The State of the Property Market Now
This is a preview to the chapter The State of the Property Market Now from the book Buying Property in Poland by Tim Hill.
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For many this rings alarm bells. Western Europe has seen property bubbles burst and the consequences of crashes. There are a host of statistics supporting the view that Polish prices have already gone too far. After all the average salary in Poland rose only 5% between 2005 and 2006 and the construction sector is delivering over 100,000 new dwellings every year.
Furthermore, growth cannot be further fuelled by foreign investors as a non-national is only allowed to buy one property without a permit (see Part Four: How to Buy), and only particular types of property. Against this backdrop future growth seems unlikely, unless you question the figures.
Prices and Percentages
The press has made the most of pointing out countries where the percentage capital gain over a year seems high. They interview investors who gleam with pride that the house they purchase 12 months ago is now worth 100% more. But 100% of what?
Firstly, in any market, real estate values starting from a very low base are going to have large percentage rises that then slow, painting the illusion that prices are 'cooling'. Take a property worth 10,000 euros. In year one it rises 100% and is now worth 20,000 euros. In year two it rises 70% taking its new value to 34,000. From a percentage point of view it appears to be 'cooling' but in the second year it actually made the owner 4,000 euros more than in year one.
Put another way it is always essential to consider not only the percentage rise but how much this actually puts in your pocket. A house, for example, purchased two years ago for 5,000 euros and now worth 10,000 euros has indeed increased in value by a staggering 100%. An apartment purchased at the same time for 300,000 euros and now worth 330,000 euros has only increased in value a paltry 10%. However the former has made you a 5,000 Euro profit while the latter, if you sold it or refinanced it, would put six times that in your bank.
Secondly, although it is recognised that Poland is coming from a low base there is some question over how low. In the past many transactions were carried out with an illegal element to them. The buyer and vendor would agree a purchase price of say 250,000 zloty but also agree that on the paperwork and legalities of the sale the price would actually be 150,000 zloty, the remainder paid under the table in cash. To save further costs some sales were not officially registered and so on paper the transaction did not even exist.
This worked for both sides in saving considerable amounts in fees and taxes but obviously goes a long way to distort the recorded figures of the last few years. Stricter rules, capital gains issues and the use of mortgages have now removed much of this but how wide spread it was and its effect is impossible to quantify due to its illegal nature.
Tread carefully with percentages, they are not the bottom line of any property purchase or investment and emerging markets often have a history of poor or unreliable data, which distorts today’s statistics.
Many foreign investors have been rightly concerned about a simple question of mathematics. How can they rent out a property to cover a monthly mortgage payment of 4,000 zlotys in a country where the official average income is just over 3,000 zlotys per month. Some have already had their fingers burnt in Bulgaria where similar scenarios simply aren’t possible and apartments stand empty.
Yet in Poland the anomaly doesn’t seem to affect the market. Large numbers of seemingly expensive properties are successfully tenanted to Poles in short periods of time although this is statistically impossible. In some cities, such as Katowice, it is difficult to beat other tenants in a race to properties that should be unaffordable.
The reality is that the average salary figure is highly misleading. In 2006 average salaries rose by 5% while GDP per capita increased by 18%. Something is amiss and its causes lie in the taxation system which affects the way people are paid and the way money earned abroad is brought back to the country.
Firstly, if you own a Polish business it quickly becomes apparent that the tax burden on salaries for high earners is extremely high. Employing someone with a pay of 3,000 zloty per month requires the company to pay around 2,500 zloty to the Polish treasury. This is a heavy cost for any enterprise and so naturally people have looked for an alternative.
The easiest solution is for the employee to go self-employed and contract himself back to the employer. There is still tax to pay but at a much lower rate. The newly established contractor is now no longer earning a salary, instead he is a business with revenue.
That is the legal choice. There is of course an extensive black market paying cash, especially to the likes of builders and other similar tradesmen who are only needed for a short period of time. The scale of this is difficult to estimate but it is believed to be the cause behind a figure showing that around 50% of working age Poles are officially inactive in the labour market. A figure even the government admits cannot be right if salaries are rising at the current rate and less than 15% have actually registered themselves as unemployed.
Furthermore with small businesses that offer services direct to end users such as carpenters, decorators or information technology, the tax system makes setting up a legal company difficult in the early stages. A registered enterprise is required to pay National Insurance (ZUS) from day one no matter what their earnings are and even if they are making a loss. To get round this many small start up companies operate on a cash only basis for the first few months or even years until their revenues are sufficient and stable enough to cover the tax.
Secondly, as most people know, there are millions working abroad. In Ireland Poles have become the largest non-native minority1. These workers are temporary and most plan to return home, buy land, build a house and enter more normal employment. In 2007 The Scotsman newspaper estimated Poles from the UK alone brought back or sent 5.9 billion euros. Global figures for workers from the rest of Europe and the USA would make this figure even higher.
A famous case in point is the town of Siemiatycze, a town of 16,000 inhabitants in the north-east of Poland. On paper this area is poor with high unemployment but this is hard to imagine as you walk through the streets of new or renovated houses with gleaming cars sitting in their driveways. How did it happen? Well it is estimated about 25% of adults actually work in Brussels and have done so for several years, illegally before Poland joined the EU and legally now. Visit the local bus station and you will find a wealth of direct services between the town and Belgium, serving what has become known as the '22-hour commute'.
But estimates on the large sums of currency that are brought back are all there are. Although the government offers a tax treaty with many countries including the United Kingdom this is only a recent phenomenon. Poles who earned money abroad before 2005 are still expected to declare this and pay domestic tax on it. Pre-2005 most who were working abroad were also doing so illegally and the culture of continuing employment on foreign black labour markets runs deep. Such inflows of cash do explain how GDP can rise so quickly and why the majority of Poles choose to buy their properties outright rather than use a mortgage.
There are some plans in the making to deal with these issues but politicians are moving warily. The country has an aging population for which tax revenues are essential and limited reserves in the national bank to handle or cover dramatic changes. As such, for the moment, GDP per capita remains the better measure as to what is happening to the wealth of individual Poles.
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