Property crisis on the cards?

With demand far exceeding supply in Warsaw there are fears that the Polish capital is heading for a property crisis that will put homes out of the reach of most Varsovians' pockets. But is there any truth to the rumors and, with everyone and his mother looking for a flat in the city, why aren't residential builders upping their output to keep up with demand?

French people may not like you very much, but it's a good time to be a Polish builder. According to Eurostat, with an 8.9 percent growth rate, Poland recorded one of the most significant increases in production in construction in the second quarter of 2005.

The Central Statistical Office (GUS) revealed that the construction sector rose by 9.3 percent since the beginning of the year, which was mainly due to huge investments in road construction. Experts say that the real boom is still to come because of unused EU funds for infrastructure development.

Building boom

The general construction upswing has also engulfed the residential market. According to the Polish Agency of Construction Research (PAB), the number of flats given out this year could be 50 percent bigger than last year, when 24,000 apartments were completed. The agency also forecasts that the number of construction permits issued to developers will grow by 30 percent.

Despite rolling flats out at a rate of knots, developers cannot keep up with demand, and most are selling flats that will only be ready in one or two years' time. The vice president of Dom-Eko from Poznań, Agnieszka Banaszak, admits that half the flats her company has sold have not been built.

Kazimierz Kirejczyk, the president of Reas Konsulting, says: "Demand has exceeded supply since 2003, with the biggest imbalance occurring in 2004. According to [our] consultants this situation will not change by 2007, considering the increase of VAT, and then in 2007/2008 the market will behave like in 2001/2002. It means that in 2008 demand will drop drastically, and real prices will go down as well. By 2007, prices will continue to increase, but the dynamics of growth will gradually slow down.

"In 2012-2014 the average level of transactions should exceed 20,000 standard flats, and the size of units should also gradually grow," he adds.

But in light of an economic slow down - economists forecast that this year's GDP will be 3.1 percent compared with 5.4 percent last year - what is driving the wild demand for what is for most people the most expensive investment they will ever make?

Easy access to loans has certainly oiled the real-estate engine. In the second quarter banks approved more than 52,000 mortgages to individual customers. Their total value was zł.5.9 billion and was 60 percent higher than last year. More and more banks are simplifying their procedures for approving loans. For example DomBank, the mortgage branch of Getin Bank, provides loans only on the basis of clients' statements. Unlike most other banks, DomBank does not require employment or business statements on behalf of clients.

Marching on the capital

People power is perhaps the biggest factor in the Warsaw housing boom. Although in the years 2000 and 2004 Poland's population decreased by 80,000 people, large cities, and especially Warsaw, actually recorded significant demographic growth. Unofficial estimates show that since 1991 the population of Warsaw has grown by 500,000 people. Although 1.7 million people live in the capital, this is still only five percent of the total country's population. In other European capitals, the proportion is 10-15 percent. It is estimated that to meet the growing demand, 120,000 to 150,000 flats will have to be built in the next 10 years. In fact, only 8,000 are being sold annually.

So many people desperate to get their hands on a piece of real estate creates a wide scope for shoddy building practices. Although listed on tabelaofert.pl as Varsovians most trusted construction brand, JW Construction (JWC) earned the ire of one group of clients lately, and may find itself in court. A housing estate the company constructed on ul. Ostrobramska in Warsaw was not completed on time and tenants say they did not receive what they had been guaranteed. Despite being labelled as "the best deposit in the city" by JWC,  residents cannot swim in the swimming pool, do not have a reception and instead of heat counters, JWC allegedly wants to install cheaper devices. JWC also inserted clauses into clients' contracts saying that customers cannot lodge claims for damages against the firm.

Sound advice

However, advisors, such as Marek Biegocki from CCIM, say this is an isolated incident and buying a flat in the Warsaw property jungle is safe as houses, provided the buyer follows basic precautions.

Biegocki stresses that the first rule is to ask as many questions as one can. It is crucial to verify whether a developer has accredited certificates and reference letters. This, however, is not sufficient - JWC is very proud of its ISO 9001:2001. It is important that the developer is a member of a known, respectable organization, such as the Polish Real Estate Federation. Biegocki explains that such organizations have their code of ethics, and, what is most important, legally clients can sue member developers. Some developers often hide the devil in the detail, and insert a paragraph in contracts saying the buyer cannot sue them if they fail to fulfill their contract.

So, if demand is the wind in the sails of supply, and the money is there to build the flats, what is the problem? Jacek Bielecki, the general director of the Association of Developer Companies, told Rzeczpospolita: "The potential of developers would allow them to build twice as many flats as they build at the moment. However, the barrier is lack of land for residential building."

Crisis, what crisis?

Some, however, do not see a problem at all. Marek Kunicki, head of the Warsaw Association of Real Estate Developers (WSPON), claims that talking about a crisis on the Polish residential market is very controversial. "Developers have thousands of offers. If somebody wants to buy a flat, there should not be a problem." Kunicki argues that the figures concerning the shortage of flats in Poland, and especially in Warsaw, are purely academic and difficult to interpret. "The Polish residential market is doing very well. It functions perfectly, according to the demand and supply rules." Kunicki argues that this is reflected in the record number of mortgages given by banks.

Kazimierz Kirejczyk says: "[When] talking about demand one has to distinguish between the scale of needs, calculated in millions, which is the result of the number of households who would like to have independent homes, and the real demand on the market of own flats for sale, counted in several thousand flats a year."

Kunicki agrees that the price of Warsaw flats is enormous and many people cannot afford to buy one. "The cost of building [one sqm in] a flat in Warsaw is zł.1,500, and developers sell it for zł.3,000. People always have the choice to buy a flat elsewhere, three times cheaper. Prices will continue to grow within the next few years, with some fluctuations."

Time will show whether the jumping prices will deter people from buying in Warsaw and force them to look for new a home in a more affordable place. But for the moment, the Warsaw residential market is looking as safe as houses.