For a long time, many indicators have suggested investing in real estate. However, neither speculative purchases nor rental investments guarantee profits and are fraught with significant risks. Entering this market without preparation is likely to lead to problems.
Poles hold over 800 billion PLN in banks. The problem is that since 2016, the average interest rate on deposits has been lower than inflation, not to mention real earnings. In other words, the purchasing power of funds deposited in this way is decreasing.
There is therefore a need to find more profitable forms of capital growth. More and more people are deciding to take their money out of the bank and enter the real estate market. Is this the right decision?
Real estate prices are increasing at a double-digit rate
Rising housing prices are certainly an incentive. According to NBP data, in the last year alone, new apartments in provincial cities have increased in price by an average of 9.75%, and used ones by 12.8%. In some centers, the annual growth rate has approached (Bydgoszcz, Katowice, Szczecin, Wrocław) or exceeded (Zielona Góra) the 20% level.
In the longer term, the price increase is even more pronounced. At the end of 2019, properties from the primary market were 1/3 more expensive than at the beginning of the last decade. Second-hand properties increased in price by an average of 1/5.
On local markets, the rate of price growth was even greater. The leaders were Rzeszów and Opole, where over 10 years new apartments increased in price by 60%, and used ones by 30%. Generally, the price dynamics of real estate in smaller provincial cities were twice as high as in the largest agglomerations.
Investing in rental apartments is profitable
Following transaction prices, rental rates are also rising. Depending on the location, owners charge an average of 35-45 PLN per square meter. This is the highest in history.
Data from Expander suggests that it is currently more profitable to take a mortgage loan than to rent an apartment. The exception is only the largest properties (over 70 sqm) and only in selected cities.
All this makes residential investment still profitable. Rental income covers the loan installment. Data from Expander indicates that the average return rate ranges from 6-8% net. In the case of smaller units, investors earn even 8-11%.
Good prospects for the real estate market
This year, further increases in housing prices and rental rates are expected. Although the growth rate is expected to slow slightly, they will still be solid single-digit levels. This scenario is supported by, among other things, high inflation, which will remain above the central bank's original forecasts, and the increase in the minimum wage.
In the base scenario, interest rates, which have been at their lowest in history for five years, will not change. If there is a stronger economic slowdown, the cost of money may even decrease.
This means that if the investment is financed with a loan, the costs of servicing it will remain stable or even decrease. However, it should be noted that banks have been increasing additional costs, such as commissions, insurance, and fees related to granting a loan, for four years. Most of these are incurred when financing is initiated.
Risks of investing in real estate
All this sounds very encouraging, but investing in apartments does not guarantee any profit. Moreover, there may be periodic declines in property values.
We experienced this in the early years of the last decade. Prices in the primary and secondary markets decreased by 10-20% at that time.
Even less certain than speculation and so-called flips (buying below market value, quick renovation, and selling at a much higher price) are rental incomes. You need to find a tenant and secure your interests in case they do not pay the rent. The undertaking is not maintenance-free (e.g., renovations), and using an external company reduces the return rate.
The risk increases even more when the project is financed with a loan. An increase in interest rates may cause rental income to no longer cover the installment. Additionally, a difficult macroeconomic situation (rising unemployment, low GDP growth, inflation spike, global crisis) may prevent adequate rent increases.
Therefore, when investing in real estate, caution is necessary, and everything should be calculated carefully. It is also good to have substantive preparation. Entering this market without preparation can be very painful.
