Czech Republic’s housing market weakening

Czech Republic’s housing market continues to grow, albeit at a much slower pace, amidst rapidly rising interest rates, high inflation, and an ailing domestic economy. The adverse impact of Russia’s invasion of Ukraine adds to the country’s economic woes.

The average price of apartments in the Czech Republic rose by a minuscule 1.05% during the year to Q1 2023, a sharp slowdown from y-o-y increases of 6.93% in Q4 2022, 15.6% in Q3, 22.3% in Q2, and 24.3% in Q1, according to the country’s statistical agency, Czech Statistical Office (CZSO). In fact, it was the lowest y-o-y growth recorded since December 2013.

When adjusted for inflation, nationwide apartment prices actually declined by a bigger 13.18% in Q1 2023 from a year earlier.

Czech Republic’s house price annual change

On a quarterly basis, prices fell by 1.07% in Q1 2023 (-7.46% inflation-adjusted).

During Q1 2023:

  • For new dwellings, the average price dropped 2.12% (-15.89% inflation-adjusted), in contrast to a record y-o-y growth of 29.82% in the same period last year. It was the first decline seen in Q1 2013. Quarter-on-quarter, prices fell by 0.41% (-6.85% inflation-adjusted).
  • For existing dwellings, the average price increased slightly by 1.83% (but fell by 12.5% in real terms), a sharp slowdown from annual rises of 7.16% in Q4 2022, 15.67% in Q3, 21.78% in Q2, and 23.13% in Q1. It was its worst showing in almost nine years. On a quarterly basis, existing dwelling prices fell by 1.21% (-7.6% inflation-adjusted).

Based on Deloitte’s Czech Republic Real Index, the actual prices of apartments sold in the country dropped 1.2% q-o-q to CZK 92,200 (€3,829) per square meter (sqm) in Q1 2023.

Despite the sharp housing market slowdown, affordability remains a concern. In fact according to a 2022 report released by Deloitte, the Czech Republic is considered the least affordable country in Europe with respect to home ownership, as homebuyers need about 13.31x of their gross annual salaries, on average, to purchase a new dwelling. As compared to the prior year, housing affordability declined by about 1.11 annual gross salaries. Among the capital cities across Europe, Prague is ranked as the second least affordable, next to Amsterdam.

“Due to decreasing affordability of own housing, over the past year many households have turned to rental segment to solve its housing situation for the foreseeable future,” said Deloitte.

Residential construction indicators showed mixed results. Nationwide, completions were up by a modest 2.7% y-o-y to 17,849 units in H1 2023 while starts plunged 20.2% to 18,103 units, according to the CZSO. In Prague, dwelling completions rose strongly by 18.7% y-o-y to 10,692 units in H1 2023 and starts increased by 6.4% to 12,736 units over the same period.

Demand is now falling for some types of residential properties. In Q1 2023, sales transactions for brick houses and residential units in apartment buildings fell by 22.8% and 19.9% y-o-y, respectively. Though for development projects, the number of homes sold in the country was still up by 6.7% over the same period, according to Deloitte’s Q1 2023 report. Prague, the capital city, also exhibited the same trend.

The overall economy is now struggling. The Czech economy contracted by 0.6% in Q2 2023 from a year earlier, following a y-o-y decline of 0.5% in Q1 2023 and a meager growth of 0.3% in Q4 2022, amidst weak household consumption, as well as low gross capital formation. With this, the European Commission expects the economy to expand by just o.2% for the full year of 2023. But the International Monetary Fund (IMF) is more pessimistic, projecting a 0.5% contraction for the Czech economy this year.

Local house price variations

Within the capital city, Prague, the most expensive flats as of Q1 2023 were located in Prague 1 and Prague 2, with average prices of CZK 164,200 (€6,815) and CZK 150,200 (€6,234) per square meter (sqm), respectively. They were followed by Prague 8, with an average price of CZK 127,300 (€5,283) per sqm, Prague 3, with price of CZK 120,800 (€5,014) per sqm and Prague 7, with price of CZK 119,300 (€4,951) per sqm.

On the other hand, the cheapest housing in the capital was in Prague 9 with an average price of CZK 109,700 (€4,553) per sqm, and Prague 10 with an average price of CZK 108,100 (€4,487) per sqm.

In the second largest city, Brno, flats are sold for an average price of CZK 93,200 (€3,866) per sqm in Q1 2023, according to Deloitte. In the Central Bohemian region, the average price of flats was CZK 75,900 (€3,148) per sq. m. while in Olomouc, it was CZK 64,700 (€2,684) per sq. m.

Ústí nad Labem, located in the northern Bohemian region, has the cheapest housing in the country, with the average price of flats of just CZK 34,100 (€1,414) per sq. m. in Q1 2023, followed by Moravian-Silesian region in the northeastern part of the country, with an average price of CZK 39,000 (€1,618) per sqm.

Brief history

The 1998-2003 boom. In anticipation of EU entry in 2004, the Czech Republic’s house price index rose by 64% from 1998 to 2003, 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 by 118% during this period; followed by individual apartments, by 91%. Single-family house prices rose by 58% while building plot prices rose by only 31%.

Stagnation from 2004-2005. Despite accession, EU citizens were restricted from buying property for a 7 years transition period until 2009. Partly as a result, the housing market stagnated from 2004 to 2005, though measures to cut the budget deficit were probably the key factor.

Brief boom 2006-2008. Anticipating a VAT increase from 5% to 19%, the house price index skyrocketed by more than 31% (27.1% in real terms) in 2007, a sharp increase from a growth of 8.4% (5.7% in real terms) in 2006.

The crisis bites 2009-2013. After a 17.1% (10.5% in real terms) y-o-y growth in 2008, in 2009 apartment prices fell 12.3% (-13.3% in real terms) due to the global financial crisis. Both demand and residential construction continued to fall in the following years, resulting in a cumulative house price fall of 14% (-21% in real terms) in 2010-13.

Housing market recovery 2014-2022. The property market finally recovered, with the house price index rising by 13% (12% in real terms) between 2014 and 2015, amidst an improving economy.

House price growth accelerated from 2016 to 2019, rising by almost 10% (7% in real terms) annually. Despite the Covid-19 pandemic, house prices rose by 8.9% (6.2% in real terms) in 2020 and accelerated in 2021, with a whopping 25.8% growth (18.5% in real terms).

House prices continued to increase in 2022, albeit at a slower pace of 6.93%. In fact, when adjusted for inflation, prices actually declined 7.58% last year.

Czech Republic Residential Property Price Indices graph

Demand mixed

Demand showed mixed results. Nationwide:

  • Development projects: there were about 2,692 sales in Q1 2023, up by 6.7% from a year earlier, according to Deloitte. Likewise, the volume of sales increased 13.1% to CZK 17.3 billion (€718.5 million).
  • Brick houses: sales fell by a huge 22.8% y-o-y to 1,174 units in Q1 2023 and transaction volume dropped 26.7% to CZK 6.3 billion (€261.7 million).
  • Apartment buildings: sales plunged by 19.9% y-o-y to 1,605 units while transaction volume dropped by 25.3% to CZK 6.5 billion (€270 million).

In Prague:

  • Development projects: sales rose strongly by 28.4% y-o-y to 1,660 units in Q1 2023 and transaction volume increased 24.5% to CZK 12.2 billion (€506.7 million).
  • Brick houses: sales fell by 18% y-o-y to 548 units while transaction volume plunged by 23.5% y-o-y to CZK 3.9 billion (€162 million).
  • Apartment buildings: sales plummeted by 24.3% to 549 units in Q1 2023 from a year earlier and transaction volume dropped 26.2% to CZK 3.1 billion (€128.8 million) over the same period.

Dwelling completions are up but starts are down

In 2022, the total number of dwellings completed in the country rose by 13.9% to 39,398 units compared to a year earlier, following a meager growth of 0.5% in 2021 and a decline of 5.5% in 2020, according to CZSO figures. It was the highest level recorded since 2007.

On the other hand, dwelling starts fell by 6.1% to 42,242 units in 2022 from the previous year, following strong growth of 27.6% in 2021 and a decrease of 8.9% in 2020.

The residential construction sector continues to show mixed results in the first half of 2023:

  • Dwelling completions: up by a modest 2.7% to 17,849 units from a year earlier, at par with the increase of 2.5% in H1 2022
  • Dwelling starts: down by 20.2% to 18,103 units from a year ago, in contrast to a 9.6% increase in H1 2022

In Prague, dwelling completions rose strongly by 18.7% y-o-y to 10,692 units in H1 2023. Similarly, dwelling starts also increased by 6.4% to 12,736 units over the same period.

Czech Republic Residential Construction graph

Mortgage interest rates rising sharply

The average interest rate for new housing loans was 5.4% in June 2023, sharply up from 4.43% a year earlier and from 2.19% two years ago, according to the country’s central bank, Czech National Bank (CNB). It was the highest level seen since December 2009.

For new housing loans, average interest rates in June 2023 were:

  • Floating and interest rate fixation (IRF) under 1 year: 6.73%, higher than the 5.56% recorded a year earlier and 2.37% two years ago.
  • IRF over 1 and up to 5 years: 5.68%, up from 4.55% in June 2022 and 2.55% in June 2021.
  • IRF over 5 years and up to 10 years: 4.14%, up from 4.11% in the previous year and from 2.1% two years earlier.
  • IRF over 10 years: 5.85%, up from 5% a year earlier and 3.27% two years ago.

Czech Republic Interest Rates for New Housing Loans graph

For outstanding housing loans, the average interest rate was 2.94% in June 2023, up from 2.53% the previous year and 2.41% two years ago. Over the same period, by maturity:

  • Up to 1 year: 12.18%, sharply up from 7.03% in June 2022 and 4.9% in June 2021.
  • Over 1 and up to 5 years: 5.58%, higher than 4.73% in the same period last year and 4.17% two years ago.
  • Over 5 years: 2.94%, up from 2.53% in the previous year and 2.41% two years earlier.

Czech Republic Interest Rates for Outstanding Housing Loans graph

In June 2022, the central bank once again hiked its key rates as it tries to combat soaring inflation. The 2-week repo rate was raised by 125 basis points to 7% - the ninth consecutive rate hike since June 2021, when the repo rate was just 0.25%. Over the same period, the discount rate and the Lombard rate were also raised by 125 basis points each, to 6% and 8%, respectively. The key interest rates were unchanged since.

Previously, the CNB had continuously cut its key interest rates to cushion the impact of the Covid-19 pandemic.

Czech Republic Key Interest Rates graph

Mortgage market growth slowing

In 2022, the size of the residential mortgage market was around 24.7% of GDP, down from 26.2% in 2021 but still up from 23% in 2019, 19.8% in 2012, 15.2% in 2008, and 4.2% in 2002.

Housing loans grew by an annual average of 7.1% from 2010 to 2022, a slowdown from almost 30% growth annually from 2003 to 2009.

In June 2023, the total amount of housing loans outstanding rose by 4.8% to about CZK 1.72 trillion (€71.44 billion) from a year earlier, following y-o-y increases of 4.8% in 2022, 11.2% in 2021, and 8% in 2020, according to figures from CNB.

By maturity, in June 2023:

  • Up to 1 year: CZK 1.13 billion (€46.93 million), down by 16.3% from a year earlier
  • Over 1 and up to 5 years: CZK 2.25 billion (€93.45 million), down by 8.3% from the previous year
  • Over 5 years: CZK 1.72 trillion (€71.44 billion), up by 4.9% from the same period last year

 An increasing number of borrowers now prefer shorter-term loans. New loans with initial rate fixation (IRF) of 5 years and below accounted for a 73% share in the first half of 2023, sharply up from 52% in H1 2022.

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

Czech Republic Housing Loans Outstanding graph

Lending regulations

Effective 1 April 2022, the CNB has decided to set limits on credit ratios for the provision of mortgage loans, in an effort to limit excessive lending.

  • Mortgage lenders are required to comply with the limit on the DTI (debt-to-income) ratio, now set at 8.5 (9.5 for applicants under 36 years).
  • The limit on the DSTI (debt service-to-income) ratio is 45% (50% for applicants under 36 years).
  • The upper limit on the LTV (loan-to-value) ratio is lowered to 80% (90% for applicants under 36 years).
  • Lenders may apply an exemption not exceeding 5% of the total volume of mortgage loans provided.

The CNB also decided to increase the countercyclical capital buffer rate to 2.5%; banks were required to maintain the buffer at the said level from 1 April 2023. Until then, the buffer would rise gradually. From 0.50% by end-2o21, the rate increased to 1% from July 1, 2022. A rate of 1.5% was applied from October 1, 2022. From January 1, 2023, to March 31, 2023, the CNB required banks to apply a countercyclical capital buffer rate of 2%.

“The countercyclical capital buffer was introduced as an important macroprudential policy instrument in the European Union in 2014. Obliged institutions are required to create this buffer on the basis of the regulator’s instructions in periods of excessive growth in lending. Excessive lending growth usually increases financial imbalances and leads to a rise in systemic risk,” said the central bank.

However as the economy slows and credit growth decelerates, the CNB recently deactivated the upper limit on the DSTI ratio with effect from July 1, 2023. Though the central bank decided to leave the upper limit on the LTV ratio and that on the DTI ratio unchanged.

“At a time when we are fighting elevated inflation, it is essential to keep mortgage-lending conditions tight. At higher interest rates, however, the DSTI limit is not necessary,” said CNB Governor Aleš Michl.

Moreover, CNB also decided to lower the countercyclical capital buffer rate by 25 basis points to 2.25%; banks are required to maintain the buffer at this level from July 1, 2023.

“The Bank Board is ready to lower the buffer rate gradually further if we see a continuation of the trend of cyclical risks naturally fading out of the banking sector’s balance sheet. Should the scenario of a significant deterioration of the domestic economic situation and the occurrence of unexpected credit losses in the domestic banking sector materialize, the Bank Board is even ready to fully release the buffer. That would enable banks to cover their losses and ensure sufficient capital capacity for lending to the real economy,” emphasized CNB Bank Board member Karina Kubelková.

Poor rental yields; foreigners buy-to-let

Gross rental yields, i.e., the rental return on a property if fully rented out, before all expenses, are poor in Prague. Though some areas have higher yields, gross rental yields for apartments tend to be near or under 4%, according to a Global Property Guide research conducted in November 2022.

Prague is the most expensive of any significant Czech city to buy or rent a property. Prices for two-bedroom apartments in Prague range from €280,000 to €950,000, depending on location.

In Prague 1, where some of the most pricey flats in the Czech Republic are located, the average price of a two-bedroom apartment is nearly €1 million. The same unit can be rented for €1,795 per month, generating a rental yield of just 2.26%.

The district that is favored by expats is Prague 5, one of the largest districts of Prague. A two-bedroom apartment in this area typically costs €305,946 and rents for €1,102 per month. Apartment prices here are much more affordable than in the city center. The average rental yield for two-bedroom apartments is 4.32%.

The largest Prague district is Prague 6 which has a very high cost of living. But there is a relatively few available options. A two-bedroom apartment costs around €340,625 and rents for €1,244 per month, generating a rental yield of 4.38%.

Current yields are much lower than 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 CNB figures.

Two-bedroom apartments in Prague have monthly rents ranging from €800 to €1,800 per square meter (sqm), according to the Global Property Guide. The five cadastral areas in Prague with the highest rents are Malá Strana, Josefov, Nové Město (New Town), Vinohrady, and Staré Město (Old Town).

A high proportion of luxury buyers in the country are either Czechs or Russians.

Rent deregulation led to higher rents

Residential rents have been rising in the past decade due to deregulation. 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. Regulated rents used to cover 80% of all rented apartments (equivalent to about 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.

The Czech economy is now struggling, inflation remains high

During 2022, the Czech economy expanded by a modest 2.5% from a year earlier, lower than the prior year’s 3.6% growth, amidst slowing household consumption. 

“Czechia’s real GDP grew by 2.5% in 2022, driven by investment and increased inventories, while dampened by weak household consumption amid lower consumer confidence and the tighter financial situation of Czech households,” said the European Commission.

Economic conditions worsened over the first half of this year, with the country’s real GDP declining by 0.5% y-o-y in Q1 2023 and by another 0.6% in Q2 2023, mainly due to lower consumption expenditure of households, as well as gross capital formation.

As such, the European Commission expects the Czech economy to expand by just o.2% for the full year of 2023. But the IMF is more pessimistic, projecting a 0.5% contraction this year.

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 into recession in 2012-13 due to weak domestic demand.

Economic recovery in 2014 was followed by healthy expansions of 5.4% in 2015, 2.5% in 2016, 5.2% in 2017, 3.2% in 2018, and 2.3% in 2019, thanks to increased private consumption and robust growth in the real estate market. However, the country suffered a pandemic-induced recession in 2020, with its real GDP contracting by a record 5.5% - worse than the 4.7% decline seen during the 2009 global financial crisis.

Czech Republic GDP Growth and Inflation graph

In 2022, the government’s budget deficit eased to about 3.6% of GDP, an improvement from shortfalls of 5.1% of GDP in 2021 and 5.8% of GDP in 2020, according to the CZSO. Though it remains far above the surplus equivalent to 0.3% of GDP recorded in 2019 before the Covid-19 pandemic.

“The balance of the general government sector for the year 2022, which ended up with a deficit in the amount of CZK 247.5 billion, improved by CZK 63.1 billion, compared to the previous year,” said Helena Houžvičková, Director of the Government and Financial Accounts Department of the CZSO.

In the first five months of 2023, the budget deficit reached CZK 271.4 billion (€11.28 billion), its highest level ever recorded for that period, mainly due to higher pension payments, energy price subsidy expenditure, and growing debt servicing costs.

The deficit is expected to remain at 3.6% of GDP this year, before declining to about 3% of GDP in 2024, based on the European Commission estimates.

Inflation eased to a 17-month low of 8.8% in July 2023, thanks to the slowdown in price increases for housing and utilities, restaurants and hotels, and food and non-alcoholic beverages, among others. Inflation averaged just 2.35% from 2000 to 2021, before reaching a 30-year high of 18% in September 2022.

Despite this, headline inflation is expected to remain high at 11% this year before falling to 2.1% in 2024, based on the latest forecast released by the CNB.

In June 2023, the general unemployment rate was 2.6%, slightly up from 2.5% a year earlier, according to CZSO.

Czech Republic General Unemployment Rate graph

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