Sunday, 27 October 2013


Just coming over to let you know I'm alive.

When I heard the news of stomach flu decimating staff of my division, I simply shrugged them off and thought it could affect anybody, but me. I doesn't mean I haven't taken precautions to fend off the disease being spread. Despite strictly obeying personal hygiene rules (as always) I somehow contracted it, or alternatively I'm down with some food poisoning - symptoms do not indicate unanimously any of the possible causes why my digestive system has been being turned upside down for the third and fever doesn't ease off, but I hope to pull through by the end of the month. In the meantime I will spend four days on a sick leave, first since two years - good opportunity to catch up with reading and film watching (as soon as the disease eases up).

Will post something substantive next weekend.


Sunday, 20 October 2013

Worries - shelved

It's been a sort of a hectic weekend, hence a very short note. My dear few avid readers - accept my apologies.

The political event of the week in Poland was a debacle of referendum in Warsaw. The turnout of 25.66%, vs. roughly 29% required to deem the voting valid, was too low to oust Mrs Gronkiewicz Waltz from her stool in the town hall. A month before the referendum at least 40% of Warsaw's inhabitants would avow to take part in a vote (and depose the mayor). In my opinion all the efforts of the civic movement aimed at removing the haughty mayor were thwarted, when the referendum campaign was dominated by politicians trying to capitalise on Warsaw's inhabitants disgruntlement. Warsaw remains a stronghold of PO, but those people would easily give up on supporting the party, if only they were faced with a decent alternative. When Mr Kaczynski stepped in, the lesser of two evils was chosen. PiS officially treats the referendum as its success, however I dare to argue had it been engaging so actively in the anti-mayoral campaign, the turnout would have been higher. Lots of people must have got angry seeing the civic initiative turning into political squabble. The proper course of action would have been for the politicians to launch a campaign after the new election were called, or to run a campaign in more constructive way - all what the critics of the mayor would say was "Mrs Gronkiewicz Waltz is a bad mayor, let's oust her", no proposal beyond the moment she loses her position, no counter-proposals on how to sort out what has been done wrong by her. To recap - pure flavour of Polish politics with little policies.

The global political event of the week was the debt ceiling in the United States. As illustrated to the right, the easier option has been chosen - now there is more room to pump in the shit. Currently creditworthiness of the United States cannot be evaluated in terms of its capacity to repay its debt, this may only be considered as ability to roll it over. Yet, this cannot be done until the end of the world. The only way the US government can get rid of its huge debt is... inflation, which would reduce the real value of liabilities, thus through inflation tax the US government would dupe its creditors and its own citizens - the middle class, except for those heavily indebted, who usually benefit from high inflation. The new Fed governor, extremely dovish, would most probably see to it.

Sunday, 13 October 2013

Pension law - draft released

Five weeks after the general shape of the pension reform was unveiled, the government made public the document which might become the new legal act governing the pension system in Poland. The document is available here, is 47 pages long and… I have taken the trouble to read through it quite carefully.

The text is a compilation of amendments into several other legal acts regulating workings of pension funds, social security system and public finances. For this very reason is it absolutely unreadable for an average reader. In other words, just like most official documents in Poland, the document is a piece of anything, but informative twaddle, whose authors probably have not intended to confuse recipients, but have done so…

May the first article of the draft law give you the flavour of how reader-unfriendly it is:

Art. 1. W ustawie z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych (Dz. U.
z 2012 r. poz.361, z późn. zm. 2)) wprowadza się następujące zmiany:
1) w art. 30:
a) w ust. 1 dodaje się pkt 14 w brzmieniu:
„14) od kwoty wypłat...

Okay, I concede this incongruous form has to be retained for legislative purposes, but a reader who comes across such stipulations, unless equipped with several other acts, has no idea what the paragraph is referring to. My proposal of best practices in such instances is to attach to a draft of new law all other legal acts it changes in “track changes” version. For those unfamiliar with such methods – a “track changes” document marks what has been added, removed and changed – very convenient for readers who need to opine changes or simply quickly find out what has been amended.

The other thing I noticed (not necessarily rightly, as at second glance, I spotted a paragraph setting forth framework for settlements between pillars of the pension system, to be governed by a separate decree) is a potential cock-up regarding the 10-year period before retirement when “money” should gradually flow between pension funds and state-run social security fund. The law states 10 years before planned retirement the social security fund informs a pension fund (to be precise a company which manages it, on its behalf) about the obligation to redeem settlement units amassed by a pension fund participant and transfer money to the social security fund. The capital assigned to a fund participant is divided into 120 equal parts, then 1/120 of all settlement units a pension fund participant has is transferred each month. Amounts of transfer will vary depending on current market valuation of settlement units (i.e. underlying assets). For the whole operation to hold water mathematically, new contributions must not be transferred to pension funds over 10 last years before retirement. Otherwise the moment an employee retires, they would still hold in the pension fund account assigned to them all contributions transferred there over last 10 years, while the government’s intent was to bring the balance of pension fund account to zero.

Contrary to original plans, the choice between private- and state-run parts of the system will not be irrevocable. The decision taken in 2Q2014 might be changed in 2016 and then in 4-year intervals. On one hand this offers additional choice to future pensioners, which is an upside, on the other I fear this option will not work for the benefit of the would-be retirees. 4-year period does not offer enough flexibility for those who would like to benefit from long-term trends on stock market (75% of assets will have to be invested in shares of publicly traded companies), while given the retrospective approach to results of pension funds, many people might choose to transfer their contribution there after a period of substantial rallies (seeing high past returns), just before the oncoming bear market. In the long run this solution is quite likely to incur losses to future pensioners and discourage them from participating in private-managed pillar of the pension system. Maybe the ‘revocable freedom to choose’ has been a deliberate step towards scrapping private-run pension funds at all?
When laying out the blueprint of the reform, government had declared in case of moving government bonds from pension funds to social security fund and writing them off, debt-to-GDP safety levels would be decreased accordingly to reflect drop in official government debt (not to give room for extra indebtedness). As the draft law shows, this avowal has vanished into their air. The law brings forth only amendments to so-called ‘expenditure rule’ which would now be more restrictive in containing unfettered growth of government spending, but 50% and 55% debt-to-GDP levels, serving as a safety valve against reckless politicians, will, unfortunately, be intact.

One of more meaningful changes for future pensioners who will decide to have part of their contribution transferred to pension funds is a decrease of load fee from 3.50% to 1.75%. Slashing the commission charged at each paid zloty means higher pension benefits for system participants and undermines risk-free business of fund managers. Noteworthy is to observe pension fund defenders stance on the reduction. When interviewed, they assert this is a fine move, long overdue and then deftly sidetrack into other aspects of the reform that as a whole are, according to them, likely to decrease overall potential return beyond gains from load fee savings. Actually such stance has been quite common whenever topic of exorbitant fees was brought up – each time there came an ‘expert’ who would claim the government should focus on initiatives that could increase potential returns fetched by pension funds, rather than confining to taking the easiest way out, i.e. regulatory decreasing fees; thus denigrating the importance of low cost of the pension system for its participants.

On Friday I took a day off to make use of the great weather and catch up with some gardening. In the late afternoon I sat back in front of TV, turned over to TVP Info and watched a TV programme dedicated to the pension reform in which the audience were free to call and ask questions representatives of the ministry and pension fund managers, send text messages and write e-mails. The show contained also some footages recorded on the streets of Warsaw with people having their say on the reform and sharing the ideas on how to secure their pension. The picture that emerged from the programme was horrific. The economic ignorance in the Polish society is a crying shame. Most people do not understand how the pension system works and therefore can believe in every lie / misrepresentation / distortion they told about it. Given the level and bias of public discourse, an average Pole who lacks basic understanding of economics is meant to end up confused. Once they hear minister Rostowski saying the government is the best guarantor of pension payouts – this holds water, so why not trusting him? Then they see dr hab. Balcerowicz shouting the government is brazenly seizing citizens’ money to pay benefits to current pensioners at the expense of future pensioners whose savings are depleted – at first sight this also hangs together so they feel like a theft victim. Then they listed to prof. Oręziak who says due to existence of pension funds the public debt of Poland has risen by additional 300 billion zloty and pension funds are a huge burden for public finances that is a ball and chain – so again they think from the taxpayers’ perspective this must be a praiseworthy reform. Then comes up dr Petru who pronounces the government is taking the path of least resistance and instead of seeking savings somewhere else, destroys a good pension system and destabilises it.

Same issues, different opinions. If you are familiar with economics, you can critically assess utterance on the pension system. If you are not, clashing opponents make you even more lost and more indifferent about what is going to happen…

Meanwhile in the capital – soon comes the verdict…

Sunday, 6 October 2013

Wishful thinking

Don’t wait for the perfect moment! Take the moment and make it perfect!

- Why do you argue now is the right time to buy a flat? When will the property prices go up again?
- Prices won’t rise soon, however in my opinion the third quarter of 2009 will bring the onset of slow, yet stable upward trend (…) Those who take decisions swiftly will be the winners.
- Do you think then prices on secondary market will not decrease in the coming months?
- Where they were meant to fall, they have already fallen.

The scales on the property market have not been tipped so favourably for a while. And it seems this won’t last long. Hurry up then!

Decline of property prices has come to a halt and prices are not going to fall any more. This is a good moment to buy a property, but a bad time for selling it.

Property prices are still low and banks are more willing to grant loans. According to property agents, this is the perfect moment to buy a dreamt-up flat.

Some time later in the second half of 2010:
This is the best moment to buy a property. It won’t be any cheaper!

Some property agencies seem affected by the slowdown on the market, other describe the current market as ‘stable’. Nevertheless, all property agents claim in unison this is the perfect time for property buyers.

Last days of 2011 and first months of 2012 will be the perfect time for property purchases – experts convince.

Whoever plans a property purchase should not put it back. Downward trend in prices is likely to reverse.
If you consider buying a property, this is the perfect moment. Prices have gone down, but fewer buyers can boast about desired creditworthiness. Even if next year prices fall, the decline will be negligible.

Planning to buy a flat? Property market practitioners point out sellers are ready to make bigger concessions in price negotiations. This indicates the perfect moment to buy has come!

Property prices keep falling and have reached the levels last seen in 3Q2006 – good moment to buy a flat!

Experts claim now is the best moment to buy a flat!

Over the last year property prices have significantly gone down. The economy is markedly reviving. The probability of further price decline is miniscule, while choice of flats is wide. It seems this is the perfect moment to buy a flat!

Chart 1: Average price of one square metre of a property on primary and secondary markets in Warsaw over last almost seven years. Source: National Bank of Poland’s quarterly report on property market, figures based on data collected from notaries (reflect only transaction prices, rather than asking prices (sellers’ wishful thinking!) in property ads).

Chart 2: Average quarterly prices of one square metre of a property in Warsaw, this time sample covers all properties from primary and secondary market. All data are transaction prices and are based on data collected from notaries. Source: excerpt (short version of) from AMRON-SARFiN’s quarterly report.

Conclusion 1: chart 1 is biased – by starting in 3Q2006 it omits the first phase of property market frenzy which kicked off in late 2005. Since then up to the peak of property market bubble (?) in prices went up by up to 100% - growth scale in time frame of 3 years (therein some 50% growth in 2006 alone) makes it justified to call it a bubble.

Conclusion 2: the perfect moment has lasted for five years. It has been one of the longest perfect moments in the history.

Conclusion 3: based on the recent history of property price fluctuations and frequency of developers and property agents bleating about the perfect moments, there is no significant correlation between intensity of obtrusive urging to buy and higher demand for flats reflected in mounting prices.

Conclusion 4: The regularity observed during many stock market and property bubbles, i.e. when everyone tells you to buy this is the best moment to sell has proved true between late 2008 and now.

Conclusion 5: the future trend is rather unpredictable… (deserves the ‘conclusion of the year’ award ;-))

…Albeit my expectation is that within the coming year (i.e. by the end of September 2014) average property prices will decrease by 3 percent year-on-year and with 95% probability the price change will range from –10% to +6%. Over the coming decade the prices are most likely to stabilise in nominal terms and drop in real terms on average (with some deviations from the long-term trend). Here’s the rationale:

Why property prices might rise:

1. Interest rates, now at their historical lows, are predicted to stay unchanged for about a year, and then are unlikely to rise quickly. Lower interest rates have a huge impact on amount of monthly instalment of a mortgage and hence on creditworthiness. Thus a borrower with the same earnings has some 30% higher creditworthiness than a year ago. But watch out – this is a trap. The capacity to repay a long-term liability is assessed based only on current market conditions and National Bank of Poland’s base rate will not equal 2.50% forever. If it goes up by 2 percentage points, monthly instalment of a 250,000 PLN loan with current interest of 4.00% taken out for 25 years will rise from 1,319 PLN to 1,610 PLN (by 22%) if the interest rate increases to 6.00% (note annuity payments are very sensitive to interest rate changes).

2. Low income on bank deposits discourages wealthier depositors from keeping their savings in banks and makes some of them to invest in properties in pursuit of higher yields on rents. Beware though, this is a trap as well – if everyone buys flats with the intent to lease them – will the supply of new properties be matched by demand from lessees? Won’t this trend exert a downward pressure on yields to make them equal with bank deposits? And note flow of income from a relatively small group of well-off people is a rather one-off occurrence, therefore the price incline cannot rely solely on demand generated by wealthy buyers.

3. There is a group of buyers who’ve already had enough of waiting for prices to go even lower and are running out of patience. In the meantime they’ve amassed some cash, so they can either pay in 100% or take out a small loan to finance the purchase – this group is capable of generating steady demand and unlike wealthy disgruntled depositors can make the upward trend sustainable.

4. Supply of new flats offered by property developers and number of new dwellings under construction are both shrinking. As the basic laws of economics state, lower supply should result in higher prices.

5. New government-run scheme (flat for the young), bound to take effect in January 2014 – the government will fund 10% - 15% of purchase price of a flat from the primary market only. The biggest restrictions in getting the subsidy are a square metre price cap (to be set at 5,865 PLN in Warsaw in 1Q2014) and the fact an applicant must not be older than 35.

Why property prices might fall:

1. Demographics, one of key drivers of the property market. People naturally seek to have their housing needs met and want to buy (or rent, or build their own) properties. Number of young people entering the labour market is decreasing year by year and given that the population of Poland is set to contract, prospects for price hikes in the long run are downbeat.

2. The biggest demand for flats is generated by youngsters looking for their first flat (later they swap one for another, bigger one, i.e. upgrade) – not only their number is lower, but also labour market is not on their side: unemployment rate among youngsters is higher than a few years ago, many of them work under ‘junk contracts’ (banks do not view it as steady source of income), salaries for workers under 30 are much lower than before the crisis.

3. Recommendation S, issued by Polish Financial Services Authority (KNF) which states a mortgage borrower will need to put up a specific percentage of purchase price as equity. This percentage will be rise 5% in 2014 to target 20% in 2017. This recommendation (banks won’t date to try not following it) will bring to the end dicey 100% loan-to-value lending.

4. Banks’ reluctance to increase their mortgage portfolios. This product is not the most profitable (hard to cross-sell it) and its risk seems to have turned out underestimated – for many CHF-denominated mortgages, outstanding debt considerably exceeds property market value, putting banks at risk of not recovering the lent amount in case of borrowers’ defaults.

5. Future insecurity among potential borrowers – given the scale of layoffs in the corporate sector (which should by all means fall back along with recovery in the economy), many people think twice before taking out a loan for several years (who can guarantee nothing bad happens in such time horizon). Even if someone has not been affected by a job loss or salary cut, they could have observed someone else losing their source of income. Mortgage-taking spree from 2006-2008 was fuelled by booming economy and over-optimistic expectations that good time would last forever. That craze is extremely unlikely to repeat in many years.

6. Despite considerable decline (some 20% in nominal terms over last 5 years in Warsaw on average), property prices are still steep in relation to ordinary people’s earnings and for many potential buyers out of reach. Currently an average monthly after-tax salary in Warsaw (some 3,600 PLN) is enough to buy a half of a square metre of property in Warsaw. This means after two months of putting aside 100% of one’s salary (in practice impracticable) you can buy one square metre of an average flat; after a year you can buy six square metres; after eight years of not spending at all you can buy a decent one-bedroom 50-sqm flat for cash.

7. In the meantime costs of living have risen disproportionately to nominal wages growth. This means the discretionary income, i.e. the share of monthly cash inflow that can be either saved or spent on mortgage payment has dwindled. Needless to say what effect it has on demand for properties.

I’m planning to buy a flat in about a year. Hope the wind blows in the right direction…