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Nov 11, 2013

Czech Republic: housing prices are stabilizing


Czech annual house price change graphHouse prices in the Czech Republic have been depressed for the past four years. During the year to Q4 2012, the average transaction price of apartments fell by 1.8% (-4.9% in real terms), according to the Czech National Bank (CNB).  This was worse than the 0.8% price drop recorded in 2011, but still better figure than the 12.3% and 5.1% nominal house price fall in 2009 and 2010, respectively.

The number of transactions also continued to decline in 2012, with a 10.9% y-o-y fall in entries of house and apartment titles in the cadastre, and apartment starts down by 13.4%, according to CNB.

  • Family house transactions were down by 1.8% (-4.1% in real terms) during the year to Q4 2012.
  • Building plot transactions also fell by 3.7% (-5.9% in real terms), during the same period.

Despite this, the housing market seems to be stabilizing. In Q3 2013, apartment asking prices in Czech Republic rose by 1.2% y-o-y, from a 0.3% decline in the previous quarter, according to Czech Statistical Office (CZSO). But asking prices in Prague fell 2.7% in Q3 and 2% in Q2 2013, from an average y-o-y growth rate of 8.1% from Q2 2012 to Q1 2013.

Analysts expect house prices to rise by around 1% by end of 2013, and increase further by 3% in 2014.

The recession in the Czech Republic is set to continue this year. The economy contracted by 1.3% during the year to Q2 2013, an improvement from the 2.4% y-o-y GDP decline in first quarter. The economy is expected to shrink around 1% by end of 2013, but is expected to have a positive outlook in 2014.

New VAT rates were implemented in January 2013,  with rates increased by 1%, raising the standard VAT rate to 21% and the reduced rate to 15%.

The Czech Republic’s average apartment price in November 2013 is CZK 1,742,934 (€67,464), according to realitymorava.ck, the leading residential portal. The most expensive apartments can be found in Prague 2, with average apartment prices of CZK 5,942,851 (€230,031), followed by Prague 1 with an average price of CZK 4,747,280 (€183,754).

How the crisis started

From 1998 to 2003 the Czech Republic´s house price index rose 64% in anticipation of EU entry in 2004, according to the CNB. This price rise was partly 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%.

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.

It is debatable whether the ownership restrictions dissuaded foreign buyers, but the housing market stagnated from 2004 to 2005, more probably because of measures to cut the budget deficit. 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.

Thanks to lower interest rates in 2006, the housing market recovered from stagnation in 2004 to 2005. The house price index rose by 8.4% (5.7% in real terms). With the anticipation of a surge of home buyers before the VAT increase implementation (from 5% to 19%) in 2008, housing completions shot up in 2007 by almost 38% to 41,649 units. The market expectation was proved to be correct as the house price index skyrocketed by 31.2% (27.1% real) in 2007.

In 2009 apartment prices fell 12.3% (-13.3% in real terms), from 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. Despite the decline, Czech housing market remained in dire shape, because of the oversupply of newly built apartments, and low consumer and investor confidence.

Another VAT increase

To keep Czech Republic’s budget deficit below 3% of GDP, in January 2013 VAT rates were increased by 1% to 21% for the standard VAT rate, and 15% for the reduced rate. The lower rate applies to goods such as food, medicines, books, new housing and housing-related expenses (water and heating).

The period for which property transfer (i.e. non-residential space, new buildings and flats) are subject to VAT was extended from 3 years to 5 years.

Interest rates are still low

Czech key rate housing loans

The CNB continuously lowered its key interest rate after the economy plunged into recession in 2009 and remained weak in succeeding years.  In August 2013, the average housing loan rate slightly rose to 3.4% from 3.37% in the previous month, but was still down from 3.83% in August 2012.

  • The average interest rate for loans with IRF of up to 1 year fell to 3.2% in August 2013, from 3.4% in the previous year, and from its 6.13% peak in August 2009.
  • During the same period, the interest rate for loans with IRF of between 1 to 5 years was at 3.24%, a decline from 3.86% in August 2012 and 5.68% in December 2009.
  • Loans with IRF of 5-10 years have an average interest rate of 3.97% in August 2013, down from 4.45% in the same month last year.
  • The average interest rate for loans with IRF of 10 years and up dropped to 4.09% from August 2012’s average of 4.26%.

czech new housing loans

However, it is worth noting that the Czech Republic´s mortgage market is relatively small, so the impact is less. Czech Republic’s total mortgage loans were around 21% of GDP in 2012. New housing loans amounted to CZK 171.3 billion (€6,628 million) in 2012, down by 16.7% from the peak of CZK 205.7 billion (€ 7,959 million) in 2007.

Out of the total new housing loans in 2012, loans with interest rate fixation (IRF) between 1 and 5 years has the highest share at around 53.5%, followed by IRFs of up to 1 year with a 26.2% market share of the new housing loan market. New loans with IRF of more than 10 years have a 16% market share, while loans with IRF of 5 to 10 years had lowest share at 4.3%.

Czech housing loans

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

Slumping rental market, poor rental yields

Czech rental yields

The decline in the Czech housing market is partly due to a decline in interest by foreign buyers who previously bought 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.

“The rental market dropped 20% in the last two years…Companies aren’t renting flats for their expat employees, and those used to command a large rental price. That’s another reason people aren’t investing in expensive properties for rentals: They can’t get the rental income from them anymore,” according to Novakova.

Gross rental yields in Prague are poor, based on the Global Property Guide research released in May 2013. A 200 sq. m. apartment has an average yield of 2.95%, while a 120 sq. m. apartment has a rental yield of 3.38%. Smaller apartments at around 50 sq. m. to 85 sq. m. have an average yield ranging from 4.1% to 4.51%, still not great for investment.

Apartments in Prague have monthly rents raging from €10 per sq. m. to €14.07 per sq. m.

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. In 2012, the average rental yield in Prague was at 4.2%. Ostrava and Ústí have better rental yields at 9.3%, while the rest of the country has an average rental yield of 5.3%.

The end of rent regulation

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.  It was expected that the end of rent regulation would boost the rental market, but with a weak economy, this may take some time.  The Czech Republic’s rental market WAS regulated since the 1980s, causing a significant difference between rent prices of regulated and non-regulated units.

Czech house price index

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.

Declining new supply

New housing starts have been declining since 2007. In 2012, housing starts sharply fell by 13.4% to 23,853 units from the previous year, though completions increased by 2.9% to 29,467 units.

Czech construction of dwellings

Economic contraction continues in 2013

Czech GDP

Czech Republic is heading for another recession in 2013 as the economy continued to shrink during the first quarter of 2013 by 2.4% y-o-y, followed by 1.3% y-o-y decline in Q2 2013. The contraction in Q2 2013 was reduced by the improvements in the external sector and consumption.

By end of 2013, the economy is expected to contract by around 1%. However, experts believe that the country will have a positive outlook in 2014.

The economy has been in the doldrums since 2012 wherein the economy slumped by 1.2%, due to weak domestic demand as well as foreign demand for fixed capital. The country went back to recession, after experiencing a 4.5% plunge during the global economic crisis in 2009, and slight economic growth in 2010 (2.5%) and 2011 (1.8%). Before the global recession, Czech Republic enjoyed an average growth rate of 6.5% y-o-y growth, and then slowed to 3.1% in 2008.

Slowing growth in 2011 and in 2012 was partly due to budget cuts and other measures to bring down the country’s budget deficit. The spending cuts made by the government also put pressure on the housing market over the recent years.

Czech budget deficit

From a high budget deficit of 6.6% of GDP in 2002, the deficit went down as low as 0.7% of GDP in 2007. However, due to the spending package launched in the wake of the global crisis, the deficit increased again to 2.7% in 2008 and 5.8% in 2009. After undergoing to a slump in 2009, budget deficit slightly fell to 4.7% in 2010, 3.2% in 2011/

Having a low budget is one of the criteria needed to in order to be accepted in the Eurozone. Currently, the country hasn’t met the 3% limit. In 2013, Czech Republic is expected to have a budget deficit within the European Union’s limit. The government’s official target is a deficit of 2.9% of GDP.

The adoption of Euro as the country’s official currency is still unattainable since the HICP and the criteria for participation in ERM II (European Exchange Rate Mechanism) have not been satisfied yet.

According Prime Minister Petr Nečas, his cabinet will not be deciding on joining the ERM II during his term. The Czech Ministry of Finance also confirms that the country hasn’t yet set a target date for currency adoption.

The unemployment rate in the Czech Republic is expected to be around 7.4% in 2013 and 7.5% in 2014.

Inflation remains benign. In 2012, inflation rose by 3.3% and is expected to slow again in 2013 and in 2014, to 1.8%.

  





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