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21^st July 2008 - Poland's mortgage debt to GDP ratio approx 8% compared to 80% in UK and USA!

The global credit crunch has put an end to the housing booms experienced in the USA, Britain, Ireland, Spain and several other major world markets. With no more access to easy credit and new mortgage approvals at record lows, the falls in the price of housing in these markets look set to continue for some time. What effect can we see in Poland and what is the future direction of house prices in the largest CEE (Central and Eastern European) market to join the EU since 2004?

by Andrew Balfour

When considering these questions, the most telling data to observe is the ratio of mortgage debt to GDP in each country. By the end of 2006, when the most up-to-date data was produced, the USA and Britain had mortgage debt as a percentage of GDP around the 75-80% mark. The ratio in Ireland and Spain was lower at around 60%, but in the case of Ireland, it almost doubled in the period 2002-2006. The EU average is around 50%.

Poland’s ratio has also almost doubled in the period 2002-2006, but from a MUCH lower base. As at the end of 2006, Poland’s mortgage debt represented approximately 8% of GDP. Only 8%! Mortgage markets in Poland and other former communist countries in the region are still underdeveloped, though competition is increasing and the range of the market offer is improving.

This perhaps presents the best argument as to why Poland has and will continue to be partially insulated from the worst of the credit crunch. Of course, in a globalised economy, no country is immune. We can already see some instances of foreign banks reining in their borrowing in Poland due to the problems they have experienced in the USA and other markets. The fact remains, however, that bank lending in Poland was never reckless. It was actually the opposite, very strict. There are very few bad debts on most bank’s books in Poland , and hardly any homeowners with negative equity.

The growth of the mortgage market in Poland, and the rise in the country’s mortgage debt to GDP ratio, will be dependent on wages continuing to rise (currently increasing around 10% per annum) and also increasing competition in the Polish banking sector, which could result in strict lending policies being loosened. There isn’t much chance of the latter happening this year, but once the situation stabilizes on the global credit markets, I expect it will some time in 2009.

Poland’s housing market experienced a huge boom in the period before, during and after EU accession, from 2003-2007. The end of this boom has coincided with the credit crunch and the bursting of the bubble in the speculative markets in the USA, UK, Ireland and Spain. There are many reasons, however, to expect that the Polish story will be different going forward. As well as the aforementioned reasons, there is still very strong demand in Poland for new housing to replace the country’s ageing stock, and from the martial law baby boomers born in the early 1980’s and now entering the workforce. Of course prices never rose as high in Poland as they did in other more developed countries, and the vast majority of buying was for habitation rather than speculation. I expect stabilization through 2008 and the early part of 2009, before prices (and not to mention access to mortgages) begins to increase steadily again. This would also mirror the experience in the Czech Republic, where mortgage and real estate markets are a few years ahead of Poland on the development curve. Czech experienced a big real estate boom, followed by stabilization and then a second wave of growth fuelled in part by a growing access to mortgage finance.

Another cause for optimism in Poland is the relative health of the economy. Poland is experiencing higher inflation, currently just over 4%. However, this is a global problem caused by high oil and food prices. However, unlike many of its neighbours in the CEE region (where inflation is in fact much higher, incidentally), Poland’s central bank has been able to use its monetary policy powers (by raising official interest rates) to try and curb this inflation. The level of inward foreign investment in Poland continues to be high, unemployment is still falling (now less than 10% compared to 15% before EU accession), there are still billions of structural funds from the EU to be spent improving infrastructure (much of it with the goal of hosting the 2012 European football championships in mind), and the current level of GDP growth continues to be high, 6.2% in the first half of 2008. The recent strength of the Polish zloty is a concern for Polish export competitiveness, but should also have the effect of reversing the brain drain which Poland experienced after EU accession.

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