Boom of bust

The residential market is currently booming in many parts of Poland. Experts feel confident that the market will remain stable for around two years. However, there are some large black clouds on the horizon. By Alex Hayes For some years now apartment prices in Poland have remained stable. Across Poland apartment sales are high, with 51,800 units sold in 2015. This is compared to a figure of around 43,000 units sold in 2014. The number of apartments on sale dropped, indicating that demand is currently stronger than supply. But, when Kazimierz Kirejczyk, managing partner of REAS, was asked if now was a good time to buy an apartment, he was cautious. “If you need to, yes, you have a wide choice, prices are stable, they will not go down by 20 percent in five years unless there is an economic or political catastrophe, so if you need to, it is probably a good moment to do so.” However, despite his short-term optimism, he makes a number of provisos. At the present time interest rates are low, and since all mortgages in Poland are currently variable interest rate mortgages, if one wishes to borrow money, one has take into account that sooner or later interest rates will rise. When it comes to buying apartments in order to rent them out as an investment, he seems far from certain that now is the right time to invest. “If you are an investor, I would suggest waiting until the government announces exactly what it is going to do.” In the short term, the price stability that has reigned so long on the market looks set to continue. Kirejczyk describes the market as, “stable this year, slight decline in 2017 and probably a decline again in 2018.” But beyond 2018, he feels that there are too many uncertainties to make confident predictions. He’s not the only one predicting price stability in the immediate future. It seems that this trend will be maintained for the next one or two years, “Of course as long as there are no surprises that are completely beyond our control, which at this moment cannot be foreseen,” stated Katarzyna Lubaś, Business Development Coordinator at EY. [negative]If you are an investor, I would suggest waiting until the government announces exactly what it is going to do.[/negative] According to Lubaś, the price of an apartment is always an amalgam of many different factors. However, one of the most important is the price of the land, which is most often reflected in the price of the unit when it is sold. In her opinion, each segment of the market should be considered individually and she points out that, although stable prices can be observed throughout most segments of the market, prices in the luxury segment have clearly begun to rise. “The luxury segment is always something that is separate from the rest of the market,” she claimed. Gimme money, yeah that’s what I want What is it that is propping up this demand? One of the main suspects is the government’s MdM program, otherwise known as “Apartments for the Young”With this program, the government subsidizes the mortgages of young couples for apartments that fall within a certain price range. [caption id="attachment_94812" align="alignright" width="300"] Image: RED Real Estate Development[/caption] In Warsaw this price limit will only allow people to buy the cheapest of apartments, but in other less expensive cities, the price is set high enough to buy a fairly reasonable property. According to Kirejczyk, it is possible to find a good standard apartment eligible for an MdM subsidy in Poznań and Gdańsk whereas in Wrocław and Kraków it is not. It is clear that the market has adapted to the MdM program, with many developers choosing to develop apartments that are specifically designed to fill its criteria. But, there is no obligation to take out an MdM loan. Lubaś points out that developers try, from a marketing perspective, to place their offer in the range of the MdM program, and that this is one of the factors that have shaped the current residential property market. The program also appears to be quite popular. “BGK bank announced that the money designated for 2016 has been fully allocated,” Kirejczyk explained. The program has now been in operation for two years and has reached full speed. “The positive impact of the MdM program will decrease slightly in 2017, and in 2018 it will decrease again and there will be no positive impact of the program in the second half of 2018, and then the program stops.” Negative selection The effect the MdM program has on the popular segment of the market is clear, but opinions vary as to whether it has had any impact on apartments that are above MdM price ceilings, such as the premium segment. [negative]The National Bank of Poland has been unable to make a proper inflation forecast for the past two years.[/negative] “The MdM program has no influence on that market segment because their target buyers are two completely separate groups. There is no room for competition,” asserted Natalia Sawicka, sales and marketing director at Angel River, a new investment in Wrocław by Angel Poland, which offers apartments priced at PLN 6,700-12,000 per sqm. By comparison, the MdM price ceiling for Wrocław stands at around PLN 5,200 per sqm. Ewa Skibińska, marketing manager of Nowa Papiernia, a new development by RED Real Estate Development, with prices starting from PLN 7,100 per sqm, also stated that the premium and the MdM markets are completely separate. However, Kirejczyk was less convinced and said that the impact of the MdM on the upper segment was rather negative. He explained that buyers who might have been interested in buying a better quality apartment were being drawn into the lower segment by the government, especially in the cities where the subsidy was the highest, allowing potential buyers to choose a slightly better apartment. On the other hand, Ron Ben Shahar, CEO and partner at Angel Poland, considers price as “a secondary consideration in the premium segment. It is location and additional services that are essential,” he stated. He also believes that prices in the premium segment will remain stable over the next few years. Safe as houses A large percentage of the demand for apartments comes from those people who see an apartment as a safe investment. Current low interest rates are encouraging people to take their savings out of the bank and invest in the property market. According to Kirejczyk, this accounts for around 20 percent of the market. “Buy-to-let schemes are popular because the interest rate is so low. [caption id="attachment_94811" align="alignleft" width="300"] Image: Angel Poland Group[/caption] People take their deposits out of the bank and invest them in residential units. The return can be 4-5 percent depending on the scheme.” Lubaś also talks of the stable economic situation. “For a long time now we have had record-low interests rates,” which has been reflected in the price of bank loans. With regard to how long interest rates will remain so attractively low, Kirejczyk pointed out that the National Bank of Poland has been unable to make a proper inflation forecast for the past two years. “They still believe that in a two-year period, inflation will return to a level of 2 percent.” This was the exact same prediction that they made two years ago. Sooner or later, he believes interest rates will rise, including interest on deposits. The attractiveness of investing in residential property will decrease, while more and more newly completed apartments purchased by such investment buyers will enter the rental market. “We can imagine that around 2018, rents will go down or vacancies will go up.” He pointed out that such investments still incur both risk and some work from the investor, so with higher interest rates such purchases will be far less attractive. To be continued In MdM and investment demand, Kirejczyk sees two drivers that are both waning, and one of them, the MdM program, is set to disappear entirely. Or will it? MdM was a replacement for another government scheme dubbed “Family on its Own” (Rodzina na Swoim) that also subsidized the purchase of apartments. Therefore, can we not expect another such scheme when the MdM program expires? Kirejczyk thinks it’s probable, but the current government has not yet declared its intentions. Rather he suspects that the government will be looking to increase the supply of social housing, thus benefiting a much poorer segment of society. [negative]How can you make forecasts if you cannot rely on your basic premises, one of which is the new government housing policy?[/negative] However, if the government vastly increases the supply of social housing with subsidized rents, this will clearly be a big blow to those who have invested in the residential property market when they find that their rents are being undercut by the government. But, until the government declares its intentions, this will remain, just like the question of when interest rates will rise, a huge uncertainty. “As you know, one of our tasks is making forecasts, and we’ve never before had such difficulties with agreeing as far as the premises for the forecast are concerned. How can you make forecasts if you cannot rely on your basic premises, one of which is the new government housing policy?” The current uncertainty on the market could be both detrimental and beneficial. According to the latest REAS report, “Some potential buyers may have a sense of uncertainty, and in the current situation they prefer to refrain from deciding to draw a loan. However, there may also be those who consider investing in a flat as a good solution in times of rising uncertainty.” Will we see another 2009 crash in residential prices, or will the market find its equilibrium peacefully once all outside drivers are gone? Although things appear set for the next couple of years, it seems that the unknowns are about to start multiplying.