Robust house price rises in Czech Republic
January 30, 2017
Prague posted an 8.34% (7.73% inflation-adjusted) rise in the average price of second-hand flats y-o-y in Q3 2016, according to the CZSO. Excluding Prague, Czech Republic flat prices rose by 13.05% y-o-y (12.42% inflation-adjusted).
During the year to Q3 2016:
- The average price of new dwellings sold rose by 5.98% (5.39% inflation-adjusted), according to the Czech National Bank (CNB). This was 9.47% higher that the average price at the previous Q3 2008 peak, so the primary housing market has fully recovered from the crisis.
- The average price of existing dwellings also exceeded the all time high in Q3 2008 by 4.13%.
There was a sharp rise in demand in the first half of 2016. The number of new apartments and villas sold was 11% higher than during the same period last year at 3,960, according to Jones Lang LaSalle (JLL) Czech Republic. Most apartments sold cost US$ 1,764 to US$ 2,156 per square metre (sq. m.).
"The current interest rate is below 2%", says JLL Czech Republic's Head of Research, Blanka Vačkova. "The volume of granted mortgages this year (2016) will hit the decade's maximum."
Dwelling starts rose by 8.3% y-o-y in 2015, while dwelling completions were up by 4.8% y-o-y, according to the CZSO. By end-2016 Prague dwelling completions reached the highest figure since the 2009 real estate crisis, at around 6,500 units, according to the JLL Czech Republic.
Yet despite increased construction, during the first half of 2016 the number of available units for sale fell 23% y-o-y, due to the slow issuance of building permits in cities such as Prague and Brno, according to Czech Point 101.
"It is now typically unclear how long the permitting process will take and whether it is likely to be successful in the end," says JLL Czech Republic's Head of Residential Agency, Anthony Mathieu. "Thanks to favourable mortgage rates and general lending conditions, demand for new housing is high and supply, due to the current administrative processes, is going to be smaller and smaller,"
On November 1, 2016, the responsibility of paying the real estate transfer tax (currently 4%) was changed from the seller to the buyer. This new rule does not apply to the first sale of a newly constructed flat, only to transfers after that. Homebuyers tried to complete their house purchases before the implementation of the new rule, which drove prices up in the third quarter of 2016.
Yet with low interest rates, strong economic growth, and increasing real wages, and a good economic outlook, property price rises are expected to continue, according to Czech Point 101.
Poor yields in Prague
Prices of houses and apartments in the Czech Republic have begun to rise again, according to Czech National Bank statistics. Wonderfully beautiful Prague is quite an expensive city in which to buy property:
- a 120 square metre (sq. m.) apartment in Prague will cost you around 460,000 euros
- a 70 sq. m. apartment in Prague will cost you around 260,000 euros
The purchase price of apartments in Prague’s prime residential districts is now around 3,500 euros to 4,000 euros per sq. m..
How much will you earn? Prague’s rental yields are weak:
- a 120 square metre (sq. m.) apartment in Prague can rent for around 1,500 euros per month, earning a yield of around 3.7% a month
- a 70 sq. m. apartment in Prague can rent for around 780 euros, earning a yields of around 3.6% a month
Currency risk. Over the past two years, the Czech Koruna has flat-lined against the euro.
Conclusion: You’re not going to buy in Prague for yields, 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.
Modest economic growth in 2017The Czech economy is believed to have expanded by 2.8% in 2016, and is expected to grow further by 2.9% in 2017, according to the Czech National Bank (CNB).
In 2014, the Czech Republic's economy posted 2.7% growth, after economic contractions of 0.5% in 2013 and 0.8% in 2012, according to the IMF. The economic recovery in 2014 was followed by a robust growth of 4.5% in 2015, the highest level for eight years, thanks to increased private consumption and robust growth in the real estate market.
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 2% in 2011. However, the economy fell in recession in 2012-13 due to weak domestic demand.
Having a low budget deficit is a criteria for acceptance 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 country's budget deficit in 2015 was estimated at around 0.6%, down from the 1.9% in 2014, according to the Czech Statistical Office (CZSO). In 2016, the country's budget balance is expected to be zero and is predicted to have a 0.2% deficit in 2017, according to the European Commission.
Unemployment in the Czech Republic was 3.9% in October 2016, down from 4.7% during the same period last year, according to the CZSO. As of October 2016, there were 204,400 unemployed persons in Czech Republic, 15.6% lower than last year.
In November 2016, inflation rose to 1.5%, the highest rate in three years, from 0.8% in October. This increase was still within the CNB's target range between 1% to 3%. For the past two years, the country has recorded very low inflation rates of 0.3% in 2015 and 0.4% in 2014, according to the IMF. The CNB predicts inflation of 1.9% in 2017.
In July 2016, President Milos Zeman called for a referendum on Czech Republic's membership of the European Union (EU) and North Atlantic Treaty Organization (NATO), a few months after the Brexit.
"I disagree with those who are for leaving the European Union," Czech Radio quoted Zeman as saying. "But I will do everything for them to have a referendum and be able to express themselves. And the same goes for a NATO exit too."
However, President Zeman's suggestion is quite unlikely to happen. "The government is not considering taking any steps which would question in any way our membership and the long-term orientation of the Czech Republic's foreign policy. Therefore it does not envisage any referendum," according to a statement by Prime Minister Bohuslav Sobotka's spokesman.