Abstract
ABSTRACTWe analyse the determinants of prices of flats that are bought on the primary (new construction) and secondary markets (existing stock) in the 17 largest cities in Poland during the 2002–2015 period. We find that prices are driven by economic fundamentals, such as income growth and drop in the unemployment or real interest rate. Interestingly, prices in the secondary market react strongly to those fundamentals than to prices in the primary market. Especially, the reaction to the real interest rate is more than twice as high. The most likely buyers on the secondary market are first-time buyers with little own capital, and need a large mortgage. On the other hand, those who buy housing in the primary market quite often sell their old flat, so they only need to acquire the difference. Our finding indicates that the primary and secondary markets need to be analysed separately.
Highlights
Growth in house prices in the primary market and the secondary market is the subject of continuous interest of central banks and regulators, as it rapidly translates into changes in real estate construction, drives housing cycles and generates risk for the banking sector
The same holds for the average mortgage availability, which has a larger effect on prices in the secondary market that in the primary market
The analysis confirms that property prices in the primary and secondary market in 17 largest cities in Poland depend on fundamental variables such as wages, the rate of unemployment and the real interest rate
Summary
Growth in house prices in the primary market (new construction) and the secondary market (existing housing stock) is the subject of continuous interest of central banks and regulators, as it rapidly translates into changes in real estate construction, drives housing cycles (see Augustyniak, Łaszek, Olszewski, & Waszczuk, 2014a) and generates risk for the banking sector. This study is, to our best knowledge, the first that analyses house prices in a Central and Eastern European (CEE) country on the existing stock market and the new construction market separately and uses data for 17 large cities in a panel. Homeowners, who improve their living conditions, quite often move from the existing stock to new construction and only need to finance the price difference with the mortgage This allows us to formulate the following research hypothesis: Research hypothesis 2: House prices in the secondary market react stronger to income and mortgage conditions than prices in the primary market.
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