Despite a drop in residential sales, the market remains in a state of equilibrium
25 July 2019
Developers still doing well
25 April 2019
Kazimierz Kirejczyk, FRICS
Łódź: the shining star of the development market in 2018
6 February 2019
The housing market in 2018: a thriller with a happy ending
22 January 2019
Summary of 2018 on the primary residential market
31 December 2018
Kazimierz Kirejczyk, FRICS
In the past four years, one sales record after another was broken on the primary residential market in Poland. Actually one should think that such excellent sales results could (or even should) have converted into considerable price rises. However, price rises are not visible at first sight when we look at the average price level. Yet, prices have in fact grown since 2013. The apparent stability in the average price level is due to a structural change of the offer.
A standard indicator for market trends is the development of the average price level. Most often the average price level of the current offer is used*. Throughout the last four years the average gross asking price of units available for sale in the market offer in Warsaw oscillated in a narrow range of +/-3% around PLN 8,000 per sqm. Today the average is exactly back at the same level as four years ago. In Q1 2013 it was at PLN 7,862 per sqm, while at PLN 7,885 in Q4 2016. Thus, it can be interpreted as that the price development in Warsaw was quite stable over the four-year period, despite minor fluctuations. This trend looks very similar in the remaining large cities, except for Tri-City and to some extent in Łódź where higher increases in the average price have been noted since 2015.
If we analyze specific market segments though, we can observe some real price growth trends over the past four years. In the low-end market segment in Warsaw the average gross asking price increased by 9% between Q1 2013 and Q4 2016. The correspondent growth indicator in the lower-middle market segment was even at 15% in the same period. At the same time, the upper-middle market segment remained stable, with the average in Q4 2016 being only 3% higher than in Q1 2013. The high-end market segment noted the highest growth of 24%, though in contrast to the lower market segments the increase was not following a stable growth pattern but was volatile.
These indicators finally show that the excellent sales results enabled an increase in the average price levels across almost all market segments. This is even more so, if we bear in mind that there was almost no inflation during the four years analyzed. Still, these growth rates are far from those we witnessed during the boom period of 2006-mid-2008. The recent price growth is much less based on speculative demand but it is to a large extent due to an increase in land prices. In many recent transactions we can estimate that the cost of land as percentage in the sales price per square meter of usable area surpassed the critical mark of 20%. This shows in turn limits in sustained price growth. Increased costs for land cannot be simply passed on to buyers, as the demand side is still very much price sensitive.
Changing structure of the offer
So, how did it happen that the average market price did not increase, while prices increased almost across all market segments? This phenomenon can be explained by a fundamental change in the structure of the market offer. In today’s offer there is a much higher share of the cheapest units. While the share of the low-end market segment was at approximately 50% in Q1 2013, it rose up to 84% in Q4 2016. In absolute numbers low-end units increased by almost 65%, from roughly 10,000 to nearly 16,600 units. Even though the average price in the low-end market segment in Warsaw increased from approximately PLN 6,700 per sqm to PLN 7,300, the average price of the whole market offer remained stable balanced out by a lessening number of higher priced units. Over the past four years, the number of units in the lower-middle market segment shrank by 56%, the upper-middle market segment by 59% and the high-end market by 41%.
Again, we can see how price sensitive the market actually is. The market for the cheapest units proved to have the highest demand. Main buyer groups are either households with limited financial capabilities purchasing for owner occupancy or non-institutional buy-to-let investors. On the contrary, the demand for higher market segments is limited, mainly catering for more affluent households who by the apartment for own living purposes. The market balance in these upper segments could only be sustained by a consequent reduction of supply over the past years, which in turn enabled price increases for new supply.
Average price developments allow only to a certain extent to generalize statements on condition and trends of the market. Also average price growth is not equal to capital growth. The value of an existing apartment building can increase over time to a higher extent than the growth in the market average, or the opposite. It is necessary to go into more details to make the right statements and to spot the right trends, depending on the specific need of the person who asks.
Therefore, we show at REAS a number of different price indicators for years. These include average prices of the market offer, of units sold and of units launched for sale. Furthermore, we analyze prices for submarkets, including for instance by market segments, price brackets or cities, districts and specific areas. Such information makes a firm foundation for decision-making processes for developers, investors and homebuyers, especially if gathered regularly and by using sound methods.
 At REAS we calculate the “average asking price of the current market offer” by weighting the prices of all units available for sale in development projects (irrelevant of the construction status) in a certain moment. Due to the relatively large scale of the offer in Poland’s large cities, the average price in the offer is typically the most stable price indicator. Other indicators, like the average price of units launched for sale, are by nature more volatile. This is however easy to comprehend if you bear in mind that the average price of the offer in Warsaw in Q4 2016 was based on more than 20,000 units, while the average price of units launched took into account only approx. 5,500 newly supplied units.