Czech Republic's housing market remains buoyant despite pandemic
Lalaine C. Delmendo | March 02, 2019
During Q3 2020:
- The average price of new dwellings soared by almost 10% (6.44% inflation-adjusted) – so that prices of new dwellings are now 65.5% higher than the previous Q3 2008 peak.
- The average price of existing dwellings rose by 8.12% (4.66% inflation-adjusted) from a year earlier, or 49.3% above the previous Q3 2008 peak.
Land prices increased 10.11% (6.58% inflation-adjusted) during the year to Q3 2020.
While demand remains robust thanks to low mortgage rates, residential construction fell last year, helping the surge in house prices.
“Mortgage rates fell under 2.0% during 2020 and these extremely cheap loans are currently encouraging clients to invest in the residential sector, despite the continued strong increase in pricing,” said Colliers International, adding that there had been a record volume of mortgages approved in 2020.
Sales prices of flats in Czech Republic's regional capitals, including Prague, soared by 15.8% in Q3 2020 from a year earlier, to an average of CZK 70,300 (US$3,171) per square metre (sq. m.), according to Deloitte.
In Prague the average price of flats increased 10.4% y-o-y in Q3 2020, to CZK 94,300 (US$4,254) per sq. m.. Prague accounts for just under half the country's total property sales.
Nationwide house prices rose by almost 10% annually over the past five years, more than double the rise in wages. As a result, homebuyers in the Czech Republic need to pay 11.4 times average annual salaries to purchase a 70-sq. m. dwelling, the highest in Europe, according to a 2020 study conducted by Deloitte.
Dwelling completions fell by 5.4% in 2020 to 34,432 units, following y-o-y rises of 7.6% in 2019, 18.5% in 2018, 4.6% in 2017, 8.9% in 2016 and 4.8% in 2015, according to the Czech Statistical Office (CZSO). Likewise, dwelling starts were down 8.9% to 35,254 units in 2020.
The Czech Republic's housing market is expected to remain buoyant this year, as the economy improves.
The Czech economy contracted by 5.6% in 2020, in contrast to average growth of 3.5% from 2014 to 2019.The economy is expected to recover this year and grow by 5.1%, according to the International Monetary Fund (IMF), though as another lockdown comes into force, the European Commission's 2021 growth forecast of 3.2% might be more realistic.
Moderate yields in Prague
Prices of houses and apartments in the Czech Republic have rise strongly since 2014, according to Czech National Bank statistics - but these price rises have now paused. Wonderfully beautiful Prague is quite an expensive city in which to buy property:
How much will you earn? It very much depends on the location of your apartment. Rental yields in Prague 1 are quite weak, at around 3.2% on a 60 square metre apartment. In Prague 5 you can earn 5.3%.
Conclusion: Prague yields are moderate, at the moment!
Round trip transaction costs are moderate to high in the Czech Republic. See our Czech Republic transactions cost analysis and our Czech transaction costs compared to other countries.
Rental income tax can be high
Rental Income: Rental income is taxed at a flat rate of 15%. Income-generating expenses are deductible from the gross income, with a maximum of CZK600,000 (€21,429).
Capital Gains: Capital gains are included in the aggregate taxable income and taxed at the normal income tax rate.
Inheritance: Inheritance received by a qualifying spouse or a close family member is not taxed.
Residents: Residents are taxed on their worldwide income at a flat rate of 15%.
Total transaction costs are moderate in the Czech Republic
Roundtrip costs in the Czech Republic are moderate at around 7.51% to 10.02% of the purchase price of the property. The buyer pays around 2.5% to 5% of the transaction costs. The seller pays the real estate acquisition tax at 4%.
Czech law is pro-landlord
Czech law is kind to landlords (although 90% of the population still lives in the old, controlled rental sector).
Rents: Rents can be freely agreed between landlords and new renters of houses with vacant possession, and the parties may freely negotiate any contract length.
Tenant Security: At the expiry of the contract, the tenant must vacate; no notice need be given, and he is not entitled to substitute housing. There is no maximum deposit.
Record economic contractionThe Czech economy contracted by 5.6% in 2020 from a year earlier, the biggest decline on record amidst the COVID-19 pandemic, according to the CZSO. This is in sharp contrast to an annual average of 3.5% in 2014-19.
The economy is expected to recover this year, with a projected real GDP growth of 5.1%, according to the International Monetary Fund (IMF). However as another lockdown comes into force due to a surge in infections, the European Commission’s 2021 growth forecast for Czech Republic of 3.2% might be more realistic.
The Czech Republic enjoyed an average growth rate of 6% from 2004 to 2007. GDP fell by 4.8% in 2009 but bounced back immediately in 2010, registering growth of 2.3%, followed by 1.8% in 2011. However, the economy fell in recession in 2012-13 due to weak domestic demand.
An economic recovery in 2014 was followed by healthy expansions of 5.4% in 2015, 2.5% in 2016, 5.2% in 2017, and 3.2% in 2018, thanks to increased private consumption and robust growth in the real estate market. Economic growth slowed in 2019 to 2.3%.
In 2020, the government recorded a budget deficit of CZK 367.4 billion (US$16.54 billion), the biggest shortfall since the establishment of the Czech Republic, after the government spent about CZK 216.5 billion (US$9.74 billion) to cushion the impact of the coronavirus to the domestic economy. The deficit was equivalent to about 7.3% of GDP in 2020, in contrast to a surplus of 0.3% in 2019.
Recently, the government has approved an even bigger state budget deficit of CZK 500 billion (US$22.51 billion) for 2021.
Unemployment in the Czech Republic increased to 4.3% in February 2021, the highest level since April 2017, according to the Ministry of Labour and Social Affairs.
Inflation eased for the seventh consecutive month to 2.1% in February 2021, the lowest level since December 2018, according to the CZSO. Yet it remains within the CNB’s target range between 1% and 3%. Inflation is expected at about 2.5% this year, according to the European Commission.