Why have rental rates increased by up to 40% in 2 years on the market?

Although the increase in average rental rates has slowed down, data from Otodom indicates that tenants must take into account amounts even 30-40% higher than just two years ago. What is the cause of this? It turns out that the influx of immigrants from Ukraine in 2022 resulted in just a few percentage points increase in rental prices in the Polish market. Much greater impact was made by high inflation, interest rate hikes, and the delayed effect of the increase in property values.

The annual peak in the rental market observed during August and September is fast approaching. Students are preparing to return to academic centres, and many tenants, tempted by a broad offer of rental properties, are searching for a new place to live. In most regional cities, they do not have to expect much higher rates than a year ago. As indicated by Otodom’s data, the highest annual increases in June were noted in Kielce (+7% y/y) and Lublin (+6% y/y). On the other hand, the biggest reductions in rent costs were noted in Lodz (-5% y/y).

However, the rental market is decidedly more expensive than two years ago. In 2023 rental price increases y/y reaching up to 29% affected tenants in medium-sized cities with populations of 50 to 100 thousand inhabitants and in the largest metropolises (+27% y/y). The increase in average rental rates was often associated with a sudden jump in demand caused by migration from war-torn Ukraine. However, the research published in the Otodom “Almanac of the Rental Market”, conducted by Polityka Insight*, indicates that completely different factors are responsible for the increases.

Why did prices in the rental market skyrocket?

The outbreak of war beyond our eastern border occurred during a time of significant volatility in the housing market not only in Poland, but also in other European countries. In 2022, the expansive phase of the real estate cycle was coming to an end. As experts emphasise – the increases were so rapid that they resembled those in the period of price bubbles.

– The easing of monetary policy as one of the elements of combating the effects of the COVID-19 pandemic increased the availability of housing loans and the demand for apartments. In combination with a limited supply, this caused an increase in property prices. From 2021 onwards, Poland began to tighten macroprudential policy in order to curb inflation and reduce the risk associated with interest rate increases. This limited the availability of apartments, making the purchase of one’s own flat financially unattainable for people with incomes not exceeding the national average. As a result, many people were forced to choose the rental market – explains Dr hab. Adam Czerniak, prof. SGH, chief economist at Polityka Insight.

In addition, the end of 2021 marked a post-pandemic rebound in the rental market. After periods of restrictions and remote work, some employees returned to their offices, and students to their on-site classes at universities. By the time the war broke out in February 2022, they were again searching for rental properties.

– The sharp increase in rental prices during that period was also driven by structural problems in the domestic market. The Polish housing sector is fragmented and characterised by a high share of private ownership, a low share of the rental market, and a small number of municipal flats. This makes the availability of rental apartments low – notes Dr. hab. Adam Czerniak.

Migration and rental rates

It is not surprising that in such a macroeconomic environment in 2022, the rental sector quickly reacted to the influx of refugees from Ukraine. The cheapest offers were quickly snapped up from the market, and newly introduced ones were much more expensive. Due to their shortage in the following months, prices continued to rise and only stabilised at the end of 2022 at a level 20–35% higher than before the outbreak of war.

However, as quantitative studies show, the impact of war refugees from Ukraine on rental prices across Europe was smaller than generally assumed. In Poland, their influx, corresponding to 1% of the native population, resulted in a rental price increase of only 0.2-0.3%.

– Most of the increase in real rental prices in Poland and throughout Europe, especially after February 2022, can be explained by factors other than migration: inflation increases, property price increases, and increases in the interest rates of housing loans – emphasises drr. hab. Adam Czerniak.

What’s next for rental prices?

Currently, relative stabilization can be spoken of in the rental market. In most cities, the base of available rental offers has been rebuilt and the level of demand has normalized. However, the pace of growth in average rental rates has clearly slowed down. Does this mean that rental prices will cease to rise significantly? Not necessarily.

–The rental and apartment purchase sectors are closely linked. Rising costs of purchasing property with stable rental rates may soon deter investors, especially those using mortgage loans. As a result, purchased apartments may remain empty, waiting for value growth. This could potentially limit the supply of apartments for rent and cause further increases in rental rates in the longer term – points out Agata Stachowiak, housing market expert, Otodom.

*To investigate the impact of migration from Ukraine to other European countries after the Russian military aggression in February 2022, in the second half of 2023, Polityka Insight carried out qualitative and quantitative research. It involved the estimation of panel regression models, in which the explained variable were average rental prices in 27 European countries in the period Q1 2017 – Q1 2023.