Czech house prices continue to rise

February 27, 2016

Czech annual house price change graphThe housing market continues to grow stronger, mainly fuelled by healthy economic growth, low mortgage rates and increasing foreign demand. The average price of apartments in the Czech Republic rose by 5.42%  (4.93% in real terms) during the year to end-Q3 2015, the seventh consecutive quarter of robust price increases, according to the Czech Statistical Office (CZSO).

During the year to Q3 2015:

  • The average price of new dwellings sold increased 4.3% (3.2% in real terms), according to the Czech National Bank (CNB).  This is now up by 3.2% from its level seen in Q3 2008, which implies that the primary housing market has fully recovered from the crisis.
  • The average price of existing dwellings sold rose by 3.6% (2.5% in real terms), but still down by 3% from the market’s all time high in Q3 2008.

Demand is rising sharply, mainly to improving economic conditions and low mortgage rates. The number of apartments sold in 2015 has exceeded the demand before the global financial crisis in 2008, according to local real estate experts.

“Since late in 2012, sales have been picking up significantly,” says Peter Visnovsky of Lexxus, a Czech-based real estate firm.

The undervalued koruna is also stimulating foreign property demand. “This stimulates the demand from foreign buyers as well as Czech expats working and living in the E.U.,” says Lukas Cichon of real estate company Svoboda & Williams. Though Czech citizens account for the majority of property sales in the capital, there is an increasing demand from foreign investors from Western Europe, particularly from Britain, Germany, and Italy. Other foreign buyers come from Russia, Ukraine and other former Soviet republics.

The Czech Republic’s real estate market, which is perceived as one of the most established in the Central and Eastern European (CEE) region, continues to attract foreign homebuyers.

Overall, residential property prices are expected to continue rising in 2016, albeit at a slightly slower pace since a lot of pent-up demand was already satisfied last year, according to Czech Point 101. However, the high-end market is expected to sustain its strong growth, with the prices of luxury apartments in Prague projected to rise by around 12% to 15% per year until 2018, according to a study conducted by Nexxus Norton agency.

In 2015, the economy recorded strong growth of 4.5%, the highest level in eight years, thanks to increased private consumption and robust growth in the real estate market. The economy is expected to grow by an average of 2.6% in both 2016 and 2017, according to the International Monetary Fund (IMF).

A little housing market history

Czech real estate price indices

The 1998-2003 boom. From 1998 to 2003 the Czech Republic’s house price index rose 64% in anticipation of EU entry in 2004, according to the CNB, and encouraged by a government-led spending binge, with rising public deficits. Partly as a result of these deficits, the Czech Republic never joined the Eurozone. Apartment block prices rose most during this period, at 118%; followed by individual apartments, at 91%. The price of single family houses rose 58%, while building plot prices rose only 31%.

Stagnation from 2004-2005. After long and intense parliamentary discussions, it was decided that even EU citizens, if they were not Czech residents, would be restricted from buying property for a 7 years transition period, i.e., until 2009. The housing market stagnated from 2004 to 2005, with measures to cut the budget deficit probably the key factor. The average price of flats dropped by 2.7% in 2004, a 5.2% fall in real terms. This was followed by a 2.7% increase in 2005, a 0.5% fall in real terms.

Brief boom 2006-2008. Thanks to lower interest rates in 2006, the house price index rose by 8.4% (5.7% in real terms). Housing completions shot up in 2007 by almost 38% to 41,649 units anticipating a VAT increase from 5% to 19%, and the house price index skyrocketed by 31.2% (27.1% real) in 2007.

The crisis bites 2009-2013. In 2009 apartment prices fell 12.3% (-13.3% in real terms), after 17.1% (10.5% real) y-o-y growth in 2008, due to the global financial crisis. Dwelling starts fell by 14.3% y-o-y. Nevertheless there was a substantial completions overhang. Completions during that year and in 2008 were still higher than in the years prior 2007. In 2010 dwelling starts fell by 24.6% to 28,135 units and to 27,535 units in 2011. House prices fell by 2.74% (-4.68% in real terms) in 2010 and by 4.92% (-7.15% in real terms) in 2011, based on figures from the CZSO. In 2013, house prices dropped 1.68% (-2.78% in real terms), after falling by 5.39% (-7.99% in real terms) in 2012.

Housing market recovery 2014-Q3 2015. The property market finally recovered 2014, with the house price index rising by 5.68% (5.19% in real terms), amidst improving economy. The property market has recorded modest house price rises since then.

Residential construction activity is now recovering

After several years of lackluster performance, the residential construction sector has now recovered. In 2015, dwelling completions rose by 4.8% y-o-y to 25,094 units, after declining by 5.1% in 2014 and by 14.4% in 2013, according to the CZSO.

On the other hand, dwelling starts rose by 8.3% to 26,378 units in 2015 from a year earlier, the second year of robust growth after declining by an average of 10.4% each year from 2008 to 2013.

Czech construction dwellings

Both housing starts and completions have been in decline since 2007, mainly due to the adverse impact of the global financial meltdown and the Eurozone debt crisis. However, as the economy recovers, investors are eventually returning to the housing market.

Residential construction activity is expected to continue increasing in 2016, as the oversupply in the housing market starts getting absorbed.

Mortgage interest rates at record low

Czech key interest rate

The CNB has continuously lowered its key interest rate since 2009. From above 3% before the crisis, the CNB slashed its 2-week repo rate many times to reach a record low of 0.05% in December 2012. This remains unchanged, along with the discount rate (at 0.05%) and the Lombard rate (at 0.25%), to buoy the economy and discourage an appreciation of the koruna (CZK).

Mortgage interest rates continue to fall. The average interest rate for outstanding mortgage loans fell to 3.29% in December 2015, from 3.32% in the previous month and 3.73% in a year earlier.

Czech avg interest housing loans

In December 2015:

  • The average interest rate for outstanding mortgage loans with IRF of up to 1 year fell to 3.94%, from 4.35% the previous year, and from a peak of 7.37% in December 2008.
  • The average interest rate for loans with IRF of between 1 to 5 years was at 5.31%, a decline from 5.86% in December 2014 and 6.15% in December 2008.
  • The average interest rate for loans with IRF of 5 years and up dropped to 3.27% from 3.71% a year earlier and 5.24% in December 2009.

Mortgage market is expanding rapidly

The Czech Republic’s mortgage market is relatively small, but is expanding rapidly. In 2015, the size of the mortgage market is equivalent to around 21.72% of GDP, up from 21.24% in 2014, 15.39% in 2008, and 4.18% in 2002.

New housing loans skyrocketed by 24.8% to CZK26.3 billion (€0.97 billion) in December 2015 from the same period last year, according to the CNB.

Czech housing loans

Total outstanding housing loans rose by 8% to CZK977.3 billion (€36.18 billion) in 2015 from a year earlier, based on figures from CNB.

Out of the total new mortgage loans in Q3 2015, loans with interest rate fixation (IRF) of between 1 and 5 years had the highest share at around 57.3%, followed by loans with IRFs of up to 1 year with a 25.2% market share of the new housing loan market. New loans with IRF of 5 to 10 years have a 15.2% market share, while loans with IRF of more than 10 years had lowest share at just 2.3%.

Likewise, for total outstanding mortgage loans, IRFs of between 1 and 5 years have also a dominant share of about 57.3% in Q3 2015, followed by loans with IRFs of up to 1 year (24.3%), loans with IRF of more than 10 years (9.6%) and loans with IRF of 5-10 years (8.8%).

Mortgage loans in the Czech Republic are typically granted with 20 year maturities, the maximum LTV ratio being 85%.

Recovering rental market, moderate rental yields

Czech new mortgage loans

The residential rental market continues to show sharp improvement. Foreign buyers are returning to the market to purchase properties for investment purposes. A higher proportion of luxury buyers recently were either Czechs or Russians, according to Jones Lang LaSalle’s Iva Novakova. Svoboda & Williams, a luxury estate agency, states that around 75% of their clients are Czechs, while around half of the remaining 25% are Russians.

Gross rental yields in Prague remain less than attractive, based on the Global Property Guide research released in May 2015. A 200 sq. m. apartment has an average yield of 3.82%, while a 120 sq. m. apartment has a rental yield of 3.5%. Smaller apartments at around 50 sq. m. to 85 sq. m. earn slightly higher rental yields of about 4.36% - still not great for investment.

Apartments in Prague have monthly rents ranging from €11.1 per sq. m. to €12.6 per sq. m. as of May 2015, according to the Global Property Guide.

Current yields are lower then the yields during 2000-2005, when the average rental yield in Prague was 6.8%, or around 10.8% in Ostrava and Ústí nad Labem, and 7.8% in the rest of Czech Republic, according to the CNB figures.

The end of rent regulation

Czech gdp inflation

In 2006, the rent deregulation law (Act No.107/2006) was passed to equalize the rent levels of formerly regulated apartments with free-market ones by 2011. The Czech Republic’s rental market was regulated since the 1980s, causing a significant difference between rent prices of regulated and non-regulated units.

Regulated rents used to cover about around 80% of all rented apartments (around 750,000 apartments). Around 300,000 affected units were privately-owned, while the rest are owned by municipalities.

Most cities and municipalities ended their deregulation process on December 31, 2011, while the Central Bohemian region (which includes Prague) as well as cities with over 100,000 inhabitants, were deregulated on December 31, 2012. While the end of rent regulation had been expected to boost rental market returns, this process has taken a long time, due to weak economic growth in recent years.

Record economic growth in 8 years

Czech unemployment

The Czech Republic’s economy returned to growth in 2014, with a real GDP growth rate of about 2%, after contracting by 0.9% in 2012 and 0.5% in 2013, according to the CZSO. In 2015, the economy recorded strong growth of 4.5%, the highest level in eight years, thanks to increased private consumption and robust growth in the real estate market.

“There is a lot of equity on the market and with cheap debt being available we have seen record activity on the Czech real estate market,” said Karel Klecka MRICS. “In comparison to other asset classes, real estate still offers higher returns, attracting new investors previously active in other segments.”

The economy is expected to grow by an average of 2.6% in both 2016 and 2017, according to the International Monetary Fund (IMF).

GDP fell by 4.8% in 2009 due to the global economic crisis. Fortunately, it bounced back immediately in 2010, registering a modest real GDP growth rate of 2.3%, followed by another growth of 2% in 2011. However, the economy became depressed again in 2012-13 due to weak domestic demand as well as foreign demand for fixed capital. The Czech Republic enjoyed an average growth rate of 6% from 2004 to 2007.

Due to the spending package launched in the wake of the global crisis, the Czech Republic’s budget deficit rose to 5.5% in 2009, but was cut to 4.4% in 2010, and to 2.9% in 2011, but then rose again to 4% in 2012. Because of this, the government implemented budget cuts and other measures to bring down the country’s budget deficit. The government spending cuts also put pressure on the housing market.

Having a low budget is one of the criteria that a country should satisfy in order to be accepted in the Eurozone. In 2013, Czech Republic posted a budget deficit of just 1.3% of GDP, well below the European Union’s limit of 3%. The budget deficit was estimated at 1.6% of GDP in 2015, down from 1.9% in 2014, according to the European Commission.

Prime Minister Bohuslav Sobotka announced that Czech Republic might decide to leave the EU bloc in the coming years, amidst fears that the union is danger of total collapse.

"If Britain leaves the EU, we can expect debates about leaving the EU in a few years too," said Sobotka.

Unemployment stood at 4.5% in December 2015, down from 5.8% from the same period last year and the lowest level in the European Union, according to the European Commission. The country’s unemployment rate is projected at 4.9% this year, from an average of 6.6% from 2009 to 2015, according to the IMF.

There were just about 236,000 unemployed persons in the country in December 2015, down by 23.4% from a year earlier.

Inflation remains very low. In 2015, the Czech Republic’s overall inflation rate stood at just 0.37%, from 0.35% in 2014, 1.4% in 2013, 3.3% in 2012, 1.9% in 2011, and 1.5% in 2o1o, according to the IMF.

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