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The Warsaw Voice » Real Estate » January 30, 2008
The Real Estate Voice
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HOUSING MARKET: What's in Store in 2008?
January 30, 2008   
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Last year the supply of housing in Poland's largest cities matched or even outstripped demand. Will this trend continue?

The country's residential real estate market stabilized last year as the prices of housing in most big cities stopped growing. The prices of new apartments in Warsaw became stable in the second quarter. Here, developers building big and relatively expensive apartments in non-central districts are beginning to have problems selling them, while there are still too few apartments in outlying locations. In 2008 and 2009, interest in non-luxury apartments is expected to grow. Warsaw suburbs such as Lesznowola, Ożarów and Raszyn are likely to develop thanks to less expensive housing. A greater supply of medium-priced apartments may push down the average price in Warsaw, analysts say, though not necessarily in the city center.

The markets in cities with a population of 100,000-500,000 are expanding. Examples include Olsztyn, Białystok, Bydgoszcz, Katowice and Lublin, where apartment prices went up by 20-30 percent last year.

In general, housing sales in the biggest Polish cities remained relatively high until May and started to drop in June. By the end of the year, prices in most major cities were only a little higher than in the first quarter.

This trend has been even more visible on the residential resale market. Since mid-2007 average asking prices have remained stable, while the difference between the average asking price and the actual price at which properties are purchased has grown. However, developers seemed to be surprised not so much by the dwindling sales and higher prices in the summer as by the lack of a visible increase in the fall.

Last year again saw a growing supply of housing, with the fastest growth since 2001. The number of newly completed apartments went up significantly, to over 130,000. Many apartments that were bought earlier as an investment also hit the market. This year, the number of apartments and houses for which construction permits have been issued or will be issued in the near future is expected to exceed 220,000. This means that the supply will grow further. Builders are expected to begin work on some 160,000-170,000 new apartments and houses to deliver them to the market in the next few years.

Several factors limited demand last year. First, speculative purchases clearly slowed down. Interest rate hikes, coupled with banks' tighter mortgage lending policies, especially in the case of loans in Swiss francs-which are significantly cheaper than those denominated in zlotys-resulted in fewer loans taken out. Also, high prices deterred potential buyers. In addition, many young people who previously looked for apartments have gone to work abroad. Also, some buyers decided to wait because the overall sentiment on the market was not good, hit by forecasts of a global crisis on the real estate market, fears of resurgent inflation and slower growth of the Polish economy, in addition to media reports of an inevitable drop in prices.

After a period of dynamic growth in 2006 and the first quarter of 2007, apartment prices stopped growing in the biggest cities in the spring and summer. Prices on the new-housing market started to go down, with an even more dramatic fall on the resale market. This trend was inevitable because the prices were already beginning to go through the roof, and hence this situation should not be perceived as a market crisis but as a natural phase of market development, experts say.

Analysts at Emmerson real estate company say apartment prices in the biggest Polish cities will stabilize this year. Apart from the interplay of supply and demand and various short-term factors, the residential market is likely to be influenced by structural factors, they say. These include a shortage of some 1.5 million apartments in Poland, a relatively low share of recently completed apartments in the total housing stock (only 20 percent of Poland's apartments were built after 1990), and demographic trends (with a generation of baby boomers currently entering adulthood).

Emmerson analysts estimate that this year the supply of housing will grow significantly, with some 180,000 units delivered to the market. They also foresee no real risk of a crisis on the mortgage market, especially as interest rates continue to grow. The Monetary Policy Council (RPP) increased them four times last year and says it will carry on with this policy this year until the rates grow by around 1 percentage point in total. Moreover, credit expansion has eased temporarily, though in the long run the volume of mortgage loans is likely to grow further. Stable interest rates in Switzerland would also be a positive factor. The value of mortgage loans in Poland amounts to some 8 percent of the gross domestic product, while on developed markets it exceeds 50 percent, and sometimes even reaches 80 percent of the GDP. The dynamic growth of salaries in Poland improves borrowers' chances of obtaining a loan. Given the encouraging forecasts for the economy, the mortgage loan market is likely to grow further-though not as fast as in the past few years, analysts say.

As the volume of bank deposits remains low and the price of money on the interbank market keeps growing, Emmerson expects a tightening of the banks' mortgage policies. The company's analysts say that most developers offering apartments for sale are likely to cut their prices by no more than 10 percent in order to avoid losses. With such price cuts they will reduce their profit margins while still staying in the black. Analysts say there is high unmet demand on the residential market and the demand has weakened only temporarily. The high prices of land and of construction and installation works will not allow developers to cut their prices significantly. The only exception will be developers who bought their land earlier at lower prices, but there are few such companies in Poland.

The demand for apartments is falling as more potential buyers adopt a wait-and-see attitude, analysts say. They add that the expected growth in the supply of new apartments this year will make 2008 a year of "consolidation" and "stabilization" when it comes to apartment prices. Potential price cuts may appear in the case of apartments built in less attractive locations where demand has fallen the most.

The situation differs depending on the city. Prices are likely to drop the most dramatically in the most expensive cities in which developers are delivering increasing numbers of new projects, for example, in Cracow and the Gdańsk-Sopot-Gdynia tricity area. However, the price cuts are likely to be just a temporary trend, while in the long term prices will probably continue to grow.

As sales subside, some developers are calmly waiting, keeping their prices stable, while others are cutting prices. For example, some are ready to offer a 7-percent discount for their clients to cover VAT tax, or offer them free parking space in an underground garage, or interior finishing works included in the price of the apartment.

Some investors have given up plans to launch new projects. Developer profit margins for new projects currently range around 15-20 percent, less than in previous years. With some projects, based on lavish designs and expensive plots, profit margins may even drop below 10 percent. Higher construction costs have contributed to lower profits.

However, no across-the-board price cuts are likely to occur this year unless there is a serious economic downturn, accompanied by a rapid growth of unemployment, inflation spiraling out of control, or other negative trends in the economy. In fact, a Spanish scenario seems the most likely. In Spain, after five years of continued price growth, during which real estate prices doubled, a small downward correction occurred, followed by a few years of stagnation. In Poland, the Euro 2012 soccer championships and the country's probable joining of the euro zone around that time may stimulate demand again, starting in 2010.

Konrad Bagiński
Source: REAS and Emmerson reports
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