Do You Really Want Your Property to go up by 100%

For some reason journalists prowl the world of real estate and look for countries or cities where property prices have risen by large percentage points. Poland hit the headlines a year ago when the Royal Society of Chartered Surveyors pointed out that in these terms Polish property had risen faster than any other country in Europe.

Now it is the work of speculators to write about where in Poland they expect to see this repeated, and it will happen, but is it that attractive.

I'm writing this blog in a small apartment I purchased in 2003. Back then it was worth 12,000 GBP. Today it is valued at 58,000 GBP. That's a very nice capital gain of 383% over five years and I certainly have nothing to complain about.

In 2002 I also bought an apartment for 250,000 GBP but it has only gone up by 54% so it seems I have not done so well on this one.

But hold on. My more expensive property has made me more than twice as much in cash terms and ,as this is my pension we are talking about, what I put in the bank is far more important.

So when someone advices you that "Warsaw is really expensive so you should put your money in another city where prices are expected to rise faster" take a moment to reflect before diving in.

As a property investor you are after pounds, euros or dollars, not percentages. If you have the budget sometimes more expensive property with a lower potential is actually by far more profitable.

How Safe is Property in a World Recession?

In the seminars I regularly give on Polish Property one of the most common questions is, "What if property prices crash?".

They do from time to time but my reply is simple, "Where else would you put your money?".

If you want no risk at all put your money in the bank. You will get a low interest rate on your savings but it is one you can rely on.

Anything more than this requires risk. A pension fund may not perform. Stocks and shares may fall through the floor. Property prices might crash. But none of these things happen out of the blue and generally they happen at the same time.

If the global economy goes into melt down everyone is going to have trouble. Banks go to the wall and savings are lost, stocks and shares plummet and real estate values go into freefall.

But if history is anything to go by this is always a short lived affair. All markets rely on confidence and when this returns economies move on and values of stocks, shares and properties rise once again.

The question is not "Should I invest in Property?" but "Am I prepared to take a risk?". If the answer is no spread your savings across several bank accounts but don't get jealous when those who were prepared to take an educated gamble make profitable returns.

Will Polish Property Weather the Credit Crunch ?

Property values are made up of two parts, their real value (or for insurance purposes their rebuild cost) and their confidence value. In recent decades the latter element has,in many areas, become the larger part of a property’s price.

When doomsayers proclaim the market is “15% over priced and there will need to be a correction” they are really expecting confidence to decrease. In America that is exactly what has happened and for good reason considering the reckless actions of many banks who cannot now recover bad debts.

As people loose confidence in the United States the effects ripple around the world but this time for no good reason.The economies of Europe are strong but if enough believe there will be a problem then, like a self fulfilling prophecy, a problem will appear.

Lenders have not helped the situation. They made mistakes in America and their reaction is to tighten credit criteria in Europe even though there was actually no problem on this side of the Atlantic.

Countries like Britain will undoubtedly feel the effect.There were people who wanted to buy and could afford the repayments but now they must also put down larger deposits and so their moving plans go on hold. Those who need to sell must price down but only a handful will find themselves in negative equity. House price inflation is slowing and not decreasing as many would have us believe.

Some other European markets are also likely to suffer. In Bulgaria the majority of real estate transactions are to foreign buyers. According to the Royal Institute of Chartered Surveyors the average property price is thirty times the average salary so those who own a Bulgarian house or flat so they have to, more often than not, find another foreigner who can afford it. The problem is these are exactly the people who are tightening their belts.

Poland is a slightly different case. Legal restrictions stop a foreigner buying more than one property which means the recent boom has been caused by the Poles themselves and real estate still remains affordable to the domestic market.

We can add on top of this the fact that lenders to Polish buyers have always been exceptionally prudent. A purchaser with a good job is expected to put down a deposit of between twenty and forty percent. So while banks in European countries are changing their criteria, in Poland the situation remains unchanged.

The Polish economy is also, to some degree, protected.Billions of Euros in EU funds are already assigned to redeveloping the country’s infrastructure and billions more of corporate investment is currently being ploughed into projects across the country in levels far beyond those seen by other Central European countries. Poland is still playing catch up with the West.

This does not mean the country will escape the credit crunch entirely. Perception is often a more powerful factor than reality. Potential Polish buyers believe that if there is a problem in America then there will be one here too and so they are putting their plans on hold. The difference,compared to Britain, is that they can still afford to buy if they want to.

The result will be a boom, probably in the latter part of 2008. It will happen because the Spring and Summer buyers are hesitating due to a lack of confidence. As the dust settles on the Credit Crunch they will return to the market along with the normal Autumn buyers. Six months of pent up demand will hit sellers and prices will undoubtedly rise.

This is not theorizing. Historically it has happened with surprising regularity on the European stage but it is rarely reported in the press. In London, for example, property prices have actually dropped three times during the past decade. After 9/11 the market slumped and then boomed again as all those who had waited returned at the same time. It happened again during the Iraq War of 2003 and once more in 2005.

To the prudent and experienced property investor it means only one thing. Buying Polish property now is the most profitable thing to do. In years to come buyers will look at the historical graph of real estate prices in Poland, point to the first half of 2008 and say, “We should have bought then.”