Are dwelling prices breaking records?

We have been observed slight, systematic increases in dwellings prices in the largest Polish cities for several years, but in recent quarters we have noted an acceleration of this trend, when quarterly increases in both primary and secondary markets have amounted to even 5 – 6%. In Q3 2019 the average transaction prices of 1 sqm of floor area of dwellings in the largest Polish agglomerations increased by approx. 4% – this phenomenon was observed not only in the capital city, but also in Bialystok or Katowice agglomeration. In relation to the same period of 2018, recorded increases amounted to approx. 7 – 10%, and since the beginning of 2013, average prices in most of the analysed cities increased by approx. 20 – 25%, while in Lodz and Gdansk increases by almost 40% were recorded.

CHART 1. NOMINAL AVERAGE TRANSACTION PRICES PER 1 SQM OF A HOUSING UNIT IN SELECTED POLISH CITIES

source: AMRON Centre

Significant nominal increases in housing prices on primary market result not from increases in developers’ margins, but from the growing risk and costs of housing production, i.e. labour costs, prices of building materials and prices of building plots. At the same time, high demand driven by favourable economic conditions on the labour market and low interest rates resulted with shrunken housing offer and supply problems mean the further prices increases. Even now it is easy to hear or read some analysts’ opinions that transaction prices of dwellings already break records before the subprime crisis.

Looking at the chart above you can get the impression that housing prices in Poland have exceeded their current maximum values and the flats are the most expensive now. The average transaction price of 1 sqm of a dwelling recorded in Q3 2019 in most of analysed Polish cities was actually close to the level from the peak of the housing market cycle at the turn of 2007 and 2008. Only in Katowice agglomeration the average price per 1 sqm of a flat was lower by a few percent, while in Lodz and Gdansk, where price growth was the highest, increases by 9% and 16% respectively were recorded in relation to the maximum values ​​noted in Q1 2008. This are nominal terms. In real terms, however, considering the cumulated inflation, which in the last 10 years amounted to approx. 24%, it turns out that the current price level in most of the analysed locations corresponds to the price level recorded in 2010 and 2011, i.e. much lower than the record ones. In this approach, the average price of 1 sqm of a dwelling in Warsaw still remains nearly 18% lower than that recorded in Q2 2008. In Katowice agglomeration this difference is even higher – almost 26%, while in Gdansk it is by far the lowest among all analysed cities – only 6.37%.

CHART 2. AVERAGE TRANSACTION PRICES PER 1 SQM OF A HOUSING UNIT IN SELECTED POLISH CITIES ADJUSTED FOR INFLATION

source: AMRON Centre, GUS

However, the price level is only one side of the coin. Really good economic situation on the housing market is also caused by record low interest rates and consistently growing salaries. In the period from 2006 to 2018, the average gross salary in Poland increased nominally by 83%. In analysed cities, this increase ranged from 62% in Katowice to 95% in Cracow. Therefore, if we take this information into account in our study, it turns out that despite the high level of nominal prices, the price availability of dwellings is currently much higher than before the peak of the housing market cycle in 2007 – 2008. This is well illustrated by the Housing Availability Index prepared by AMRON Centre. In Q3 2019 it reached the level of 198.70 points, i.e. it was almost twice as high as in Q2 2008.

CHART 3. HOUSING AVAILABILITY INDEX M3

source: AMRON Centre

Despite the high nominal price level, it cannot be said that dwellings are overpriced and buyers’ behaviour is irrational. What is more, taking into account the factors that will shape the situation on the housing market in the near future, including low interest rates, dynamically rising inflation and increasing costs of housing construction, it is difficult to expect any reductions in housing prices.

Agnieszka Pilcicka
Real Estate Analyst