Nightmare from the past

A new definition of \\\'social housing\\\' should exempt nearly all of the Polish housing market from the devastating effects of a huge tax hike

The current rate of VAT stands at 7 pct, but under European law this should increase to 22 pct at the beginning of 2008. As house prices in Polish cities are rising at a rate of around 15 pct anyway, the double whammy of a further 15 pct increase could have a devastating impact on the market.

Snowball effect
Andrzej Halicki, the director of the board office of PZFD (the Polish Union of Developers), describes the potential fall-out from such a change in the tax on properties: "A 30 pct increase could lead to a collapse in the market. Credit taken out would have to be bigger, people could then have problems paying mortgages or taking out loans, so people could stop buying houses." According to Mr Halicki, this situation would firstly affect the smaller firms, who would not be able to operate if the finance for such projects is removed - a situation such as this occurred at the end of the 90s. As Mr Halicki continues to explain: "Smaller developers going bankrupt has a snowballing effect, in that the image of the sector becomes more risky, and then even the bigger companies with better connections with financial institutions start to suffer. A lower number of customers leads to a lower number of flats."
It seems, however, that those concerned about the long-term health of the Polish residential market can breathe a sigh of relief, as some kind of common sense compromise has now been brokered with the EU over the original directive (77/388/EEC) which imposed the 22 pct rate. In January and February, discussions were held involving Zyta Gilowska, the Polish finance minister, Karl-Heinz Grasser, the chairman of the ECOFIN group of European finance ministers, and Laszlo Kovacs, the EU taxation and customs commissioner. These led to the reaching of an understanding that countries such as Poland could get round the problem of the VAT increase by amending their local laws - which are not subject to EU impositions. Such a compromise is not only in the interests of Poland, but in that of EU also, which would not benefit from having the economies damaged of any of its new members.
The key to this solution lies with the definition of \\\'social housing\\\'. If this is extended to cover most types of dwelling, then this would result in almost all new properties being exempt from the increase in VAT. The intention to widen the \\\'social housing\\\' definition was announced by the minister of transportation and housing on February 15th. The precise terms have yet to be disclosed, but it seems that only apartments with an area greater than 350 sqm would fall foul of the increase in VAT, or those which have had an exclusive finish (worth 50 pct of the price of the whole property), or those which have a terrace measuring more than 65 sqm, or those with a swimming pool. It is estimated that only 1 pct of all housing would qualify for the new rate, and thus the vast majority of the Polish residential market would be saved from disaster.

Biting their nails
The new legislation that this requires looks likely to be enacted before the 2008 deadline. Yet one cause for concern for developers and constructors is that the new law may have problems passing through the Polish parliament. However, the prospects are good for this, as the proposal would appear to have cross-party support, with the failure of the bill being in no-one\\\'s interest. "This new definition should have no problems being enacted," says Robert Chojnacki, president of residential consultants RedNet, "no-one is interested in not going with it. It is a good definition and there\\\'s no sense for anyone in opposing it. The market, therefore, is relaxed - confident that this legislation will be passed."
Andrzej Halicki of PZFD, however, admits to being slightly jittery: "We are a little nervous that the government is not moving faster. The proposal has been sent to different ministries for approval, but nothing else has happened. Today customers don\\\'t know what they will have to pay when their houses are built." However, he adds that: "For us it is important to get this discussion closed quickly - it is very important for the market that we get a 100 pct guarantee that this will happen. A parliamentary majority for this legislation is in the bag - it will obviously be voted through very quickly. But we are afraid that other parts of the government who do not feel as much pressure as the Ministry of Housing may mess up the act."
The effect of the new legislation should be to calm down the agitation of the housing market, as Robert Chojnacki explains: "The market had been afraid of the potential hike in VAT and had been building faster, but now they are building more steadily. The crash that was once expected is now a nightmare from the past - it will not happen. There\\\'s no need to hurry now as there is less risk in the future. The growth will not be as rapid as last month, but will remain healthy as long term prospects are good - so the outlook is less risky and not so rapid."

"Quieter" price increases
The prospect of the VAT increases for all residences had certainly intensified the boom in home construction in Poland, as developers hurried to get their products on to the market before 2008, and thus cash in on the rush to buy homes before this deadline. Now, however, with the VAT situation likely to change, Robert Chojnacki believes that the runaway rises in house prices that have been seen over the last year or so should now start to abate: "Prices have been increasing very much, but this will now quieten down to around 10-15 pct pa. There will be less saturation - recently, people who have had the money have been buying as many flats as possible," says Mr Chojnacki.

Nathan North