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What's next for Poland?

Posted by Catherine Deshayes on Tuesday, July 14, 2009

Poland real estate has fared better than neighboring countries partly due to a relatively flat economy in 2009 and Government policy that restrained borrowing earlier in the decade. Although a recent housing boom has led to an oversupply in unsold housing units, the Polish economy is expected to recover strongly in 2010. The following article looks at the history, trends, and outlook for Poland's real estate market...

After strong increases from 2004 to 2007, property prices in Poland either paused or declined in 2008. Although not nearly as severe as some of its neighbors, Poland's house price decline continued in Q1 2009, and prices are expected to keep on falling until 2010, at least.

In Q1 2009, the average asking price of ‘exposed' units in Warsaw, the capital, was relatively unchanged from a year earlier (an increase of 0.36 per cent y-o-y), according to REAS, the country's premier housing consulting firm. When adjusted for inflation, the average price actually dropped by 3.1 per cent.

(Exposed units are properties that are already on the market, as opposed to units newly-launched by developers.)  

REAS figures show severe price falls in other major cities in Poland. The average price of ‘exposed' units plunged by 25 per cent in Wroclaw, 16.8 per cent in the Tri-City (Gdansk, Sopot and Gdynia), 15.7 per cent in Poznan and 8.9 per cent in Lodz to Q1 2009 from a year earlier. In Krakow and Katowice, average prices fell 3.4 per cent and 1.9 per cent, respectively, over the same period.

The economy is expected to recover in 2010 with a 1.3 per cent expansion, after a 0.8 per cent contraction in 2009, housing demand is expected to fall tremendously. Home purchases are likely to be delayed, due to higher unemployment rates, and lower wage growth.

In addition, the current oversupply is likely to put downward pressure on house prices. Residential housing projects started during the peak of the house price boom in 2006 and 2007, are now completed and delivered. Because of these newly completed units, and extra supply from cash-strapped property investors, the housing market is now swamped with unsold units.

Since Q4 2008, developers have reported increasing number of cancellations by homebuyers of preliminary contracts, mainly due to much tighter new loan conditions.  Developers have tried enticing buyers by adding amenities, appliances and furnishings, to no avail.

Although a substantial housing deficit exists, oversupply in certain cities prevails due to a mismatch between the type of units available, and the preference of the population. Also, developers seem unwilling to lower prices to affordable levels.

Poland's great economic transformation

The massive economic transformation of Poland during the early 1990s led to a decline in housing construction. The number of dwellings completed dropped from an annual average of 130,000 between 1990 and 1992, to an annual average of 75,000 between 1994 and 1999.

A significant portion of Poland's housing stock lacks basic amenities, such as heating, piped water, and toilets.  Most housing stock was built before 1970, while only 12 per cent was constructed after 1989.

Despite an increase in dwelling completions since 2001, it is reckoned that around 1 million extra dwelling units are required to meet popular expectations.

And demand keeps rising, as a result of rapid economic growth. The Polish economy grew by 5.4 per cent annually, on average, from 1993 to 2001. Although growth stalled in 2001 and 2002, the economy bounced back and expanded by an average of 4.8 per cent annually from 2003 to 2006.

In 2007, Polish GDP growth was 6.52 per cent, the highest since 1997. Real private sector wages rose 4.2 per cent in 2006 and 6.7 per cent in 2007. Unemployment has fallen dramatically to 11.2 per cent in 2007, from 19.6 per cent in 2003.

This strong period of economic growth led to a massive house price boom. Average prices of newly-launched units surged by more than 150 per cent from 2001 to 2008. In Warsaw, for instance, the average price of new units rose by almost 180 per cent from £668 per sq. m. in 2001, to £1,857 per sq. m. in 2008, according to REAS.

Tightening mortgage market

Polish housing demand has been stoked by very strong mortgage market growth over the past eight years. Outstanding housing loans increased from £1.85 billion in 2000, to £37.5 billion in 2008, and the mortgage market grew from 1.3 per cent of GDP in 2000, to 15.3 per cent of GDP in 2008. 

Outstanding housing loans grew by more than 50 per cent in 2006 and 2007. Lending conditions started to tighten in 2008 due to the global credit crunch.  Before the crisis, mortgages in excess of 80 per cent of property values were common, and many banks offered 110 per cent mortgages. Buyers were typically relatively young (31 years old), had no children (80 per cent of buyers), and bought apartments ranging from 46 to 60 sq. m.

In Q4 2008, around 90 per cent of banks lowered their maximum loan-to-value ratio, 40 per cent increased non-interest loan costs, and 20 per cent reduced maximum loan maturity, according to the National Bank of Poland's Senior Loan Officer Opinion Survey. Almost all banks raised the spread on average housing loans.

In Q1 2009, housing lending conditions continued to deteriorate. Banks further lowered their maximum loan-to-value ratio, tightened collateral requirements, increased non-interest loan cost and reduced maximum loan maturities.  Almost 70 per cent of banks experienced a fall in demand in Q1 2009, and more than 50 per cent termed the fall ‘considerable'. 

Housing loans in Swiss francs curbed

No less than 60 per cent of outstanding housing loans in Poland are denominated in foreign currency, mainly in euro and Swiss francs.

The preponderance of non-zloty loans is largely due to an interest rate arbitrage. Yet the average interest rate on new zloty housing loans has been declining, from 8.6 per cent in Q4 2004, to below six per cent from April 2006 to August 2007 (though it had risen to 8.8per cent by November 2008). On the other hand, the interest rates on new euro-denominated housing loans have been rising since 2005. 

With the rise in euro rates, the market shifted to loans denominated in Swiss francs (CHF). By April 2009, after central bank easing, the average interest rates on housing loans in zloty was seven per cent, while it was 4.6 per cent for loans in euro, and 2.54 per cent for loans in CHF.

In 2008, the ratio of foreign currency loans rose to 70 per cent, due to the depreciation of the zloty.  As a result, banks have been becoming more cautious. Several banks stopped offering Swiss franc (CHF) loans in Q4 2008. Another four banks followed suit in Q1 2009, among them Poland's largest banks. 
The rental market is shrinking

The private rental market is virtually non-existent in Poland, except in major cities.  And the social-rental market has been shrinking over the past 20 years.

Only around 25 per cent of dwellings were rented in 2002. In contrast back in 1990, around 51.7 per cent of dwellings were rented, mostly from municipalities and co-operatives.  After the privatization of social housing in the early 1990s, owner occupancy rose from 48.3 per cent in 1990, to 74.5 per cent in 2002 (55.2 per cent individually-owned and 19.3 per cent co-operatively owned).

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 per cent were intended for co-operatives while 47 per cent for individuals. In 2008, out of the 165,800 dwellings completed only 5.4 per cent were for co-operative housing (less than 9,000 units).

In April 2009, average rents in central Warsaw varied from £.9.8 to £14 per sq. m. per month. In Krakow, rents range from £7.4 to £10 per sq. m. per month, according to the Global Property Guide.

Rents have been flat little during the last 3 years. But since Q4 2009, rents falls were observed across Poland.  There is a slight oversupply of apartments for rent, especially in the high-end segment.

Polish rental yields are now moderate. Gross rental yields on apartments in Srodmiecie, Warsaw, range from 4.95 per cent to 5.8 per cent.  Yields on apartments in other areas of Warsaw are higher, at 6per cent - 6.7 per cent.  In Krakow, gross rental yields of apartments range from 4 per cent to 4.6 per cent in April 2009, according to the Global Property Guide. 

The building boom: apartments

Housing construction has 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, an unusual year when a new regulation caused a rush of notifications of completion. Since 2003 completions have exceeded 100,000 annually.

This building boom has mostly gone into apartments.  In Q3 of 2006, houses made up 42 per cent of the available residential market stock, but by Q4 2007 this had dropped to 24 per cent, and in Poznan and Warsaw it was just 10 per cent.

Now the construction boom is over. In Q1 2009, dwelling permits for construction of 41,240 units were filed, down from an average of 60,000 permits quarterly from 2007 to 2008. Construction starts were at 23,473 dwellings in Q1 2009, down from an average of 45,000 dwellings started quarterly from 2007 to 2009. 

Recession

Compared to its neighbors, Poland has dealt relatively well with the crisis. But this was partly due to luck, as The Economist noted.  "An overly tight monetary squeeze early in this decade headed off an asset-price bubble. Bureaucratic government checked the property boom; so did tough bank regulation...."

The economy is expected to contract in 2009, but by less than 1 per cent, and an immediate recovery is seen in 2010. Polish economic growth was 4.8 per cent in 2008.

Nevertheless, ordinary citizens are likely to feel the crunch. Unemployment is expected to rise 11.4per cent in 2009, and to 13.5 per cent in 2010. Nominal wages are also expected to fall by as much as 20 per cent in 2009.

Yet help may be at hand. Preparations for the 2012 Euro football championships involve infrastructure spending worth about £18 billion for the construction of over 600 kilometers of new motorways, as well as several new airports, including Lublin.

These large investments may help stabilize the economy and property prices, in a country already doing relatively better than its neighbors.

Written by Global Property Guide and www.nuwireinvestor.com

Picture by soylentgreen23

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