Why do housing prices rise? This is the effect of high pre-pandemic construction costs, the current optimism of buyers and low interest rates – believes Kamil Zdonyuk, an expert at Pekao Bank. In his opinion, the housing market may cool off due to the expected increase in interest rates and a decline in “housing purchasing power”.
– Several factors are responsible for the rise in apartment prices – said Kamel Zdonyuk, an expert in the macroeconomic analysis department of Bekao Bank.
– First of all, we can see the optimism of buyers regarding the end of the pandemic, as jobs could have been effectively protected, and there were also low interest rates. As a result of all this, Kamel said, those who buy their first apartments on credit have returned to the market on the one hand, and on the other hand, those who see real estate as a good capital investment have returned to the market. Zduniuk, an expert in the macroeconomic analysis division of Pekao Bank.
’caused by the economic situation’
According to NBP data, in the first quarter of 2021 compared to the fourth quarter of 2020, home prices in the primary market increased in the largest cities. The increase varied by city, with the highest rate recorded in Gdynia, where transaction prices in the primary market jumped by more than 14%, and the lowest in Wroclaw, where it was 0.8%. The average transaction price on the primary market in Poland’s six largest cities was 7.1 percent. Up from the previous quarter, and in the 10 largest cities the average increase was 6.7%.
Zdonyuk noted that rising housing prices is not a new phenomenon. It was already clear before the pandemic. – At that time it was because of the economic situation – it was strong, unemployment was falling, wages were going up, interest rates remained low – said an economist at Pekao Bank.
GUS data on average construction costs of 1 square meter of residential space also show that prices have accelerated since 2018. In the first quarter of 2018, the average price of 1 square meter of usable floor space for a completed apartment building was PLN 4,132 in 2019 was 4,132 PLN. It was 4,388 zlotys, in the first quarter of 2020 – already 4,567 zlotys, and in the first quarter of this year – already 4,944 zlotys.
“A lot of flats are still being bought at the hole-in-the-ground stage.”
– The current increase in housing prices also reflects, in part, the increase in construction costs over the past two years, because this is about the same time in the construction process. Such operations are taking place gradually in the housing market. Although it must be remembered that a lot of apartments are still bought at the stage of a pit in the ground – said Kamel Zdonyuk.
He added that the epidemic had disrupted the housing market. – It seems that at the beginning of the pandemic, that is, in the second quarter of 2020, the psychological impact associated with concerns about the development of the situation was in the first place. In addition, transactions were disrupted by purely physical factors, and some offices were not physically available. But in the third and fourth quarters, it was clear that we were used to the pandemic, as did the entire economy. The Pekao Bank economist said it was noticeable that those who abstained from their purchases were gradually returning to this market.
An additional factor that has encouraged at least some buyers to return is lower interest rates. In the second quarter of 2020, NBP rates fell to their lowest level in history, and the reference rate was lowered to 0.1%. However, the interest rate cut by itself did not lead to an increase in housing loan sales. In 2020, according to the data of the Association of Polish Banks (ZBP), just over 204,000. Mortgage loans were taken, and therefore more than 9 percent. Less than a year ago. But those who borrowed decided to get more financing. The value of loans granted increased by about 2 billion PLN, or more than 3%.
“The market is hot”
Only the obvious improvement in the situation this year, as Kamel Zdonyuk points out, has led to more people wanting to buy apartments.
The effects that led to higher prices before the epidemic returned, so lower interest rates encourage the search for alternative forms of capital investment. In addition, investment funds have appeared that buy apartments. Optimism has also returned among core buyers. Pekao Bank expert said the market is hot, and the epidemic has only provided a slight correction.
There is also a clear increase in interest on loans. According to data from the Credit Information Bureau, from January to May 2021, more than 108 thousand. Mortgage loans, while in the same period in 2020 it was less than 92 thousand. loans, and in the first five months of 2019 – 96.5 thousand.
However, as the Central Bureau of Statistics data shows, supply is not keeping pace with the increase in demand stimulated by credit. In May 2021, the number of apartments prepared for use decreased. Just over 15.2 thousand were completed. There is a clear decrease in the developers – in May they completed 7.9 thousand. Fewer workplaces, almost 1/3 less than in May 2021. As of the beginning of the year, developers have completed almost 49.85 thousand. residences, while in the same period of the 2020 pandemic it was approximately 57.55 thousand.
– I don’t think developers will consciously decide to reduce supply to take advantage of higher prices. Because of the epidemic, land availability simply declined, building permits were issued more slowly, and spatial development plans were prepared more slowly. In addition, the supply of apartments is still large (at the stage of their sale, this is largely reflected in the number of construction starts more than the number of completed units, which has increased very rapidly in recent months), so the increase in their prices, said Pekao Bank economist Largely caused by strong demand.
“We don’t have a real estate bubble in 2008,”
He pointed out that housing prices were affected by the same factors that affected the prices of other goods and services, that is, the rise in the prices of various types of raw materials and goods, including fuel, as a result of the rise in oil prices, due to the rise in oil prices. Sharp rebound in global demand. But Kamil Zduniuk believes that the rise in housing prices may gradually fade away.
– It is possible that the current situation will continue for some time, but there are factors that will nullify the increase in prices. Although there was no real estate bubble in 2008, the purchasing power of Polish housing is declining. This means that developers will not be able to raise prices for a long time and will have to adapt to market opportunities. Zdonyuk said the situation certainly requires close monitoring in the coming months and quarters.
He added that the fourth wave of the pandemic could pose a threat to the housing market. While everyone now expects its impact on the economy to be less than that of the previous waves, there is a risk that it will take a bigger hit after all, and then buyers’ optimism will decline, which will also translate into prices. However, in his view, monetary tightening may be more important.
An increase in interest rates may calm the market. Of course, as a result of the increases, we will not reach a high level of interest rates, and our base scenario is that the rate hike will start next year, and at the end of 2023 we assume rates will reach 1.5%. However, this will be the first serious cycle of interest rate increases in many years, which may have a clear psychological impact – said the Pekao Bank expert.
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