Recent comments

Łódź: the shining star of the development market in 2018
6 February 2019
Agnieszka Mikulska

The housing market in 2018: a thriller with a happy ending
22 January 2019
Katarzyna Kuniewicz

Summary of 2018 on the primary residential market
31 December 2018
Kazimierz Kirejczyk, FRICS

Long-term rental only for a year?
21 November 2018
Maximilian Mendel, Ph.D., MRICS

Sales are dropping, but “it will not be any cheaper”
18 October 2018
Katarzyna Kuniewicz

Summary of 2018 on the primary residential market

31 December 2018

In many ways, 2018 was an unusual year for the primary residential market in Poland. Demand was high, but supply started to decline. Despite a decrease in sales, there was a distinct increase in the number of new mortgages. Based on systematic monitoring of the primary market for more than 10 years, firstly as REAS and presently as JLL as well – we can conclude that 2018 will be the second most successful year in the history of the Polish property development market in terms of sales in Poland’s major cities.[1]

The total value of contracts signed will definitely be higher than in 2016, and the number of contracts signed can be expected to be comparable to 2016 as well. On the other hand, the mood among market participants has changed dramatically in relation to 2016. Euphoria and optimism on the part of property developers has given way to concerns about the future. Extensive plans for projects are now in doubt – not only due to concern about the potential level of demand, but also in terms of the ability of contractors to finalise ongoing projects, as they are facing hard times.

To reiterate briefly on the most significant tendencies affecting the mood and results in 2018, the year began with the last transactions under the Home for the Young scheme. This scheme, which provided support to maintain demand for cheap flats, and had a major impact especially in Poznan and the Tri-City, has now practically come to an end, as funds for government subsidies have run out. This led to a fall in the number of transactions in this market segment. Theoretically, to keep buyers interested in cheap flats, property developers should compensate for the absence of subsidies by lowering prices. Meanwhile, the costs of realising projects started to see immense increases, with not only plots for development, but above all the offers being made by general contractors, becoming more expensive. These conditions led many firms to put new projects on hold. Firms that still had flats on offer started to raise prices.

Flats preferred to savings accounts

The factor responsible for the period of prosperity of almost five years (from mid-2013 to the end of 2017) on the residential market was the lowest interest rates on record. At one point, the interest on deposits in real terms even fell to below zero. There can hardly be a more powerful stimulus to withdraw savings from banks and use them for whatever investments have a higher rate of return. This coincided with increasingly alarming news from the corporate bonds and investment fund market. At the same time, flat rental appeared to be a form of investment of savings that was at once profitable and safe. For some people having cash reserves, they were also a sensible means of securing their future, a kind of private pension scheme.

The rate of increase in demand would not have been so high however were it not for two important trends. Firstly, for some Poles, there has been a significant increase in the amount of their savings. This was due both to the healthy state of the economy and liberal taxation policies. Secondly, there is greater interest in rental of flats, and consequently there was a rise in the rates charged for rental on the free market in the major cities. An influx of immigrants from Ukraine, occupying residential stock of lower quality, was also a factor. This should also be seen in the broader context of the problem of almost no new social housing being built for rental for many years. Individuals and families seeking a dwelling in which they can live on their own can only look on the free market, regardless of whether they wish to purchase or rent it.

In 2018, the number of people wishing to buy flats to let has , far from decreasing, in fact increased other the years. The percentage of units intended for investment buyers in the properties offered by property developers has also gone up – in general these are small flats in attractive locations, and are distinctly more expensive per sqm. A special kind of investment product has also emerged, which is units with VAT at a rate of 23% and units delivered which are fully fitted out or being finished as turn-key properties by firms contracted by property developers. Approximately 20% of flats are now estimated to be finished turn-key. At the same time, the cheapest flats were bought up quickly, while the prices for flats now being put on the market were increasingly high due to higher construction costs. As a result, average prices of flats began to go up.

“Buy quickly because they will never be that cheap again”

The fact that prices increase initially does not by any means equate to a decline in demand. Buyers purchasing for their own purposes are trying to buy before there are even greater increases. There is also another demand group – those concerned with “flipping” investments, who wish to make a profit on short-term speculation and sell a flat on as construction is being completed. People looking for a flat as way of investing their savings but not intending to let them have also become more active.

In turn, investment buyers have become more cautious. The rate of increase in the number of purchases as investments in the major Polish cities was no longer as high as in other years. Despite low interest rates and increasingly high rents, purchases at a higher price meant a lower forecast rate of return from letting. Investors reacted by seeking bargains on the markets on which the ratio of rent to flat prices was still favourable. The market in Łódź finally gained momentum in this way, being the only city in which the Home for the Young scheme led to less, not more, demand for new flats. This was because prices on the secondary market were low enough for flats to be purchased with subsidies under the Home for the Young scheme. The market in Katowice also finally grew, although this continued to be on a small scale in relation to Silesia’s economic potential.

In the major cities, the residential investment market was finally forced to compete for buyers with the rapidly growing condo hotel and holiday apartment market. Real estate investments of this kind are in fact becoming more of a financial product, which differs from purchase of shares in a property developer in that there is better security in the form of ownership title to a specific unit.

In partnership with a bank?

A change in climate was also seen on the mortgage market. For a number of years, despite low interest rates, the annual amount of new loans remained steady. In this regard, the Polish market was highly unusual, because typically low interest rates lead to more liabilities being contracted, and this is the main mechanism driving supply when the economy is in good shape. Meanwhile, in 2018, the amount of new loans went up. While in Q1 2018 this could still be attributed to the last throws of the Home for the Young scheme (the main condition was purchase with the help of loans), in the quarters that followed this high level was sustained despite infusion from the Home for the Young scheme no longer being available. The results for the overall year will probably be the best in this respect since the last boom. Clearly, as prices increased, buyers were finding that they did not have enough savings to buy in cash and had to seek loans.

Novus rex, nova lex

The disquiet on the part of market participants last year was not however due solely to factors relating to the market itself: costs, prices, a shortage of land plots, and concern about demand. Equally important, and perhaps more important, were fears about legislative developments. The first was a fundamental amendment that the Office of Competition and Consumer Protection (UOKiK) said would be made to the Act on Purchaser Rights which in practice abolishes open escrow accounts for flat purchases on the primary market. The second was the finding of allowances in cases of the granting of perpetual usufruct to be unlawful state aid. Fears of a crash in demand for corporate bonds, due partly to the Getback affair, were another reason for concern. Uncertainty also grew with respect to future spatial planning and housing policies at local government level, as the election approaches in the Autumn.

It must be borne in mind that today the main channel for financing an ongoing project is funds coming in from buyers via open escrow accounts. Property developers’ equity capital, funds generated by corporate bonds, and bank credit facilities are important but complementary resources. If lawmakers stopped the free – although bank-controlled – flow of payments from customers to property developers, and at the same time sales dropped and there were fewer options for obtaining funds from the capital market using bonds, the potential for launching new projects would shrink dramatically. For the market, this would mean dominance by the largest firms – usually with foreign capital, that have the easiest access to funds. Fortunately, it seems that today this risk is being considered in the work on the amendment to the act, and more prudent measures according to the principle of “the best of both worlds” can be expected.

Results will take time

The special housing act was supposed to partly alleviate the problem of lack of building plots, although it will not be a question of months, but years from the moment the act comes into force to the moment units built on plots that become available under the act go on sale. If, on top of this, state-owned plots were put on sale, it would be easier for supply to remain high. The first indications from the market however could render hopes for a significant increase in access to plots futile. It does not look as if local government authorities in the major cities intend to become involved in legislative measures proposed by the government, especially in a year in which there is a forthcoming general election.

Last year however there was a gradual decrease in fears of declining demand due to the hypothetical departure of some buyers to the Housing PLUS scheme. Delays in work to implement the commercial element of the scheme, intended to cover units with a purchase option, meant in practice that there was no threat of any kind for future demand for property developer units in the next few years. Meanwhile, this is not cause for satisfaction. If the scheme to build affordable housing is a failure, we can forget, for many years to come, a solution to the problem of housing for young families who cannot afford a mortgage.

What awaits in 2019

Firms on the Polish residential market are starting this coming year with mixed feelings, but with moderate optimism. They realise that the number of flats being sold could not keep rising forever, and the predicted slowdown of the economy will be reflected in lower demand for flats. They will keep in mind that an increase in interest rates still awaits us, and that when that happens, both investment loans and mortgages will be more expensive. They also recognise that the outcome of the general election in 2019 is uncertain, making it hard to foresee housing policy and what new legislation will emerge in the coming years.

At the same time, there is every indication that the decrease in the number of transactions on the market will be slow and gradual, giving property developers a chance to adapt to the changing market climate. Provided that nothing very serious happens in the market environment in a broad sense, there is no danger of the problem of incongruity between growing supply and decreasing demand arising.



[1] This article was written in mid-December, and the final data regarding monitoring of the market for the whole of 2018 will be published on 21 January 2019.