Housing Construction – Breaking Records and the Coronavirus

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Housing Construction – Breaking Records and the Coronavirus

The residential construction sector experienced strong growth over the years: sales of developer-built apartments had remained at record-high levels for three years, and construction activity continued to improve year after year. In 2019, a record number of construction projects were started, and the highest number of building permits was issued.

The mortgage market reached a record high in terms of the value of home loans granted; a correction in the housing market seemed increasingly unlikely, and home prices were rising. The market came to a sudden standstill in the face of restrictions related to the coronavirus pandemic.

What will we find when the housing industry returns to normal operations?

In recent quarters, analysts have been drawn to impressive statistics reflecting a boom in residential construction. The boom in the real estate development market has continued virtually uninterrupted since 2013, and the last three years have been marked by very high activity in the residential market.

The year 2019 went down as a record-breaking period in terms of residential construction activity

Construction began on 237,300 housing units (+6.9% year-over-year, breaking the previous record of 221,900 housing units started in 2018);
207,200 apartments were completed (+12.0% year-over-year), which was the best result since 1980;
Building permits were issued or construction plans were filed for 268,500 apartments (+4.4% year-over-year).

The first two months of 2020 still reflected an upward trend in residential construction activity statistics. Paradoxically, February of this year turned out to be the best month of the past decade in terms of both completed apartments and newly started construction projects.

It seems, however, that the outbreak of the coronavirus pandemic and its dire consequences will mark a turning point, bringing about a reversal of the trend and the long-predicted market correction. Supply in the housing market, demand for apartments, and apartment prices will all decline.

Arguments in favor of this scenario

All developers and real estate agencies closed their sales offices in March; they are now communicating with clients and offering apartments through virtual offices and the Internet. However, this does not facilitate the completion of transactions, and apartment sales have practically come to a standstill. Notary offices remain closed. Listed developers have issued statements regarding the potential negative impact of COVID-19 on their sales plans;
The closure of government offices and the shift to remote work have made it very difficult and time-consuming to compile the applications and administrative decisions required to apply for a building permit. Feedback from individual developers indicates that construction projects will get off to a late start due to the inability to complete all necessary procedures through the ePUAP system. Boxes have been set up at government offices where applications can be deposited, but the entire process of obtaining a permit is still proceeding more slowly. This situation will undoubtedly lead to delays in the launch of new real estate development projects;
Buyers are holding off on purchasing decisions: the immense uncertainty is encouraging a wait-and-see attitude. Buyers are aware that the problems associated with delays and disruptions will also affect contractors and developers, so they expect apartment prices to fall;
The ban on short-term rentals is hitting investors who have been managing apartments under this rental model. Investors can no longer generate income from these apartments, so they are looking for long-term tenants. However, if they cannot find any and want to maintain financial liquidity, they will sell the apartments. A surge in such apartments will certainly lead to price declines in the housing market;
The effect of lower interest rates will be largely offset by the restrictions and higher margins imposed by banks under current conditions (risk premium), it is therefore difficult to expect that lower interest rates will translate into a greater willingness to take out loans under such uncertain circumstances. The situation in many industries is very serious; we will not be able to avoid a wave of bankruptcies and financial difficulties, which will also cool down the overheated mortgage market.

Positive factors that will mitigate the impact of the economic cycle’s phase reversal on residential construction contractors:

After several truly lucrative years, during which they posted impressive financial results year after year, developers have a financial cushion—they should not be at risk of losing their financial liquidity;
A portion of the funds from apartments already sold by developers is held in escrow accounts—hence, it is crucial for developers to complete ongoing construction projects according to schedule. Subsequent projects will certainly be delayed. Therefore, in the short term, a noticeable decline in demand for general contractor services should not be expected—it will become apparent in the second half of 2020;
the option to suspend mortgage payments for borrowers who have lost their liquidity—this could, at least initially, stem a potential wave of home sales;
After lackluster results during its initial phase, the government’s “Mieszkanie +” program is finally showing signs of picking up steam. The implementation of these projects should not be at risk and may, to some extent, serve as a buffer against the expected long-term decline in demand for construction services from developers.

Progress of the “Mieszkanie +” Program

907 apartments under construction (as of December 31, 2019)
18,000 apartments in the design phase with approved funding
In 2019, construction began on the “Mieszkania+” housing project in, among other places, Dębica (201 apartments), Mińsk Mazowiecki (138), Świdnik (108), Kraków (481), Zamość (96), Radom (124), and Łowicz (96)
Construction is scheduled to begin at approximately 20 locations in 2020.

It will be possible to accurately assess the impact on construction and installation output in the residential construction sector once pandemic-related restrictions are lifted. At that time, we will present the most likely scenario. We encourage you to review the baseline forecasts presented in the report “The Construction Sector in Poland: First Half of 2020.”

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