Property market in Poland – going bonkers indeed?

As prices of residential properties soared in a double-digit pace in Poland in recent months, pricing several first-time buyers out of the market, many wonder, whether the market is already red-hot, how big the imbalance of it is and where the property prices are heading. I will try to come up with a cool-headed analysis, with my judgements underpinned by 3Q2023 NBP and Amron-Sarfin reports (charts come thereof).

Looking at the past two decades, one sees property prices skyrocketed between 2005 and 2007, then levelled off on unsustainably high level, to decline by 20% - 25% in nominal terms by late 2012. For the next five years dwelling prices where in a slight uptrend, which began to accelerate in 2018. In nominal terms, peak levels from 2008 were hit over a decade later. The pandemic did not cool the market down, but the increasing interest rates did it in 2022. In nominal terms prices levelled off, but upon the inflationary adjustment, they fell by 15% - 20% within one year. Then in the second half of 2023 prices increased again, driven by a generous mortgage subsidy programme…

Looking at the graph which shows how many square metres an average salary in major Polish cities would buy, one could infer the market has not gone crazy. The underlying analysis by NBP has some critical drawbacks:
1) salaries are gross-of-tax, which fails to take into account changes in taxation (Polski Ład), which benefitted those who earn less, but hit the middle class,
2) it does not take into account costs of living, especially:
- a portion of net-of-tax wages need spent on payments to landlord by those who reside in rented flats,
- rising costs of basic expenses, such as dwelling upkeep costs and nutrition.

As I coincide with the conclusion dwellings were most affordable in 2016 and 2017, the uptick in affordability in 1H2023 is doubtful given that salary growth did not catch up with rising costs of living around that time.

Analysts from Amron-Sarfin have come up with an enhanced housing availability index, which takes into account more factors, including purchasing power of disposable income and access to mortgage lending. According to their measures, the dream of an own residential property was harder to come true already in 2021 and by the second half of 2022 it declined to levels unseen since a decade. Currently an ordinary man finds it as difficult to buy a flat, as they did in 2011.

Arguably, the property market in Poland is not in a most buyer-friendly shape, but let’s look where it might be heading.

The factors which are likely to drive property prices up are:
1) ongoing first-time buyers schemes extended recently by the government – in Warsaw given the tight criteria they will not spoil the market badly,
2) overall conviction of market participants that prices will go up, turning into self-fulfilling prophecy (this means bubble-like conditions),
3) stringent technical requirements residential buildings from the primary market must meet – they elevate construction costs and jack up property prices on secondary market too,
4) supply constraints – as property developers still have it uphill to get the planning permission.

On the other hand, the market is facing some headwinds, which makes good news for buyers:
1) interest rates remain on a high level and prospects for a material monetary loosening are weak,
2) rental yields are already low – current net income from dwelling subletting is these days lower than on a bank deposit or from government bonds, while risk and liquidity of property investments is incomparably higher,
3) the long cycle is drawing to a close, as examples of countries where prices began to rise earlier than in Poland (Germany, Scandinavia) show,
4) more and more buyers are priced out of the market, which dents the demand.

I have no bloody idea which group of factors will have a bigger impact on the market in real terms (note property price growth below in the inflation rate is an actual decline), but there are several solutions, which might let ordinary people have their housing needs met.

Firstly, let’s build more dwellings, yet without allowing for pathological solutions (which should be theatrically verified by the free market, but under conditions of constrained housing availability, such mechanism does not work).

Secondly, levy taxes on multiple residential property owners (those in possession of more than two properties), which would be progressive (higher tax rates for each next dwelling) and  which would hit harder uninhabited (including not sublet) dwellings. This would curb speculative purchases, which have done a lot of harm to the market (a flat bought for speculative purposes is empty, i.e. not rented and a speculator bets they will gain only from value growth, which is typical for a bubble-like market).

Thirdly, increase protection of landlords – sadly tenants are overly protected by the law in Poland and hence many property owners are afraid of subletting their flats. With a higher supply of flats, rents would go down, which would mean demand from investors would decrease and properties would become more affordable to those who seek their own roof over their heads.