Sunday 17 June 2018

(Not) homeless, (not) hopeless

Yet another post written to vent my anger and out of hopelessness. While you are attempting to succeed in something for months and fail to pull it off, fall over and then get up, the risk of growing weary increases, along with the risk of taking a regrettable decision.

It may sound like an absurdity (though I have heard some stories of people in a situation akin to mine), since if somebody sleeps on a heap of cash, they should simply buy a property, instead of picking and choosing endlessly. I realise I have precise expectations towards a flat I would like to own, each one I had found and wanted to purchase had some drawbacks, yet acceptable.

Since that update I found another four flats (which means one flat generally meeting my expectations per month, I suppose not a bad result).

Flat 1 in Kabaty had one disadvantage I could not get over, namely a pub with beer garden was run beneath its windows and balcony. I feared the noise and smell coming out of it and having taken advice of a few people who shared my reservations that residing there could become a nuisance, I abandoned it.

Flat 2 in Bielany was under construction (completion and handover planned for 4Q2018) and I fell in love with the layout of it. The price was acceptable yet the charm was gone when I cycled to see the building and see that:
- the amount of light coming into the flat was grossly reduced by a nearby 15-storey block of flats,
- the flat was just next to a street, busy and noisy even on Saturday afternoon during the 9-day April-May weekend.
On top I learnt from the developer the flat would be just above the grocery store.

Flat 3 in Natolin had a nice layout, was in a lovely building in a lovely location, but was completely ruined by previous tenants, so lots of money would need to be put in to restore it. Sadly, the owner got stuck to the desired price of PLN 9.3k per sqm and asserted he would not let anybody beat it down even by a single zloty. The flat remains unsold until now.

Flat 4 in Kabaty was found quickly after the comeback from holidays and seen immediately. The first impression was that it was quiet, sunny and had large potential (also ruined by tenants and in need to comprehensive refurbishment). My father got involved in preparing a renovation calculations, however the flat was given up not for cost and hassle reasons, but because of poor layout which fully transpired at the stage of planning / designing (bathroom would fit nothing except for shower booth, washbasin and toilet bowl, kitchen also gave little room for manoeuvre, corridor would fit nothing expect for a closet) and location on second floor without a lift.

In the meantime, media reports of skyrocketing property prices and shrinking supply began to flourish. Indeed, demand is still propped up by people withdrawing money from bank deposits (oddly enough my bank savings fetch 40% higher return that a year ago despite central bank rates unchanged, only thanks to increased competition to attract depositors), on top banks have loosen their mortgage lending criteria. Supply of flats on the secondary market is constrained by owners who believe it pays off more to let a flat rather to sell it and put money on a low-interest bank account.

To find out what is actually happening on a property market, you can draw on many sources. I find bleating developers, property agents, loan brokers and financial advisors less credible that National Bank of Poland and AMRON-SARFIN databases. The two transaction registers and still patchy, since NBP database relies on data voluntarily passed by property developers and estate agents, while AMRON-SARFIN base is compiled by mortgage-lenders, so flats purchased for cash only fall out of the sample.

NBP data which differentiate between primary and secondary market indicate that transaction prices on secondary market indeed went up a bit, yet were higher in mid-2017 than recently and that the gap between asking prices and transaction prices increased. No wonder. If in any newspaper and on any webpage you can read the prices are going up, vendors naturally reach out for more.

AMRON-SARFIN data which show the broad picture of the market astonishingly indicate a minor q/q decline in Warsaw in 1Q2018 which might be attributable to the seasonal factor and some transactions under MdM programme. Year-on-year change in flat prices is no longer close to zero, but still far from 10% of which those who benefit from price incline speak.

Some of you could ask why have I focused on secondary market and does not want a brand-new flat. It is not even a matter of waiting or of higher prices (here the 5% y/y hike is a matter of fact) or even idiotic layouts. Those factors do matter, yet the biggest risk which I observe as bank analyst (having insight into some information before they hit the headlines) is the risk of construction not being completed, on account of cost pressure on building materials and labour force sides. I know of some developments where construction works have been halted and an investor faces a problem. The phenomenon is already signalled in the press, but I fear also somewhat shrugged off.

Tensions in the economy are more and more visible, though officially the economy is steaming ahead at full blast. The currently observed salary growth, not followed by inflation pressure is not sustainable and it is a matter of months or quarters before the economy overheats. I also believe the National Bank of Poland is doing an evil job of not jacking up interest rates, when the economy would easily withstand tighter monetary policy but threat of imbalances would be fended off. As I pointed out several times, if the price of money is too cheap, those in possession of surpluses of cash would flee low-earning investments and chase higher returns. Currently, such are offered by property rental, but with:
- growing supply of flats for rent, rent rates are unlikely to go up,
- if flat prices rise and rent continue flat, yields will go down,
- on top if interest rates go up and banks keep on fighting for deposits, the gap between nearly risk-free bank deposit and risky property rental would narrow down.
Since most of flats purchased today are not bought for own use, but to be let to someone else, a sell-off is conceivable one day…

But on the other hand, the market can stay irrational longer than you can stay liquid. Poland is growing richer and one of evidences of it is the increasing number of people who can afford to buy properties out of their accumulated savings only. Besides, in terms of number of square metres which can be purchased for an average salary, Warsaw still ranks among the most affordable property markets in Europe. This makes sad news, if London or Paris appear as gloomy benchmarks.

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