The end of Poland’s house price boom

After strong house price increases from 2004 to 2007, Poland’s house price boom is now over.

In Q1 2008, property prices in major cities were down 0.5% to 1.7% from a year earlier according to Mamdom, the leading real estate portal in Poland.

Apartment prices in Poland fell 4.7% y-o-y to Q1 2008, while house prices rose by less than 1%, in sharp contrast to the enormous price increases of previous years.

The average price of new flats in Warsaw, its capital, rose 28% in 2007, 33% in 2006 and 28% in 2005, according to REAS, the country’s premier housing consulting firm.

“A time has come in the residential market, when investing requires some caution,” says Kazimierz Kirejcyk, CEO of REAS.

The housing market slowdown is due to tightening monetary conditions, higher inflation and lower economic growth. Although a substantial housing deficit exists, there is oversupply in certain cities, leading to the stabilization of prices.

Housing demand

With the shift from socialism to a market economy in the 1990s, housing construction declined. The number of dwellings completed dropped from an average of 130,000 from 1990 to 1992, to an average of 75,000 from 1994 to 1999.

There is a huge deficit in terms of quality. A census in 2002 revealed that 68% of the housing stock was constructed before 1970, while only 12% were constructed after 1989. A significant portion of the housing stock lacks basic amenities such as heating, piped water and toilets.

Despite the increase in dwelling completions since 2001, the housing deficit is still huge at around at around 1 million dwelling units. The demand for housing, both in terms of quantity and quality, has risen as a result of rapid economic growth in Poland.

After lethargic growth from 2001 to 2002, the economy expanded by an average of 4.77% annually from 2003 to 2006. In 2007, GDP growth was 6.52%, the highest since 1997. Real private sector wages rose 7.5% in 2007.

Unemployment dropped dramatically in 2007, 9.6% from 19.6% in 2003.

Mortgage market growth

Developments in the mortgage market have helped push housing demand, though the market is still relatively small. Outstanding housing loans increased from PLN 9.6 (€2.5) billion in 2000 to PLN116.8 (€30.87) billion in 2007, growing from 1.3% of GDP in 2000 to 10% of GDP in 2007.

Financing property purchases is relatively easy. Financial institutions grant home buyers mortgages in excess of 80% of the property value. Indeed many banks offer 110% mortgages. The typical buyer today are young (31 years old), have no children (80% of buyers) and buy apartments ranging from a 46 to 60 sq. m.

In 2001, 50% of housing loans were denominated in foreign currency, mainly in Swiss francs, euros and US dollars. The share of foreign-denominated loans gradually rose to 64% in 2006. With the recent changes in local and foreign interest rates, the share of zloty-denominated loans rose to 45% in 2007 from 36% in 2006, while the share of foreign-denominated loans moved down to 55%.

Average interest rates on new housing loans denominated in Polish Zloty (PLN) declined from 8.6% in Q4 2004 to below 6% from April 2006 to August 2007. It gradually rose to above 7% in June 2008.

On the other hand, interest rates on new housing loans denominated in euro have been rising since 2005. As of June 2008, average interest rates on new loans are almost the same for loans in euro (7.2%) and in zloty (7.1%).

Rental market

The rental market has been diminishing over the past 20 years. With the privatization of social housing in the early 1990s, owner occupancy rose from 48.3% in 1990 to 74.5% in 2002 (55.2% individually owned and 19.3% co-operatively owned).

Around 25% of dwellings were rented in 2002 (11.5% from municipalities, 9.3% from co-operatives, 2.2% from employers and 2% from State treasury or social housing associations). In 1990, around 51.7% of dwellings were rented, mostly from municipalities and co-operatives. The private rental market is virtually inexistent except in major cities.

Rents have moved little in the last 3 years. Average rents in central Warsaw vary from €14.30 to €17.06 per sq. m. per month. In Krakow, rents range from €11.55 to €13.50 per sq. m. per month. There is even a slight oversupply of apartments for rent, especially in the high-end segment.

“The rising prices of flats increases the number of people who cannot afford to buy a flat, and consequently forces them to rent a flat. If both those phenomena are appearing simultaneously, rental fees will be stable for quite a long time,” says Kirejcyk of REAS.

Increased supply

Housing construction has gradually risen since 1995, but the amount of new construction is still insufficient to meet supply. From 62,130 units in 1995, the number of dwellings completed peaked at 162,000 units in 2003.

The sharp increase in 2003 was due to a new regulation introducing fines for dwellings occupied without a notification of completion submitted to the authorities. Hence some dwellings completed by private investors in 2002 were only registered in 2003.

Since 2003 dwelling completions have fallen somewhat but have continued to exceed 100,000 annually. Most of the building boom has gone into apartments. Since 2005, more than half of construction permits were for multi-dwelling buildings (58% of all dwellings in 2006 and 2007). In Q3 of 2006, houses made up 42% of the available residential market stock. As of Q4 2007 this figure had dropped to 24%, and in Poznan and Warsaw it was just 10%.

There has been a notable drop in the number of dwellings constructed for co-operative housing. Out of 67,000 dwelling completed in 1995, 40% were intended for co-operatives while 47% for individuals.

In 2007, 53.5% of the 133,788 dwellings completed were for private individuals and only 6.2% were for co-operative housing. Dwellings intended for sale or rent account for 34.2% of completions in 2007, up from just 4.1% in 1995.

The need to prepare for the 2012 Euro football championships has also led to increased infrastructure spending - over 600 kilometres of new motorway are expected this year, as well as progress on several new airports, including Lublin. These large investments will have a positive impact on the economy and property prices.

Tightening financial conditions

The housing market is expected to weaken further due to higher interest rates and a forecast of slower economic growth. The continuous increase in housing supply is expected to soften house prices further.

Since March 2007, the National Bank of Poland (NBP) has been tightening monetary conditions by raising interest rates. During 2008 the reference rate has been raised four times, by 25 basis points each time. As of August 2008, the reference rate was 6%, up from 5% in December 2006 and 4% in March 2007. Other market interest rates have more than kept pace with Central Bank reference rates, pushing up banks’ funding costs sharply during the year.

With global food and fuel prices rising, the consumer prices rose 4.6% in the year to June 2008, exceeding the Monetary Policy Council’s 2.5% target. Economic growth is expected to slow to 5.3% in 2008.