Tim Hill, author of Buying Property in Poland, looks at how the reaction of lenders to America’s sub-prime crises may actually cause a boom in Polish property market.

This is a press release from Tim Hill, who was recently interviewed on Channel 4’s A Place in The Sun

Property values are made up of two parts, their real value (or for insurance purposes their rebuild cost) and their confidence value. In recent decades the latter element has,in many areas, become the larger part of a property’s price.

When doomsayers proclaim the market is “15% over priced and there will need to be a correction” they are really expecting confidence to decrease. In Americathat is exactly what has happened and for good reason considering the reckless actions of many banks who cannot now recover bad debts.

As people lose confidence in the United States the effects ripple around the world but this time for no good reason.The economies of Europe are strong but if enough believe there will be a problem then, like a self fulfilling prophecy, a problem will appear.

Lenders have not helped the situation. They made mistakes in America and their reaction is to tighten credit criteria in Europe even though there was actually no problem on this side of the Atlantic.

Countries like Britain will undoubtedly feel the effect.There were people who wanted to buy and could afford the repayments but now they must also put down larger deposits and so their moving plans go on hold. Those who need to sell must price down but only a handful will find themselves in negative equity. House price inflation is slowing and not decreasing as many would have us believe.

Some other European markets are also likely to suffer. In Bulgaria the majority of real estate transactions are to foreign buyers. According to the Royal Institute of Chartered Surveyors the average property price is thirty times the average salary so those who own a Bulgarian house or flat so they have to, more often than not, find another foreigner who can afford it. The problem is these are exactly the people who are tightening their belts.

Poland is a slightly different case. Legal restrictions stop a foreigner buying more than one property which means the recent boom has been caused by the Poles themselves and real estate still remains affordable to the domestic market.

We can add on top of this the fact that lenders to Polish buyers have always been exceptionally prudent. A purchaser with a good job is expected to put down a deposit of between twenty and forty percent. So while banks in European countries are changing their criteria, in Poland the situation remains

The Polish economy is also, to some degree, protected.Billions of Euros in EU funds are already assigned to redeveloping the country’s infrastructure and billions more of corporate investment is currently being ploughed into projects across the country in levels far beyond those seen by other Central European countries. Poland is still playing catch up with the West.

This does not mean the country will escape the credit crunch entirely. Perception is often a more powerful factor than reality. Potential Polish buyers believe that if there is a problem in America then there will be one here too and so they are putting their plans on hold. The difference,compared to Britain, is that they can still afford to buy if they want to.

The result will be a boom, probably in the latter part of 2008. It will happen because the Spring and Summer buyers are hesitating due to a lack of confidence. As the dust settles on the Credit Crunch they will return to the market along with the normal Autumn buyers. Six months of pent up demand will hit sellers and prices will undoubtedly rise.

This is not theorizing. Historically it has happened with surprising regularity on the European stage but it is rarely reported in the press. In London, for example, property prices have actually dropped three times during the past decade. After 9/11 the market slumped and then boomed again as all those who had waited returned at the same time. It happened again during the Iraq War of 2003 and once more in 2005.

To the prudent and experienced property investor it means only one thing. Buying Polish property now is the most profitable thing to do. In years to come buyers will look at the historical graph of Polish property prices, point to the first half of 2008 and say, “We should have bought then.”