Jan Cienski in Warsaw -

Polish property developers are ramping up residential developments after years of lacklustre growth – but this is likely to offer yet another real life example of the Hog Cycle that every Economics 101 student learns.

In the Hog Cycle, high prices spur farmers to produce more pigs, which leads to a glut and a fall in prices and then a fall in hog production, which leads to an increase in prices and on and on and on…. Real estate tends to follow that pattern very closely, and Polish developers are no exception.

Poland’s residential real estate sector is having its best period since pre-crisis 2007, with strong sales and lots of new developments. During the first three quarters of this year and the last quarter of 2013, 45,000 new apartments come onto the market in Poland’s six largest cities  – the highest number since the 54,000 in 2007, according to Reas, a real estate consultancy.  That has meant that the number of new building is exceeding sales – in all 47,600 flats are waiting to be sold.

Poland’s statistical agency notes how developers are reacting to stronger sales. In the first eight months of this year, new building projects were almost 40% higher than for the same period in 2013, and the number of new construction permits is 46% higher.

Some troubling signs are beginning to appear. The time it takes to sell a newly built apartment is rising from one year to now slightly more than that. As well, almost half of apartment sales are for cash – many of them being bought as investments for the rental market. Investors have been looking for higher rates of return thanks to the central bank’s record low benchmark rate of 2%. However, the scale of investor demand is difficult to gauge.

The non-investment market is also facing potential difficulties, as the banking sector regulator tightens up rules on mortgage lending. By next year, borrowers will have to put in 10% of the purchase price, up from 5% this year,  making it more difficult for more marginal borrowers to get credit.

By 2017, Polish borrowers will have to stump up a fifth of the purchase price themselves; before the crisis mortgages with a loan to value ratio of well above 100% were common. Even before then, an analysis by the Polish Banking Association found that the number of new mortgage loans unexpectedly dropped from the second to the third quarter of this year, falling by 4% in value terms.

“The beginning of 2015 will make it significantly more difficult for potential mortgage clients of banks to file loan requests,” notes Jaroslaw Jedrzynski of Rynekpierwotny.pl, a real estate analysis website.

For now, despite the rising number of new developments under construction, prices are holding steady. Whether that continues to be the case if the gap between completed projects and sold apartments steadily grows is an open question. For an answer, probably best to look to the nearest pig farm.