Friday, March 5, 2010

Are real estate prices in Poland too high?

Hungarian Central Bank published an interesting paper showing that while real estate prices in practically all EU countries have decreased since the onset of the crisis in 3Q 2008, sometimes drastically, real estate prices in Poland have actually increased.

I am not sure whether this is true that real estate prices in Poland have recently increased - all other data show they they actually declined by about 10-15%, at least in large cities - but it is surely true that they have declined much less than elsewhere.

Importantly, real estate prices in Poland have increased the most among all new EU member states since 2000, as shown in this World Bank's focus note, which I have co-authored (p. 52) and in a paper by other Polish economists talking about a real estate price bubble here

Time for a correction in real estate prices? Probably so, although it will most likely happen through real price correction, with nominal prices staying more or less where they are now (alas and paradoxically, declining inflation will not help the process and markets will clear later than needed).

Overvalued property prices also beg a question whether the state should continue to support real estate purchases for middle income families, which in effect contribute to the real estate bubble (in Warsaw state support is available for property prices of up to some 7,500 PLN per square meter, which pretty much covers most of the market, except for high-end apartments).

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