenant. Rent indexation clauses are legal.
Tenant Security: However, the general situation over rental laws is worryingly unstable. Strict re-regulation of the rental sector was recently legislated by Parliament. Fortunately, it was declared unconstitutional shortly after coming into law. Populist pro-tenant feeling is strong.
First economic contraction in 24 yearsPoland’s economy shrunk by 2.8% last year, in contrast to a healthy 4.5% growth in 2019 and the first contraction since 1996, amidst the pandemic. The economy grew by an average of 4.2% from 2014 to 2019.
The economy is expected to grow by a modest 2.7% in 2021, according to IMF estimates. The country’s central bank is more optimistic, projecting a GDP growth of 4.1% this year, an upgrade from its previous forecast of a 3.1% growth.
In March 2020, the government unveiled a stimulus package worth PLN 212 billion (€ 46.2 billion), equivalent to 9.2% of the country’s GDP, to cushion the impact of COVID-19. Then in November 2020, Polish Prime Minister Mateusz Morawiecki announced aid for businesses that suffered during the second wave of the pandemic in transport, retail, and tourism. The new stimulus, called Financial Shield 2.0, was valued between PLN 35 billion (€ 7.6 billion) to PLN 40 billion (€ 8.7 billion).
Poland’s government fiscal deficit surged to about 8.4% of GDP in 2020, sharply up from just 0.7% of GDP in 2019 and the highest ever recorded, according to the IMF.
Government debt increased to about 60% of GDP last year, from 46% in 2019 and 48.8% in 2018.
Annual inflation stood at 2.7% in January 2021, down from 4.3% a year earlier, according to Statistics Poland. Inflation averaged 1.1% from 2013 to 2020.
Unemployment rose to 6.5% in January 2021, up from 6.2% the previous month and the highest jobless rate since March 2018. Likewise, the number of unemployed increased to a near three-year high of 1,046,000 people in January 2021.
Tension with EU raises political uncertainty
In January 2020, the Polish government passed a law that makes it possible for judges to face disciplinary actions if they make rulings that the government does not agree with – a move that the EU strongly opposes.
The conflict has been brewing since the populist Law and Justice Party (PiS) candidate AndrzejDuda won the presidential elections in May 2015 and the PiS party won the majority of seats in November 2015.
In 2017, the EU took the first steps toward stripping the country of its voting rights – a penalty never previously imposed on any member nation.
Despite this, Poland continued with its "reforms", formally introducing a law in July 2018 that lowers the retirement age for judges from 70 to 65. This triggered widespread street protests after more than 20 judges (about a third of the total) were forced to retire. This caused the EU to issue a ruling that obliged Poland to suspend the law immediately. And in 2019, the European court ruled in a landmark decision that Poland’s move to lower the retirement age of judges was unlawful.
After Duda narrowly won last year’s presidential elections, it is expected that he will continue his controversial reforms to the judiciary and his opposition to abortion and gay rights.
Poland and Hungary vetoed EU’s budget plan last year, delaying the release of the bloc’s landmark stimulus package, worth €1.8 trillion, because they oppose the tie between disbursing EU funds and compliance to European vales, the so-called rule-of-law mechanism.