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9^th January 2009 - Mortgage, Economic and Real Estate Outlook for Poland, January 2009

The worsening of the credit crisis in the latter part of 2008 affected the mortgage offer in Poland in much the same way as the rest of the world. Starting in October 2008, most banks in Poland (both home grown and foreign owned) began to severely restrict the terms of their offer to all applicants. Available Loan to Value percentages fell from above 100% and bank margins rose from in some cases under 1% to as high as 3-4%. Many banks discontinued lending in Swiss Franks (CHF). With potential financial catastrophe narrowly avoided in the West for the time being, many banks are now starting to once again open up their offers, though not to pre-crisis levels. In some ways, it could be argued, the Polish banks are back to behaving the way they did a few years back, exercising extreme caution in how much they lend and who they lend to, with the competitive gains experienced during 2004-2008 erased.

It is not surprising that the drying up of the loan offer has coincided with the end of the property boom, as with in the West, access to easier credit was such a huge influence on demand for properties. Such a statement should be qualified though with respect to the Polish situation. There was little reckless bank lending in Poland, certainly nothing to rival the sub-prime lending in the USA. Poland was coming from a much lower base, and mortgage debt as a percentage of GDP still only stands at approx 10% in Poland compared to around 80% in developed markets such as the USA, England and Ireland. 

Unquestionably, 2009 will be a difficult year for the world economy, and Poland will by no means be immune. The consensus is that Poland will still record GDP growth this year, but economists are divided over the extent. Certainly, the central bank is still hoping for around 3%, but this will be largely dependent on Poland utilizing its available EU grants and continuing infrastructure spending, rather than on private sector growth.

The direction of property prices in Poland in 2009 will be very much dependent on whether the banks want to resume lending to the average Polish buyer (we will look at lending to non-residents and foreigner later). Property prices in most major Polish cities began falling in the early to mid part of 2008. Though it is hard to get definitive information on completed transactions (such data is not centrally recorded), the consensus is that prices have fallen already around 10-15% from their peak in mid-late 2007 and there has been a parallel and larger fall in the number of transactions.

After having it too easy for so long, Polish developers had to wake up and realize that they would have to work a lot harder to sell their new apartments in 2008. As the pool of eligible mortgage applicants evaporated (and banks became unwilling to lend to lower quality applicants), sales of new apartments fell steeply. Belatedly, developers are now responding to the more competitive market with special offers, price reductions and better customer service. The average buyer of a new flat in Poland also has the choice of buying already completed flats on the secondary market. There was a spike in the issue of building permits in 2007, and consequently many more apartments were delivered to the market in 2008, and will continue to be delivered in 2009. Due to the increased risk of buying on the primary market (off-plan), buyers with cash or finance in place can elect to buy on the secondary market. In many cases, they are also negotiating very competitive prices, often from distressed investors (both Polish and foreign) who over-extended themselves at the end of the boom.

The central bank of Poland (NBP) finally concluded its tightening cycle of interest rates in July 2008 and after leaving them unchanged for a few months, has now started cutting interest rates (0.75% reduction to 5% since October). Unfortunately, new borrowers are not getting the benefits of this, as during the same time the bank margin which is added to the base rate has risen by this amount or even more. Nevertheless, the reasons for the tightening over the course of 2007-8 (largely higher inflation) have now abated, so we expect the NBP to continue cutting interest rates over the course of 2009. We are not expecting however, that the NBP will be as aggressive as the Bank of England has proved to be in recent weeks!

Whilst mortgages taken out in PLN may not be the cheapest, borrowers are now realizing that in such a difficult economic environment, they make a lot more sense. Poland’s love of the Swiss Frank (CHF) mortgage is officially over. After the Polish regulator began voicing concerns over the number of such loans being taken out during the boom years, and began to curb their availability, the banks have largely finished off the job, making their availability virtually zero (or alternatively prohibitively expensive). Those borrowers who did take out CHF mortgages have been particularly affected not by a shift in interest rates, but by the recent falls in the value of the Polish zloty (PLN). PMD has pointed out the risks of foreign currency mortgages many times, but in the boom, many borrowers were seduced by the bottom line – much lower repayments in PLN each month. The recent fall in the value of PLN against CHF has hurt a lot of borrowers resulting in 30% higher monthly repayments. Of course, not all borrowers have been losers in the foreign currency lottery. A borrower who took out a mortgage in Poland in British pounds in 2007-8 (not a popular currency in Poland, but available) has seen interest rates fall from 6% to 2%, and the repayments in PLN terms fall by upwards of 20%.

What is the best currency to choose in 2009? The safest bet is still a mortgage in PLN, for the same reasons we have outlined on several occasions, the lack of currency risk being the most important. A more aggressive borrower will essentially be making a bet on the strength of the Polish economy and its currency.  In recent months, the world has witnessed a flight to the safe havens of US dollars and the EUR. At the same time, there have been increased concerns over the health of emerging world economies, including Central and Eastern Europe. Whilst Poland has not specifically run into trouble (unlike Hungary, Ukraine and Russia), flighty investors have, it could be argued, oversold the PLN. If you wanted to take the view that the PLN will strengthen against the EUR ahead of (possible) Eurozone entry for Poland in 2012, then a EUR mortgage is worth considering, particularly as the interest rate is relatively cheap currently.

The situation for non-resident mortgages in Poland is not particularly healthy as we enter 2009. The gains in the competitiveness of the mortgage offer available to foreign investors in Poland have largely been erased in the latter part of 2008. None of Poland Mortgage Directs partner banks have ceased lending to foreigners and non-residents, but the loans are now more expensive and the credit worthiness of the borrower has to be high. We can still source up to 90% LTV in PLN and up to 80% LTV in other currencies.  We hope that as the situation in the lending market stabilizes, bank offers will again become more competitive. We know that many foreign investors took out uncompetitive mortgages with several Polish banks during the boom (they shall remain un-named, and Poland Mortgage Direct does not co-operate with such banks). Many such investors took the opportunity to refinance with more competitive offers during 2008. Unfortunately, refinancing options are currently limited, but we hope that over the course of 2009, more opportunities will present themselves.

As ever, if you are considering taking out a mortgage over a Polish property, please fill in our submission form and we will contact you with currently available offers.

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