Why aren't Polish house prices rising more?
July 25, 2016
With record-low interest rates, constrained supply, and a new housing subsidy program, housing demand in Poland continues to rise strongly. Surprisingly, house price increases have been very minimal.
The average price of existing flats in Poland's 7 big cities (Warsaw, Gdańsk, Gdynia, Kraków, Łódź, Poznań, and Wrocław) rose slightly by 0.3% (1.3% inflation-adjusted) during the year to Q1 2016, according to the Polish central bank, Narodowy Bank Polski (NBP). During the latest quarter, house prices were up by 0.1% (0.8% inflation-adjusted).
- In Warsaw, the country's capital, the average price of existing houses increased slightly by 0.6% (1.6% inflation-adjusted) y-o-y in Q1 2016.
- Bydgoszcz recorded the biggest increase in house prices of 5.2% (6.2% inflation-adjusted) during the year to Q1 2016, followed by Gdańsk, with a 3.5% y-o-y increase.
- Other Polish cities with minimal house price increases included Lublin, with a y-o-y growth of 2% in Q1 2016, Poznań (1.5%), Białystok (1.5%), Szczecin (1.4%), Gdynia (1.3%), Opole (1.1%), Wrocław (0.6%), Łódź (0.4%), and Olsztyn (0.1%).
- Kraków saw the biggest house price decline of 2.9% (-1.9% inflation-adjusted) during the year to Q1 2016, followed by Zielona Góra (-0.9%), Rzeszów (-0.8%), Kielce (-0.7%), and Katowice (-0.2%).
Warsaw has the most expensive housing in the country, with an average selling price of PLN8,658 (EUR1,975) per square metre (sq. m.) in Q1 2016, according to the NBP. It was followed by Kraków, with an average price of PLN6,827 (EUR1,558) per sq. m., Gdynia with PLN6,407 (EUR1,462) per sq. m. and Gdańsk with PLN6,193 (EUR1,413) per sq. m.
In contrast, Zielona Góra has the cheapest housing in Poland, with an average price of just PLN3,447 (EUR786) per sq. m. in Q1 2016.
In the first quarter of 2016, the economy expanded by 3% from a year earlier, down from 4.3% growth the previous year. Economic growth is projected to remain strong at 3.6% this year, and at 3.7% in 2017, according to the IMF.
Housing sales strongly up
There were about 14,300 housing units sold in Poland during the first quarter of 2016, up 24.8% from the same period last year, according to REAS. In Poland's 6 primary markets, housing sales reached almost 54,700 units from Q2 2015 to Q1 2016, up 25.8% from a year earlier, according to REAS.
The number of flats launched for sale in Q1 2016 rose 21.7% y-o-y to 13,700 units. As a result, the number of apartments offered for sale by end-Q1 2016 increased 1.3% to 48,300 units from a year earlier.
"As expected, Q1 2016 brought a very good sales performance. Those buyers who used subsidies of the MdM ("Housing the Young") program were particularly active," REAS report stated.
Moreover, REAS also stated that demand remains strong for rental apartments. "There is still a lot of interest in buy to let investments. Considering the lowest level of interest rates on bank deposits since 1990, low inflation, as well as stable rental rates, the attractiveness of rental investments is still very high."
Poland had one of Europe's biggest booms - but its bust was not so big
House prices in the country's major cities are still below their pre-crisis peaks seen in mid-2008:
- In Gdańsk, house prices are still down 7.6%
- In Krakow, house prices are down 14%
- In Łódź, house prices are down 15.6%
- In Warsaw, house prices are down 11.5%
- In Poznań, house prices are down 2.6%
- In Gdynia, house prices are down 6.5%
- In Wrocław, house prices are down 17.1%
But Poland's bust has been remarkably small, given the amazing scale of its housing boom from 2004 to 2007. This was fuelled by an inflow of investment due to the country's accession to the EU, record low interest rates, and mortgage financing development.
Property prices suddenly surged in Warsaw - up 23% in 2005, up 28% in 2006, an amazing 45% in 2007, and 13% in 2008, according to REAS. Other cities such as Wroclaw saw even larger house price rises. Behind this boom lay strong economic growth.
However during the 2008-09 crisis the Polish Zloty fell dramatically, and mortgages - mainly denominated in foreign currencies - became unrepayable.
Home prices fell for 6 straight years. House prices in Poland's 7 major cities dropped 13.8% (-25.3% inflation-adjusted) from 2008 to 2013.
Mortgage rates continue to fall
The average interest rate for house purchases in Poland declined slightly to an average 3.5% in May 2016, from 3.6% in the same time the previous year, according to the NBP.
Over the same period:
- The average interest rate for housing loans with original maturity of between 1 year and 5 years fell to 5.65%, from 6.2% a year earlier
- The average interest rate for housing loans with original maturity of over 5 years stood at 3.52%, slightly down from 3.61% a year earlier
The NBP kept its own key interest rate for 16 straight months in July 2016, at historic low of 1.5%. Despite falling consumer prices, the key rate is expected to remain unchanged in the nearest term.
"[T]he council maintains its assessment that ... the current level of interest rates is conducive to keeping the Polish economy on the sustainable growth path," said the country's Monetary Policy Council (MPC).
Moreover, the new central bank governor, Adam Glapinski, said that "Brexit wasn't an earthquake, and so far it's had zero impact on Poland. It causes huge uncertainty, however. And the best choice in this situation is to wait and see."
Gross rental yields attractive; renters plentiful
Gross rental yields are moderately good in Warsaw, varying from 5.5% to 6.5%. In Krakow, yields range from 4.74% to 6.77%, based on the latest Global Property Guide research in April 2016.
The Warsaw district of Mokotow, located just below Srodmiescie, houses many foreign embassies and companies. A 120 sq. m. apartment in Mokotow offers rental yields averaging 6.45%.
Apartments in Srodmiescie, which includes the historic neighborhoods of the Old Town (Stare Miasto) and the New Town (Nowe Miasto), offer gross rental yields ranging from 5.5% to 5.8%.
In the other popular Warsaw areas Ursynów, Wilanów, and Żoliborz, apartments offer good rental returns of around 6.4%.
In Krakow, apartment gross yields here range from 4.7% to 6.7% in April 2016.
Despite attractive rental yields, the big downside is that round trip transaction costs are high in Poland.
Renting is an unavoidable choice for more and more Poles, as stricter requirements for mortgage financing, uncertainty in the labour market, and low growth prospects, discourage households from incurring long-term debts. The movement of people from other cities to the capital, especially students or young people looking for work, also drives people to rent.
About 21% of households in Warsaw rent apartments, with half of these in social and communal housing. Most residential properties in Poland are owned by private individuals.
About 10.7% of the dwelling stock is rented at lower rates, with 5.7% in communal or social housing, 2.1% in cooperative tenancy, 1.2% in state-owned companies, 1.2% the State Treasury, and 0.5% in public building societies, according to the 2011 National Census. The remaining dwelling stock is primarily owner-occupied.
Residential construction activity rising
In Q1 2016, the number of building permits granted increased by 9.9% y-o-y to 42,200 units, according to the CSO. During the same period, the number of dwelling starts also rose by 7.9% to 34,300 units while dwellings under construction increased 2.5% to 717,500 units.
In Q1 2016, dwelling completions surged 18% to 37,400 units from the same period last year. A substantial proportion of Poland's dwelling are being built by private investors, rather than developers.
- Of the dwellings completed in Q1 2016, a huge chunk came from private investors with 18,900 dwellings completed or more than half of the total completions.
- Developers completed 17,300 dwellings (46% of total completions).
- Housing cooperatives have around 600 completed dwellings (only around 2% of the total completions).
The Polish residential market lags behind Western European countries in terms of quality, age of stock, and level of market saturation, according to Ernst and Young. Of the 13.85 million residential units in Poland, around 72% were built before 1989, mostly during the communist era using prefabricated technology, which tends to be of very poor quality. Modern units built from 2000 onwards comprise only about 12% of the total and are concentrated primarily in six areas: Warsaw, Krakow, Poznan, Wroclaw, Tricity, and Lodz.
Poland's housing supply constraint was "mainly administration driven and consists of the limited number of zoning plans, covering below 30% of country's area", according to Ernst and Young's 2015 report. The lack of zoning plan leads to administrative procedures taking from a few months to a year to resolve.
MdM ("Housing the Young") program fuelling demand
In Q1 2016, the number of applications for subsidies from the Mieszkanie dla Mlodych (MdM) program rose by 6.1% from the previous quarter, to reach around 3,500 applications. This represents about 25% of all units sold during the quarter.
Poznan saw the biggest quarterly increase in the number of applications of 18% in Q1 2016, followed Wroclaw with 11% q-o-q rise.
MdM is a housing subsidy program introduced by the government in early 2014, aimed at helping young people aged up to 35 (either single or married) buy their first new flat. However, the program places caps on both apartment size and price per square meter.
The program assumes a 10% subsidy for childless families and singles and a 15% subsidy to families with children and single parents. Another 5% subsidy is granted to families with three or more children. In the case of house construction, the subsidy will come in the shape of partial VAT return on building materials used.
The total budget for the MdM program was PLN600 million (EUR136.9) in 2014, PLN715 million (EUR163.14 million) in 2015, PLN730 million (EUR166.56 million) in 2016, PLN746 million (EUR170.21 million) in 2017, and PLN762 million (EUR173.86 million) in 2018, according to the Deputy Transport Minister Piotr Styczen.
Mortgage market expanding, but remains low by international standards
Poland's mortgage market grew sharply from just 1.3% of GDP in 2000 to 9.9% of GDP in 2007, and 21% of GDP in 2015 - but remains low by international standards. The expansion can be attributed to the rapid growth in both zloty-denominated and foreign currency-denominated housing loans in recent years.
In May 2016, total housing loans outstanding rose by 2.2% to PLN379.73 billion (EUR86.64 billion) from the same period last year, according to Polish central bank, Narodowy Bank Polski (NBP). Over the same period:
- Zloty-denominated housing loans outstanding rose by 9.4% y-o-y to PLN217 billion (EUR49.51 billion)
- Foreign currency-denominated housing loans dropped 6% y-o-y to PLN162.73 billion (EUR37.13 billion)
Aside from Polish nationals, foreign investors have been fuelling demand. From just about 2% in 1996, the proportion of foreign currency-denominated housing loans (including Swiss franc loans) reached its peak at more than 69% in 2008. However the proportion has declined since and was around 44% in 2015, according to NBP.
Economic outlook very positive
In 2015, the Polish economy grew by a robust 3.6%, its fastest pace since 2012, driven primarily by strong domestic demand, according to the IMF. Economic growth is projected to remain strong at 3.6% this year, and 3.7% in 2017, according to the IMF.
Poland, which does not use the euro, is the only European country that avoided recession during the global financial and economic meltdown. The Polish economy expanded by 3.9% in 2008, 2.6% in 2009, 3.7% in 2010 and 5% in 2011, according to the IMF.
However growth slowed in 2012 and 2013, with GDP growth rates of just 1.6% and 1.3% respectively, due to the recession in the Eurozone, which accounts for over 50% of Polish exports.
The Polish economy bounced back in 2014 with 3.3% growth, fueled mainly by strong domestic demand.
In May 2015, Law and Justice Party (PiS) candidate Andrzej Duda won the presidential elections, displacing Bronisław Komorowski. Duda, a conservative, won 51.55% of the vote, as opposed to Komorowski's 48.45%. The new president, who assumed office in August 2015, vowed to reverse the increase in the retirement age, and increase tax breaks for the poor.
In the first quarter of 2016, the economy expanded by 3% from a year earlier, down from 4.3% growth the previous year. During the latest quarter the economy actually contracted by 0.1%, but is expected to recover in the second half of 2016 with strong private consumption supported by a new child benefit scheme.
Recently, Fitch Ratings affirmed Poland's long-term foreign and local currency issuer default ratings at A- and A, respectively, with outlook stable.
Poland's budget deficit dropped to an 8-year low of 2.6% of GDP in 2015, from 3.3% in 2014, 4% in 2013, 4.9% in 2012, and 7.5% in 2011, according to the European Commission. However, the deficit is projected to increase to 2.8% of GDP this year and to over 3% of GDP in 2017 to fulfill election promises, according to the IMF.
Government debt was around 51.3% of GDP in 2015, down from 56% in 2013. Public debt is expected to increase to 53.2% of GDP in 2018, according to Fitch Ratings.
Unemployment was 9.1% in May 2016, down from 10.7% the previous year, the lowest unemployment since October 2008.
Core inflation fell to -0.8% during the year to June 2016, according to the central bank.
- Why aren't Polish house prices rising more? - July 25, 2016
- Poland’s housing market - outlook strongly positive - September 24, 2015