“Nothing is forced.” These three words by Donald Tusk could start three trends.

Last weekend, did Prime Minister Donald Tusk finally bid farewell to the idea of ​​a new cheap loan scheme sold to the public under the slogan #naStart with the phrase “nothing forced”? What consequences could this portend when the real estate market comes to terms with this painful reality? And how might it change the situation? Three trends are likely to start (or strengthen) among developers, investors and… property owners.

“Nothing is forced,” Donald Tusk said a few days ago, commenting on coalition partners’ opposition to the #naStart cheap loans programme. It is known that neither Poland 2050 nor the Left wants to support it. Nor is it worth counting on the help of the Confederation’s deputies, who have a radically different view of how to solve the problem of high housing prices. In fact, the #naStart program has the support of only the Civic Alliance and the Polish People’s Party. That may not be enough to push the idea through parliament, let alone convince the president to sign it.

Prime Minister Donald Tusk’s “nothing is forced” statement could mean that the civic coalition will not strive to implement this premise of the “100 Privacy” list at any cost. This means – and this is truly unprecedented news – that for at least a year, and perhaps even for a few years, there will be no opportunity to get preferential or cheap housing loans (because interest rates will not magically fall either). There may be other facilities for buying apartments, but they will not be cheap loans.

What does this mean for housing prices? Every year in Poland – according to the Central Statistical Office – a quarter of a million apartments are traded; in 2023, the value of these transactions was less than PLN 110 billion. Almost half of them are financed by banks (they grant from 120,000 loans in times of bad economic conditions to 250,000 loans per year in good times). Almost half of these sales are new apartments built by developers (they build from 75,000 to 125,000 apartments per year).

“Nothing is forced”? The war of nerves in the secondary market. Who is on top?

So it’s simple: if there are no cheap loans, then About 30% of the demand for loans permanently “evaporates” (because fewer people are able to buy an apartment with money borrowed from the bank). And the “credit” part of the demand for apartments in the entire real estate market is decreasing proportionally. We have seen this for at least two quarters and it is enough to stabilize housing prices. Now the question arises, How will this affect those who bought apartments as an investment after seeing that this investment does not yield any benefit?

The real estate market, like the stock market, is ruled by emotions. Either the buyer or the seller has the better cards. When a cheap mortgage program looms, sellers set higher prices and make bigger offers (because they know that more buyers will be buying apartments soon). Or they even withdraw offers because in a few months they will be able to offer the same apartment at a much higher price. They are the masters of the situation.

So far, realtors have had stronger cards, but if, as a result of “nothing forced”, it turns out that there is no chance of a cheap loan program, the psychological advantage will pass to potential buyers. It will be more difficult to sell an apartment, so those sellers who are short of time will lower prices. This has already begun, but still to a relatively small extent, as I wrote about here. What determines the potential “emotionality” of this trend?

If someone buys an apartment as a capital investment (a bearer of value) or as an element of succession policy (to pass it on to children), they will not sell it just because it has become cheaper.If someone buys an apartment for speculation (flipping) or investment (rental) purposes, he will calculate the loan repayment installment (in case of using bank funds) and look at the situation in the rental market.

So, if loan payments don’t fall by the end of this year, and rent doesn’t bring in profits (i.e. it will still be possible to extract 6-7% of Treasury bonds without risk, and rent rates won’t be as high as they have been recently), then Part of the apartments purchased for investment or speculative purposes may be offered for sale.. But how big is it? Not that great (yet), I’m afraid.

Core belief in the “business model”

I have not seen any reliable research (except perhaps the estimates of the National Bank of England regarding the purpose of buying apartments) that would give a clear answer to the question of what proportion of apartments have been bought in recent years. But NBP surveys show that about 40% of the demand for apartments is speculative or investment (or at least partial investment) in nature. This does not necessarily mean that the decline in the “profitability” of these apartments will immediately lead to a reaction from their owners and a willingness to sell them.

Other data from the Philippine National Bank shows that a relatively small portion of apartment buyers are using loans extensively to generate rental income. Therefore, what will be important to this group of investors is not the price of money, but the long-term negotiations of the lease as a “business model”.These changes must be undermined by some change in rental taxes, or structural changes in this market (the entry of more aggressive “wholesalers”), or the introduction of a cadastral tax. Or there must be an erosion of real rental income that lasts for more than a few months.

Flippers, people who make a living by buying apartments, subdividing them into smaller apartments, or “upgrading” them and selling them at a higher price, are likely to get scared a little quicker. This “business model” loses its appeal once prices stop rising rapidly. But flipping is a high-end but relatively narrow trend — even if some flippers go dormant, their demand for apartments is not decisive.

So the huge increase in the supply of apartments in the secondary market – sparked by “investors” – will take time, and the current situation will be maintained for at least a few more quarters, plus new incentives that will weaken confidence in making money on rent. Fins will react faster, but they are not the ones who set prices in the long run.

Could the lack of a #naStart program reduce demand for real estate purchases? And whoever buys to live will buy the apartment anyway, especially since creditworthiness increases due to higher wages. (And so far this is the majority of total real estate demand, about 60%). Anyone who buys an apartment to improve their living conditions should think twice about it.Because it will be difficult to sell the current apartment at a good price.

Buyers for investment purposes will be held back for some time by high loan rates (to a lesser extent) and the attractiveness of other forms of interest generation (Treasury bonds). Those buying an apartment as a way to save money or as part of a family succession plan will probably see any stability in prices as an opportunity to buy, so they will not pull demand. Demand may therefore fall, but not in all customer groups.

What will the developers do? Same thing as always.

A very interesting question: how will developers react to the absence of a cheap loan program and to the Prime Minister’s “nothing forced”? The decline in demand for real estate (which was caused at first by expensive credit, and later by a slowdown in investment demand, which sees that real estate no longer earns money quickly and in large amounts) is always interpreted by developers in the same way: as a threat to their profitability.

Because real estate development is a straightforward business: you have to earn enough in a three-year project to pay for the land, build the apartments, and finance the interest on the debt you incurred to run the entire project. Today, developers’ gross profit margins are 40-45%, financing costs typically do not exceed 10-11% per year, and the apartments are selling, so the industry is booming and peaceful.

But if housing prices stagnate or start to decline, then… Developers will have less “guaranteed” margin because for the same money they will have to sell apartments that cost 10-15% more to build. (Labor costs are rising, but fortunately the cost of building materials is not.) If the cost of financing does fall, it will only be slightly, so it will be difficult to close the deal. Developers will likely “deleverage” themselves, meaning they will simply reduce the number of projects they undertake.

What will essentially be built will be expensive, exclusive and in demand independent of the market situation. Less “sure” things, which risk being left out in the cold with unsold apartments, will probably be postponed.

Read more about the developer situation: Giant profits for developers. Their stock prices have risen significantly thanks to the real estate boom. But are they still worth buying?

This is the main argument of the proponents of loan support. They say that since the demand for apartments depends on the price of money, changes in this price must be smoothed out so as not to cause a shake-up in the development industry. Because the “production” of apartments that has stopped cannot be restarted so easily. If demand is lower and the number of apartments offered is lower, real estate prices may not rise, but the housing needs will not be met.

From the point of view of people considering buying an apartment, it just means that – assuming we have a new trend, which lasts for several years – Perhaps over time the supply of real estate from developers (who are relatively wealthy today) will narrow.So it’s worth adapting your actions to these expectations.

Real Estate Development Bonds: Could They Become a Trap?

The lack of a #naStart programme is likely to have some impact on investors who have bought – either on their own or through investment funds – bonds of companies operating in the development market. Bonds of many development companies are listed on the Catalyst Market.usually medium and large, including true giants (such as Dom Development, Robyg, Devilia, Victoria Dom, Echo Investment). It is worth several billion zlotys, and the developers roll over 1 to 1.5 billion zlotys of this debt every three months.

Most developers have accumulated significant capital from previous years’ profits, as well as strong land banks, so even if their turnover or profitability decreases, in the vast majority of cases there should be no problem with debt buybacks. As Emil Sweda from Obligacje.pl recently calculated: The average debt ratio for small developers on Catalyst decreased in 2023 compared to 2022.The average cash flow ratios of these developers increased.

In short: I don’t expect developer bondholders to face any spectacular defaults, although there may of course be unpleasant exceptions (HREIT has already collapsed for some reason). However, the developer bond market will be – in the absence of #naStart loans – more exciting than before and more demanding for developers. No longer will each “paper” be sold in unlimited quantities. Investors may be less willing to buy developer bonds or demand higher interest rates.

“Nothing forced” will work, but not right away.

Will the next few years bring such new trends in the housing market? This, of course, depends primarily on whether Tusk’s “nothing is forced” is a strategic message or just a momentary whim of the prime minister, who has run out of patience with his “appetizers”. In the first option, tectonic changes will take some time – real estate market trends are long-term, and the last bear market lasted six years (2009-2015).

They will rely not only on cheap credit and money prices, but also on the attractiveness of real estate investment “business models” (taxes, demand, competition).

Cover image: Archimedean/YouTube