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…

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