Soon we may miss the not-so-distant times when the left would chant at demonstrations: “housing a right, not a commodity”. We should actually already miss them, because the correct slogan for today would be: “housing a commodity, not an asset”. We didn’t like, and rightly so, treating flats like ordinary goods that are sold and bought on the market. But things went in a very bad direction; flats are no longer just an ordinary commodity, but rather an investment asset. A popular way of deposing capital, just like shares in companies. The latter are bought by investors to ensure themselves a share in the dividends or to profit from the increase in their value. Following the same principles investors who buy flats do so in order to make an annuity out of them (ie rent them out) or sell them for a profit after some time.
The difference is that shares of companies are not necessary for anybody to live. Nobody lives in them, nobody eats them either. Generally nobody cares about fluctuations on the stock exchange, because the stock exchange separated itself from the real economy a long time ago – especially in a country like Poland, where it is really small, so it cannot harm it as it did the USA in 2008. For an average Pole, the stock market has little meaning. Meanwhile, housing is a basic necessity. The increase in prices directly translates into the standard of living of millions of people. In other words, the wealthy speculate on the housing market, investing their money in “housing assets”: they see them as numbers in accounting columns. The underprivileged, for whom housing simply means the roof over their head rather than a financial asset, end up disadvantaged as a result of these games, as they can afford less and less of their own living space every following year.
At the beginning of the pandemic, there was talk of the end of the housing boom. After years of long increases, housing prices were to finally start falling. This lasted exactly one quarter – second quarter of the last year – and then the boom in the housing sector came back. Last year, 222,000 flats were completed in Poland: it’s an absolute record in the history of the Third Republic of Poland. Admittedly, we are still behind the construction record of the 1970s (283,000 flats in 1978) when the Polish People’s Republic was led by Edward Gierek, but we have already caught up with the 1980s when Poland, under Wojciech Jaruzelski, built as many flats as today.
And since we delivered a record number of flats in the conditions of a pandemic, when the demand had to fall, the prices had to fall too, didn’t they? Well, no. Housing prices went up, and they went up a lot. According to Eurostat’s data at the end of the fourth quarter of last year, the prices of flats in Poland rose by nearly nine per cent year-on-year, ie almost twice as fast as in the entire EU (the average is over five per cent). Only rental prices fell due to the pandemic – which was caused by, among others, the outflow of immigrants and students from the cities. In December last year, rental prices were lower by a few to even a dozen or so per cent, depending on the city and the size of the dwelling.
Despite it seeming so, this is in fact not at all an unusual situation. Since roughly 2015, across the EU, the prices of housing have been rising faster than rents. Housing prices in 2015 were even slightly lower than in 2010, while rents were a few per cent higher. Since 2015, however, there has been a rapid rise in residential property prices in the EU, which has quickly outpaced the rise in rents. In 2020, housing prices were higher by nearly 30 per cent than in 2010, while rents were higher only (!) by less than 15 per cent. In Poland, we don’t see the effects of this trend yet: at the end of 2020, both rents and housing prices were higher than in 2010 by 30 per cent (rents increased even slightly more). The past year, however, heralds the arrival of this phenomenon of so-called price scissors to Poland as well.
Why did we experience such a strange combination of a significant drop in rents and a very dynamic growth in housing prices last year? If a flat was an ordinary commodity, then the situations in both segments of the housing market should be relatively similar. However, housing is no longer a commodity: for the past few years it has become primarily an asset. Housing prices have become detached from the situation in the housing sector, just as stock prices became detached from the situation in the real economy. They no longer depend on the demand for a roof over one’s head, but on the activity of investors. Until 2015, own funds constituted a half of the share of the purchase of flats. In 2016, it had already risen to two-thirds, and in 2017 even to three-quarters. It was still at this level in the first quarter of 2020, before dropping briefly to one-third (the pandemic second quarter), but then rebounding to two-thirds again in a flash.
Who buys flats for cash? Well, not ordinary homebuyers, who usually take out a loan. According to data collected by the National Bank of Poland, 60 per cent of the purchases of flats for own use are financed with a loan, and another 18 per cent are partially financed with a loan. It is the investors who buy flats for cash – especially those purchasing them in order to speculate. While half of the value of purchases of flats for lease was covered with own funds, transactions “with the intention of resale in a profitable period” were covered exclusively with own funds in as many as two-thirds of cases, and in another one-fifth with own funds prevailing over the partial credit. The increase in the share of own funds in the purchase of flats, as described in the previous paragraph, which has taken place in the recent years, therefore simply means an influx of speculative investors into the residential market.
What does this mean in practical terms for the local population? Until 2014, real house prices (deflated house prices) were falling, which is not to say that they were falling nominally. We were simply getting richer (ie an average Pole was) at a rate (slightly) faster than house price growth. In 2015-2017, real housing prices grew at a rate of two to three per cent per year, but by 2018-2020 they were already growing at five to seven per cent per year. This was surprisingly correlated with an increase in the share of equity in housing transactions. Through the inflow of investment capital into the housing market, housing prices in Poland began to rise faster than wages. With what effect? The National Bank of Poland publishes a housing affordability index every year. In 2015, for an average salary Poles could buy… 0.84 square metres of an average flat. At the end of 2020, it was only 0.76 square metres. Over the course of five years, in terms of housing availability, we have thus gone down by almost one-tenth.
Who makes money in all this? First, of course, the developers. In 2020, the return on equity for the developers was 20 per cent, so it was even two per cent higher than in 2019, although it was already gigantic. Real estate development is by far the most lucrative sector in Poland right now. In the consecutive two sectors – namely the automotive and IT sectors – the return on equity is twice as low as in property development.
Top ten per cent
Of course, the investors themselves also make money on the rising prices of flats. Who are they exactly? Maybe they are just ordinary people who invest their saved money to supplement their salaries? No kidding, the so-called ordinary people are unlikely to invest in real estate, and if they do find some extra property, it is usually as a result of receiving an inheritance or some other coincidence. According to the National Bank of Poland (NBP), only ten per cent of moderately wealthy households in Poland own “another property” (ie property other than the one in which they live), with a total value of 26 billion zlotys [5.7 billion euros]. On the other hand, the richest decile of Polish households own “other properties” worth as much as 356 billion zlotys [78 billion euros]. Thus, the top ten per cent is in this respect as much as 14 times richer than the middle class (of course, most of these top ten per cent consider themselves to be middle class, but let’s not fool ourselves). And it is among these upper ten per cent that we should look for speculative investors in the Polish housing market, who are responsible for the increase in the prices of flats in the last few years.
What is worse, it is difficult to imagine that the price growth will slow down in the coming months. It may even increase. Due to low interest rates, holders of financial capital are looking for more attractive forms of investments. One option is to buy treasury bonds, but they also have record low interest rates. Therefore, flats become the best – that is the most stable and profitable – form of investing capital for wealthy households. And sometimes also institutional investors. According to the National Bank of Poland, last year alone nearly 100 billion zlotys [21 billion euros] flowed out of Polish bank deposits – almost one-third of the capital invested in them. Where will it be or has it already been invested? Among others, namely in flats.
Of course, the conversion of flats into investment assets is not only a Polish specificity. In Poland, this process is in its infancy. We are very far from Great Britain or even the Czech Republic in this respect. In the latter, the prices of flats have already increased by more than two-thirds as compared to 2010, ie twice as fast as in Poland. The European Parliament recently called on member states “to take action to solve the housing crisis.” The EP release reads: “One of the main reasons for the rise in housing costs is the conversion of housing into financial assets. Many people are investing in second homes to earn extra income and boost their pensions. Foreign investment is driving up local residential property prices and platforms such as Airbnb are reducing the availability of housing, especially in city centres.”
Similar conclusions are drawn in the recent OECD report entitled “Housing and Inclusive Growth”. The authors point out, among other things, that the current boom in the housing market is mainly to the detriment of young households, which have great problems with purchasing a flat. In 1995, on average in the OECD, one had to spend seven years of salary to buy a 60 square metre flat. Today, it is already ten years of salary. In the OECD countries, almost half of the people aged 20-29 still live with their parents. In Poland this is over 60 per cent and one-third of Poles aged 25-29 consider obtaining or maintaining a flat as one of the three most important risks they face. In other age groups such risks were indicated by twice as few respondents. In the entire OECD, as much as 40 per cent of young people consider getting or keeping a flat as one of the three greatest challenges.
The authors of the OECD report call for more active housing policies. They point out that spending on housing policy has declined in recent years, although it was already very low. Currently, OECD countries spend 0.3 per cent of GDP on housing policy. Importantly, the vast majority of this spending goes on housing benefits, which ultimately end up in the pockets of homeowners. Public housing investments in the OECD countries amount to merely 0.06 per cent of GDP. What does this look like in Poland? Attention! 0.0 percent of GDP is spent on housing allowances. In other words, Polish expenditures for this purpose are so low that they cannot be shown to one decimal place.
Of course, the easiest thing to do in such a situation would be to introduce yet another programme of subsidising housing instalments. Such as the earlier “A Family’s Own Place” [pol. Rodzina na swoim] programme from the times of the first Law and Justice government, or “Housing for The Young” [pol. Mieszkanie dla młodych], introduced by the Civic Platform and Polish People’s Party coalition. However, this would be a typical treatment of symptoms – it would probably help many families, but it would not only halt the increase in housing prices, and could even accelerate it. The best solution would be to create a state-owned developer who would build flats much cheaper than commercial ones. The competition from its side would force the private sector to make the prices of flats real. The problem is that the Polish state has already tried to build flats and, unfortunately, it has failed – we are talking here about the Law and Justice party’s biggest embarrassment in terms of social policy, which was the infamous “Flat Plus” [pol. Mieszkanie plus], which ended in a fiasco.
The simplest solution to curb the speculative growth of housing would be to allow municipalities to introduce an additional tax on unoccupied private premises. Any private property which would remain unoccupied for longer than, say, 12 months would be charged a drastically higher property tax rate. This rate should be high enough, even prohibitive, to induce investors to rent or sell empty premises. As a result, rental prices could fall, and property prices would at least rise a little more slowly. And maybe many private investors would think twice about whether they want to get into this business. And in the end, maybe that would make people less inclined to treat a basic need such as a flat as just another investment asset.