Sunday, May 11, 2008

Polish Property Prices - How To Cut Through The Confusion

This way of analyzing the property market is not unique to Poland. Those involved in Western European property have been using the same foundations for their calculations and getting it wrong for decades. The truth is the link between average salaries, the supply of new homes and prices themselves is weak. Very weak.


Lets turn first to supply. A degree educated school teacher once turned to me in all sincerity and said, "There must be enough homes now." He had been spending some time looking at new developments to find an apartment for himself and there were hundreds of them. Their cranes litter the skylines of almost every Polish city and town.

On the surface there does seem to be a great deal of building going on but this is not large scale for Poland when considered historically. In the late 1970s the construction industry was delivering nearly 300,000 residential units per year. They did not build just blocks and complexes, they built entire neighborhoods and suburbs, and that was still not enough.

From a European perspective Poland still has some of the most overcrowded accommodation on the continent. According to the United Nations there are 308 dwellings per thousand inhabitants compared with 425 in Great Britain and 471 in Bulgaria.

Depending who you talk to estimates of the current housing shortage in Poland varies between one and two million homes. At the current rate of build it will take at least a decade before there are actually "enough" dwellings.

But let's take a magic wand and give Poland tomorrow the same housing density as Great Britain. What would happen to prices then? Well in the United Kingdom developers have been delivering between 170,000 and 200,000 new units a year since 1997 and despite this prices rose 276% over the last decade according to the Nationwide Building Society.

This apparent contradiction has been noted in a report by Rednet - The Situation in the Residential Market. The authors warn of price decreases during 2008 because of better supply both from developers and investors that bought in 2006 in order to sell the apartments closer to completion. At the same time they admit to being "surprised" that prices in Wilanów, the upmarket Warsaw neighborhood, rose 30% in 2007 despite having some of the highest supply rates in the city and a lowering in unit sales. This apparent contradiction is not unique among speculators.

The bottom line is there is little to support a connection between the supply of new build units and property prices. The Rednet report ends by saying, "both more moderate sales and satisfactory supply rates in comparison with reported demand, does not have to result in a decrease of an average price in the short term." More accurately, as the UK has shown, it does not have to result in a decrease of the average price in the long term either.


Now comes average salaries. The logic goes that if the average person earns 35,000 zloty per year and the average mortgage is three times this (with a 20% deposit provided by the buyer) then the average price of property shouldn't rise far above 130,000 zloty.

All too often I see this used by commentators who then state "City X is reaching its maximum level" or "buyers can no longer afford the asking prices in City Y" and then go on to forecast decreases in the value of real estate.

It all makes sense but it is flawed; in Poland especially so. Work and pay on the black market is still rife, it may explain why nearly half the adult population is not active on the labour market. There is an unknown amount of "money under the mattress" caused by a lack of faith in the banking sector, especially among the older generations, because the currency has been devalued a number of times including once in the nineties. Finally there is money coming in and coming back with Poles who work abroad.

A BBC article in January 2008 noted that doctors who were commuting from Poznan to Scotland for weekend work were earning as much in one shift abroad as they did in one month in Poland. The actual total figure for this type of employment is anyone's guess as so much is moved in cash and not declared. The Scotsman newspaper estimates it to be 21 billion zloty per year, the TVP television station suggests it could be as high as 55.5 billion zloty in 2008. If they are right the average salary is double what most believe it to be.

But once again let us take out the magic wand which lets us see all the unknowns. We are able to find out how much people earn on the black market, how much is under their beds and how much they bring into the country from working abroad. Would this help?

Not really. And once again the history of Britain shows why. Over the last decade average earnings have risen 39% while average property prices increased nearly 300% despite the fact that most banks will not lend more than three and a half times the salary of a borrower.

Average salaries have not explained the changes in real estate value in London for over sixty years. On average property prices rise 100% every ten years and this has always been higher than salary increases in the city. If it has not worked there for over half a century why should a similar method be valid in any Polish city or even Poland as a whole.


So if average salaries do not point the way and supply does not always seem to have an affect on property prices how can anyone make a forecast about the Polish real estate market? Here lies the biggest problem, if there were another way then analysts and journalists would be using it. But there isn't and so time and time again they are drawn back, in desperation, to average salaries and supply. Many commentators should know better, and some probably do, but what else can they use to justify their points of view?

The real answer lies in getting out there, assessing what's really happening now and considering the growth of Poland overall before making your decisions. A comment from Michael Jones, Managing Director of The Right Move Abroad, has it right when he says, "It is important to look at the country as a whole, and not just the property market. What state is the local economy in? Is there room for further growth? Find the answers to these questions." The richer a country gets, the more house prices will rise.

For solid, reliable and unbiased advice on buying property in Poland get Tim Hill's essential printed guide at ==>

Tim is's Operations Director managing a team of consultants who help foreign buyers identify and purchase suitable Poland property opportunities for investment, development and relocation. As well as speaking regularly at seminars on the Polish real estate market his comments are often quoted in the domestic and international press. Tim is married and currently lives with his wife, Agnieszka, in the Polish city of Lublin.

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