Unfavourable interest rates on bank deposits in comparison with the inflation rate lead to a paradoxical situation. More and more people interested in investing their savings and profits buy flats, and they are not those who need a place to live.
Real estate on the roll
The prices of new flats and those from the secondary market have been dynamically appreciating for several years. The market experts are divided. Admittedly, most say that the price boom will continue this year. However, there are also opinions that the trend is already collapsing. The second argument is related to the forthcoming economic downturn, rising inflation, the banks' tightening credit requirements, and the demographic decline.
Does the real estate market really need to get prepared for the crisis? Let's just talk about the real estate market in Poland. Whatever the situation is, today the average price per square metre in Warsaw — according to the portal Cena.szybko.pl — exceeded PLN 10,000, in Gdansk PLN 9,500, in Wroclaw PLN 7,500, in Poznan PLN 7,000.
The same data may also be presented differently. The average price of a flat in Warsaw in mid-January 2020 is PLN 615 thousand, in Gdańsk PLN 545 thousand, in Wroclaw PLN 418 thousand, in Poznań PLN 374 thousand. It is easy to calculate that most often it involves premises with an area of about 60 square metres.
Interest rates on deposits are constantly decreasing
Although inflation in Poland increased in December 2019 to the highest level in seven years — 3.4%, the average interest rate on deposits has been consistently declining for several years.
The Polish Monetary Policy Council makes the most important decisions here, but its movements are strongly dependent on what the European Central Bank and the Federal Reserve in the US decide. This is why the data on increasing inflation does not seem to impress the Monetary Policy Council members more. After the last meeting, the Council announced that interest rates, on which the interests on deposits and loans depend, would remain constant at 1.5%. Adam Glapinski, Chairman of the MPC and President of the National Bank of Poland, said that Poland would sooner experience another cut in interest rates than an increase in them, justifying that after the first quarter of this year, the MPC members would be able to reduce their interest rates. The Council expects inflation to return to the inflation target after the first quarter of this year.
Indeed, such a message pleases the borrowers, but it does not give any revelation to those who keep their savings in banks — in deposits or savings accounts. It means that the average interest rate on deposits, which in December 2019 amounted to 1.41% according to data from the National Bank of Poland, may still be heading towards zero. This does not differ from the current stream coming from other central banks in Europe, where in recent years, there have even been (for example, in Sweden) negative interest rates and negative deposit rates, i.e., a situation in which customers have willingly agreed to lose part of the money they have deposited with the bank.
Can it pay off?
If an average deposit interest rate is at the level of 1.41%, can a customer who deposits with a bank expect a profit? Since prices are rising at a rate of 3.4%, the answer seems obvious. The disadvantage of savers in banks is additionally supported by the necessity of taxation with a 19% rate of profits from deposits, and often it is also accompanied by commission fees.
Not so long ago — at the turn of 2008 and 2009 — deposit interest rates rose above 6%, and at the end of 2012, they still reached 5%. In 2015, average interest rates fell below 2%. Today, it seems that they will not return above the 2% boundary.
From the articles published on Conotoxia.com, which were based on data from the National Bank of Poland, we learned that for 12 months, banks in Poland charged customers PLN 76.3 billion in commission and fees for deposits and other bank transfers. However, they paid a total of PLN 15.5 billion in interest.
The deposit is made. A year goes by
Among the top bank deposit rankings, there are offers with interest rates as high as 4 percent. One should understand that with the main interest rate of 1.5 percent, such extraordinary opportunities are often subject to additional requirements.
Sometimes it may involve a maximum deposit amount, fixed at, e.g. PLN 10,000. Otherwise, the restriction could apply to the so-called new funds, or it might require an interest-free savings and settlement account. Negotiating a higher interest rate may also result in the requirement to invest part of the savings in products recommended by the bank. A breach of the agreement might lead to a cut in the interest rate. Simply said, be cautious and take extra attention to ensure that the so-called tricks in the offers do not eliminate the expected profit.
Therefore, we can assume that we are dealing with a standard annual deposit with an interest rate of 1.41% at the end of its term, and we have PLN 300 thousand at our disposal. How much profit can we expect from blocking funds for 12 months? Unless the deposit is burdened with commission or fees, the interest rate, excluding the so-called Belka tax, will be less than PLN 3.5 thousand. Much? It is certainly better than keeping money at home. It may turn out, what is likely to happen, that after a year, while maintaining the current level of inflation, it will be possible to buy less for PLN 303.5 thousand than for PLN 300 thousand a year earlier.
The flat is bought. A year goes by
The exemplary amount of PLN 300 thousand can of course be invested differently. Today, the market is not lacking various investment tools, including those offered by banks. However, in order to seek potentially higher profits, you have to prepare yourself for higher risks.
PLN 300 thousand is enough to buy 60 square metres, fully furnished flat in one of the cities in Western Poland, for example. What next? According to the Cena.szybko.pl portal, the average rental price of a flat in one of the two capitals of the Lubuskie Province is over PLN 1.4 thousand per month. If, immediately after the purchase of the flat, a tenant could also be found and charged with all fees (rent, utility bills, etc.), after 12 months the owner of the flat might accumulate the amount of PLN 16.8 thousand, i.e. almost five times more than from a bank deposit. The simple accounting, but...
We need a stock of extra cash. The sale may last... Of course, profit from the rental of property is also taxable. The tax rate reaches 8.5%, if the annual income does not exceed PLN 100 thousand.
However, we must be aware of further expenses before the money from the rent starts to flow into the account. For 60 square metres flat from the secondary market we will pay 2% (the price of the flat) of the tax on civil law activities, which at the value of 300 thousand PLN makes 6 thousand PLN. It is worth knowing that we will not be released from the 19% tax when selling the flat before five years from the date of purchase. To complete the transaction, you will need a notarial deed and an entry in the land and mortgage register. Visits to the notary and court will consume a total of about 2-3 thousand PLN.
In the real situation, it is unlikely that you will be able to buy a flat and rent it immediately. The tenant is unlikely to be found just after the advertisement is placed, so for example, for a few months, the bills will fall upon the landlord. The rooms will need to be renovated over time, which, due to the rapidly rising prices of materials and services, may involve considerable expenses. The next ones may be caused by various failures, including the necessity to equip the kitchen, bathroom and rooms.
Another difficulty to be expected is the return of the cash. Even if the average price of housing is going to rise again after a year, which should theoretically work in favour of the seller, there are usually fewer potential buyers on the secondary market, than on the primary market. Bessa in the developer's interest may additionally delay and hinder a favourable transaction from the seller's perspective.
Usually, it is much easier to find a tenant for a place from the primary market. Then the buyer can also remove the 2% tax on civil law transactions from the list of necessary expenses because it will drop on the developer. However, there will be other, much higher costs. In order to bring an apartment in the developer's condition and appearance in which it will attract potential buyers, we will first invest about PLN 1,000 per each square metre of the flat, i.e. in the example described above about PLN 60,000. In Warsaw, Gdansk or Wroclaw, however, these rates may significantly (even twice) exceed the estimated assumption of PLN 1,000 per square metre.
Nothing ventured nothing gained
To pay for a deposit in a bank, or to buy a flat with the intention of renting it — what will be more profitable if we have extra PLN 300,000? The first solution will surely be easier, more convenient and... unfortunately, not cost-effective. Since the scale of price rises is much higher than the interest rate on deposits, the profit seems to be only an illusion. It would be more accurate to speak of safe storage of cash.
The property market offers much greater potential for significant benefits. Here, however, there are risks at stake, and plenty of time, nerves and additional expense. Not every investment is likely to be successful. Many things can depend on the location, among other things. The buyer also has to keep a financial limit on the fees associated with the purchase transaction and be patient both in terms of finding a tenant and recovering all the money invested when the decision is made to sell the property. Typically, it is not worth doing so until five years after the date of purchase.