Determinants of the liquidity risk in the construction sector in Poland

Zbigniew Krysiak

Chapter 3 in Papers presented during the Narodowy Bank Polski Workshop: Recent trends in the real estate market and its analysis, 2013, 2013, pp 39-65 from Narodowy Bank Polski

Abstract: Different distortions in the past on the property market in Poland were caused by an inadequate amount of funding delivered by banks to the households and construction companies. We observed an asymmetry in funds offered to the households and developers and in different periods there were oversupplies and undersupplies. On the one hand the oversupply of cash to the households affected the increases in property prices what limited the demand because of decline in the credit capacity of the bank’s customers3. On the other hand, a not sufficient amount of funding offered by banks for the construction sector caused their higher risk and the risk of households4. This led to the decline in the production capacity, what was the additional factor triggering the property price increase and decline of the demand for the houses. After the global financial crises the deficit of the funds, for housing projects in Poland were still an unresolved issue. This deficit was increased additionally by decline in the amount of mortgage loans extended to the households. In the period from 2008 to 2013 the value of new originated mortgage loans dropped down 10 times. The reduction in the production capacity in the housing business and the construction sector is continuing and being speeding up by the decline in the supply of the mortgage loans5 and implementing more restrictive regulatory procedures, what can lead to the crises on property market in Poland. Facing the above described problems of the deficit in the funding sources for the property market we can ask the following question: How can the risk of the construction enterprises be evaluated? Is this risk really very high in Poland and under what circumstances the risk rise or decline? How in that context the deficit of funding sources impacts the enterprise’s risk and to what extend it is significant and what are the main drivers of that risk? The goal of the paper is to characterize the selected factors impacting the financial liquidity risk of the construction companies in Poland. We stated the following hypothesis: “The deficit of the funding sources and lack of their diversity may be perceived as main factors of the liquidity risk of the construction enterprises and the liquidity risk on the property market as a whole”. We identified the auxiliary hypothesis which points to the limits in the dynamics of the increase in the supply of mortgage loans. The auxiliary hypothesis was stated as follows: “Approaching the limits in the funding of the property market from banking sources triggers the riskshifting from banks to the enterprises”.

Date: 2013
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