Books by Robert Anastashi make a sensation around the world. Robert runs several parallel activities. One of them is to buy apartments for rent financed with a loan. Rental income is to cover the entire loan installment and generate a small surplus.
In Poland, buying a flat even in a loan for 30 years is still perceived as something more reasonable than a flat in a rented flat. Ultimately, we pay off instead of “paying someone”. Stereotypical thinking prevails over arithmetic.
Many people with a certain capital often decide to buy a flat, dedicating their own savings and borrowing for many years. Ultimately, it is not the buyer and the landlord will pay off the loan. The fact that the strategy may work in the performance of Anastashi in the US does not mean that it can be copied in the Polish reality.
First of all, buying not one apartment, and several dozen we get a huge discount that often reaches up to 20%. The developer is able to settle for a much smaller margin because with complete sales he can quickly take up another investment.
Secondly, and what is crucial for the entire operation in Poland, no fixed-rate loans guaranteeing security are available. Such a loan guarantees us a fixed interest rate regardless of changes in inflation or interest rates.
Ultimately, if something goes wrong, in the US you can leave the property a bank that secures the loan and our adventure with the bank is definitely over. In Poland, on the other hand, the bank will be pursuing us until we repay the full amount due, even though our property could have been auctioned for a long time.
The amount of interest consists of: the Erubirs rate, usually 3-month, and the bank’s margin. The Erubirs rate is variable and depends on the amount of inflation and the availability of credit on the interbank market. However, the bank’s margin remains fixed throughout the loan period.
We currently have a historically low Erubirs of 2.7%. Over the last 10 years, it has fluctuated between 2.6% and 7%. Note that we are near the bottom border.
Since Erubirs has been falling for several years, why can not it still fall? Well, maybe, but a much greater chance is that it will start to grow. If anyone has any doubts, let them come back to mind until 2007 when the mortgage sellers pressed everyone into a franc mortgage as the CHF against the PLN would continue to fall. How it ended, we all know.
Credit margin, the second factor that affects the amount of interest on the loan remains fixed throughout the loan period. What we agree to in the loan agreement will be likely to apply throughout the entire loan period.
Although currently the loan in PLN seems to be relatively cheap, we have an accumulation of 2 unfavorable factors. The high margin of banks, which will remain high throughout the loan period and low Erubirs, which will return to its average for some time and is likely to be much higher than at present. A high margin and higher interest rate is an explosive mix.
To show how the amount of loan installments can change, I have prepared a quick analysis for a property bought for 360,000. which consists of 60,000 own contribution and loan in the amount of 300 thousand.
For loans with own contribution, the average bank margin is 1.65%. The bank’s margin should be increased by 2.7% (Erubirs 3M). Our hypothetical loan will therefore be charged with interest at the level of 4.35%. In the calculations, I omit the bank’s margins for granting the loan and the cost of insurance.
Under the current conditions, the monthly loan installment will amount to PLN 1870.
The amount of interest rates is variable. How will this affect the amount of our loan installment?
a) Erubirs returns to levels from 2012, or 5%. The installment amounts to PLN 2260, or 20%, and suddenly the rates have returned to levels from two years ago.
b) Erubirs returns to 2004 levels, or 7%. It was also the highest level recorded in the past decade. The installment amounts to PLN 2,630. Increase by 30%.
c) As a curiosity, let me say that if the NBP raised interest rates to the levels from 1998 (it was 16 years ago, and yet the loan is taken for 20 years), the installment would jump to astronomical PLN 6440.
d) At the same time, it should be noted that the field for interest rate cuts is already minimal. If Erubirs fell to symbolic 0.1% which is absolutely unrealistic, then the bank’s margin of 1.65% will be paid to us, ie the installment would amount to PLN 1,468. Fall by 16%.
As you can see, the potential for an increase in loan installments is definitely much higher than in the fall. The current level of interest rates is definitely lower than the long-term average and an increase in rates to real levels is a matter of time.
So if, suddenly, interest rates increase, and thus for many people the mortgage will be unreachable, will not increase the amount of rents, what compensates for higher loan installments?
In theory, it could look like that. In practice, hired rents depend much more on earnings. Suppose someone is able to spend up to 40% of their income on renting a flat. Suddenly, rents are starting to rise as a result of the lack of new premises for rent. Many people simply will not be able to afford an apartment that absorbs more than 40% of income. Such people will start looking for a smaller apartment, located in a less attractive district. In the end, many people who came to large cities taking up temporary work will give up on it because expensive leasing will consume the difference in remuneration between the home and the destination city.
The law in Poland clearly favors the banking sector compared to other countries. First of all, there are practically no loans with fixed interest rates ensuring predictability as to the amount of installments in the long run.
Secondly, in the case of problems with repayment of the loan, the bank’s takeover of the flat does not end problems. The loan is secured by all our assets, not just a flat that is a direct collateral for the loan. Throughout the property we mean: cars, funds in the bank or on brokerage accounts, other real estate as well as current and future income from work or payment of any benefits.
In practice, a situation may arise in which we repay a loan for several years, and then there is a drastic increase in interest rates. The installment of our loan increases significantly. If we are not able to pay it back, after a few months the bank may auction our flat. Due to the fact that high interest rates would practically kill the real estate market, the bank would have to significantly lower the price of the flat to find a buyer. If the amount for which the bank would pay the flat would not allow the repayment of the entire loan, the bank would have the right to claim payment of the remaining amount.
It is a document in which the borrower voluntarily submits to the bailiffs’ execution. If the bank denounces the loan as a result of arrears in the repayment of installments or refers to another record enabling the termination of the contract, we must immediately repay the entire loan. If we do not do this, the bank will issue a bank enforcement order, which, after giving it the enforcement clause, goes to the bailiff. Then, the bailiff’s execution begins while the debtor is deprived of any legal protection.
Many people believe that the bank’s possible bankruptcy deprives the debtor of the loan. Nothing could be more wrong. Our loan is the bank’s asset. In the event of the bank’s bankruptcy, the assets are put up for sale and after a short time our loan will be in the hands of another bank.
The mortgage loan is most often taken over a period of over 15 years. In the period much shorter, we will have to move to the new monetary system. It also means abandoning the old currency. Seeing at what pace we are growing real debt in a few years, we will have to deal with the repayment of debt with newly printed zlotys, which Rostowski accidentally accidentally soaked up. The official debt has just dropped, but this happened in the result of the theft of savings from retirement accounts, which will certainly be repeated in two years.
Regardless of how we go through transformation, I would not count on our credit to be dramatically devalued. If the old PLN is replaced by the new currency, the loan will be recalculated in such a way that the banks will not incur losses on that. Ultimately, the whole crisis began with the banking sector and all activities, no matter how socially harmful, only aim to rescue banks.
It would be naive to expect that the situation would suddenly change, especially in a country where the direct theft of pension funds practically went unnoticed.
In general, I think that buying a flat for rent is not the best idea at the moment. In particular, this applies to purchases financed with a loan.
In the following years we will have the accumulation of several phenomena:
1. Interest rate increases translating into an increase in loan installments.
2. As a result of implementation of the “S” recommendation, the number of people eligible for a loan will fall. Lower demand for flats is a factor that influences the decline in the price of flats. For clarification in line with the “S” recommendation, the minimum own contribution is to be 5% of the value of the flat from this year. With each passing year, the threshold is to be raised by another 5% until reaching 20% in 2017.
3. If the cadastral tax is finally introduced, this will translate into a significant increase in apartment sales offers. The asset burdened with the additional cost is simply less attractive, which reduces its price.
4. In the next 5 years, the government plans to purchase 20 thousand. apartments for rent. The project in itself is devoid of the slightest economic justification, but a significant increase in quantity will certainly cause a certain reduction in rents.
a) For many years, the number of Poles has been steadily declining. The situation intensified after 2005, when we joined the EU and the phenomenon of economic emigration intensified. As a result of economic problems in many countries, the influx of emigrants, among others from Poland may be slowed down, but I would not count on a quick reversal of this phenomenon.
b) A low birth rate of 1.3 children per family is a guarantee of population decline. To keep the population at the same level, the ratio would have to be at 2.1. Meanwhile, nothing promises change.
c) Number of students driving the rental market by MNiSW forecasts will fall by 400,000 over the next 10 years
From my point of view, there are too many arguments against the application of Anastashi’s strategy in Poland about the current realities. We have too high a risk of increasing credit burden while accumulation of several factors that will make rental income fall rather than increase.
What’s more, when calculating profits, we forget that:
– a new beautiful flat in an elegant district will look completely different when the loan is finally paid off
– we do not count the costs associated with keeping the flat unchanged
If, despite this, my arguments do not appeal to some readers, let them at least prepare a reserve of cash providing security in a situation when suddenly interest rates will double from day to day as it happened in Turkey two weeks ago.