With Europe in meltdown, is Poland an exception? Europe's sixth-largest economy has strong domestic demand, and has not yet adopted the euro: so it was able to devalue the zloty to maintain competitiveness. Poland's economy grew by 3.8% in 2011, and is expected to grow by 2.5% in 2012 and 2.5% in 2013 (OECD forecast November 2011).

Though private consumption is expected to slow, increased exports should compensate for weaker internal demand, allowing the budget deficit to fall from its present 5.3%.

Property slowdown worrying

Yet Poland's housing market was Europe's second-worst performer in 2011, down by 10.55% in inflation-adjusted terms.

Prices fell less in major cities, but the downturn is significant:

  • In Warsaw, the average price of "exposed units" (i.e. used units) fell 6.6% in 2011 (6.97% in real terms), according to REAS.
  • Krakow used dwelling prices fell 5.53% (5.90% in real terms).
  • Poznan used dwelling prices fell 4.57% (4.95% in real terms).
  • Lodtz used dwelling prices fell 5.46% (5.83% in real terms).
  • Tri-City used dwelling prices fell 3.44% (3.82% in real terms).
  • Wroclaw used dwelling prices fell 8.39% (8.75% in real terms).

Compared to pre-crisis peaks:

  • House prices in Warsaw are down by 13.63% (13.53% in real terms).
  • In Krakow, house prices are down by 11.80% (13.2% in real terms).
  • In Lodz, prices have fallen by 17.87.% (17.67% in real terms).
  • In Tri-City, house prices plunged by 25.22% (26.62% in real terms).
  • In Wroclaw, house prices are down by 31.91% (31.81% in real terms).
  • In Poznan, property prices plummeted by 44.08% (44.18% in real terms).

In the fourth quarter, prices of used dwellings continued to fall in all major Polish cities.

Market swamped by unsold units

The number of completed but unsold units increased by 11% in 2011, despite dwelling completions falling 3%. Forced sales by cash-strapped owners added to the total, so the housing market is awash with unsold units.

However, building permits recovered slightly in 2011, growing 5.2%. Dwelling starts also rose, by 2.6%.

The EU brought a housing boom

After the shift to a market-based economy in the early 1990s, the Polish economy experienced nearly two decades of 5% annual growth. Unemployment fell dramatically from 19.9% in 2002, to 7.1% in 2007, and the Polish mortgage market exploded. Outstanding housing loans increased from 1.3% of GDP in 2000, to 16% of GDP in 2009.

Buyers were typically relatively young (31 years old), had no children (80% of buyers), and bought apartments ranging from 46 to 60 sq. m.

When Poland joined the European Union in April 2004, a massive house price boom was unleashed. Having been rather static, property prices suddenly surged in Warsaw by 23% in 2005, 28% in 2006, 45% in 2007, and 13% in 2008, according to REAS. Some other cities such as Wroclaw saw even larger house price rises.

Joining the EU prompted purchases by foreigners, who are however limited to one dwelling each, and encouraged remittances by Poles working abroad. As the money flowed in, the Zloty gradually moved up against major currencies, encouraged also by lower inflation.

From 2001 onwards, a large proportion of housing loans were foreign currency-denominated. The foreign currency-denominated proportion rose from 9% in 1999, to 50% in 2001.

The total amount of foreign currency-denominated outstanding housing loans is still very high, at 61% of the total in 2011, only a slight decrease from the 69% peak reached in 2008.

Interestingly, while the share of Swiss Franc-denominated new housing loans fell from 69% in March 2009 to 52% in December 2011, the share of new loans in other currencies increased from 2% to 10%.

Developers fear a regulation tsunami

The most significant event for the future of Polish property market is the so-called "developer bill", which will take effect 29th April 2012, which aims at protecting the rights of purchasers, changing the relations between the developer, the client and the banks, including the usage of escrow accounts.

In theory, this new legal framework will force housebuilders to compete for banking loans, and will improve the quality of projects and business plans. But could the new law reduce total financing?

"On the supply side, we predict that several developers will launch new projects before the law takes effect, fearing that banks will change their construction credit policy," says Maximilian Mendel of REAS. "It will also influence the demand side.

"Before the law comes into effect, we expect that a large part of prospective homebuyers will hold back their purchase decision, whereas it is likely that we will see more sales from 29th April onwards."

Recommendation T

Another important development is the so-called Recommendation T. Before the crisis, mortgages in excess of 80% of property values were common and many banks offered 110% mortgages.

Recommendation T was approved in February 2010 and came into force in the following August. It recommends a maximum loan-to value (LTV) ratio for foreign denominated loans of 90% for 5-year loans, and 80% for longer-dated loans. Borrowers can take 100% loans only if they obtain adequate insurance.

The second part of the recommendation T, which came into force at the end of 2010, imposes a ceiling on monthly repayment installments of 50% of the income of those earning below the average national salary, and 65% for those earning more.

Curbing foreign currency denominated loans

Since June 2010 there has been stricter regulation of lending by banks in foreign currencies by the Polish Financial Supervision Authority (KNF). This has substantially cooled the housing market, as PLN-denominated loans have higher interest rates. In November 2011 the average zloty-denominated housing loan had a 6.9% interest rate, much higher than the 4.1% on euro loans.

Interest rates up!

After several cuts in the reference rate during the financial crisis, on January 2011 the Poland National Bank set out on a moderately restrictive path that has not yet been reversed, holding the reference interest rate steady at 4.5%.

The result of these measures is that loan volumes are expected to decrease considerably, according to a National Central Bank January 2012 survey:

  • 86% of senior loan officers at banks expect loan grant standards to be tightened further in Q1 2012
  • 40% say the tightening will be "considerable".

Thin rental market

The private rental market is thin in Poland. The social-rental market has been shrinking over the past 20 years. After the privatization of housing in the early 1990s, owner occupancy rose from 48.3% in 1990, to 74.5% in 2002 (55.2% individually-owned and 19.3% co-operatively owned).

Across Poland, rents have fallen since Q4 2009, after having been flat during the previous 3 years, with oversupply especially of high-end apartments.

Average rents in higher-end districts of central Warsaw (Śródmieście) varied from €14.08 and €15.41 per square metre per month in April 2011, and €11.53 to €8.64 in Krakow, according to Global Property Guide research.

Gross rental yields are higher in Warsaw, varying between 5.3% and 5.4%, than in Krakow, where they range from 3.4% to 4.1%.

Soft landing? That depends on Germany

In summary, the Polish housing market is experiencing a severe after-boom consolidation. This is not necessarily bad news. The housing market may be overbuilt, but the demographics are moving in the right direction. On the other hand, a large proportion of Polish housing loans are denominated in foreign currency, undoubtedly, a risk.

Read more on global property research: www.globalpropertyguide.com

However while most of Europe is struggling to avoid a double-dip recession, the Polish economy is growing. Its depreciated currency makes its products attractive to buyers.

Workers are moving back to Poland, according to recent OCDE data. Unemployment was 9.6% in 2011, and is expected to rise to 9.9% in 2012, but this is lower than in many European countries. This factor should not be neglected. Migration dynamics are a fundamental demand driver for urban housing markets, particularly for urban areas such as Warsaw, Krakow and Wroctaw characterized by significant in-migration rates.

"These cities host a large number of unregistered residents who take part in the local housing market, translating into demand in the rental sector and properties for sale," says REAS' Mendel.

Poland's relatively strong economic position is highlighted by Bloomberg, which calculates that Polish government bonds provide a better risk-adjusted return than German Bunds and US Treasuries.

Polish regulators seem focused on correcting the country's economic and financial imbalances. The risks are mainly negative spillovers from the other European countries.

This explains the impressive Berlin speech by Radek Sikorski, Poland's foreign minister, stressing Poland's alarm at German inaction over Greek debt.

Source: Global Property Guide