Czech Republic’s housing market remains strong
Lalaine C. Delmendo | July 01, 2022
Czech Republic’s housing market is still very strong, despite global supply chain disruptions and the economic uncertainty brought by Russia’s invasion of Ukraine.
The average price of apartments in the Czech Republic surged by 26.3% (13.5% inflation-adjusted) during the year to Q1 2022, after y-o-y rises of 25.8% in Q4 2021, 22% in Q3, 14.6% in Q2 and 11% in Q1, according to the country’s central bank Czech National Bank (CNB). In fact, it was the biggest y-o-y growth since the series begun in 2008.
On a quarterly basis, nationwide house prices rose by 5% in Q1 2022 (-1.2% inflation-adjusted).
During Q1 2022:
- The average price of new dwellings rose by a record 29.8% (16.7% inflation-adjusted) – so that prices of new dwellings are now 128% higher than the previous Q3 2008 peak.
- The average price of existing dwellings soared by 23.5% (11.1% inflation-adjusted) from a year earlier, or 101.5% above the previous Q3 2008 peak.
Nationwide house prices rose by more than 12% annually over the past six years, more than double the rise in wages. As a result, homebuyers in the Czech Republic need to pay 12.2 times average annual salaries to purchase a 70-sq. m. dwelling, the second least affordable housing among the European countries included in the 2021 study conducted by Deloitte.
“The Czech Republic recorded the second least affordable housing among the participating countries with an average of 12.2 gross annual salaries to purchase a standardised dwelling. In comparison to last year, this is an increase by almost two average annual salaries,” said Deloitte.
Despite this, demand remains robust. During 2021, the total number of apartments sold in Prague reached 7,170 units, up by 19% from a year earlier and 22% above the five-year average sales, according to JLL’s H2 2021 Prague Residential Market. In fact, it was the best showing since 2016 when 7,700 apartments were sold in the capital city.
Dwelling starts rose by 28.3% y-o-y to 10,832 units in Q1 2022, following a 27.6% increase during 2021, based on figures from the Czech Statistical Office (CZSO). On the other hand, dwelling completions were up slightly by 1% to 9,110 units in Q1 2022, after a miniscule growth of 0.5% in 2021.
The Czech Republic’s housing market is expected to continue growing this year, albeit at a slower pace due to rapidly rising interest rates, the imposition of tighter lending regulations, as well as the erosion of purchasing power due to high inflation.
Economic growth is expected to slow to 2.3% in 2022, following a 3.3% expansion in 2021, amidst the Ukraine crisis and heightened inflationary pressures, according to the International Monetary Fund (IMF). The European Commission released a more pessimistic 2022 growth projection for Czech Republic of just 1.9%.
Local house price variations
Within the capital city, Prague, the most expensive flats in 2021 were located in Prague 1 and Prague 2, with average prices of CZK 166,200 (US$6,992) and CZK 145,100 (US$6,104) per sq. m., respectively. They were followed by Prague 3, with an average price of CZK 123,800 (US$5,208) per sq. m. and Prague 7, with price of CZK 120,600 (US$5,073) per sq. m.
On the other hand, the cheapest housing in the capital were in Prague 8 with an average price of CZK 105,500 (US$4,438) per sq. m. and Prague 4 with an average price of CZK 106,300 (US$4,471) per sq. m.
In the second largest city, Brno, flats are sold for an average price of CZK CZK 89,600 (US$3,767) per sq. m. during 2021, according to Deloitte. In the Central Bohemian region, the average price of flats reached CZK 77,100 (US$3,242) per sq. m. while in Olomouc, it increased to CZK 60,300 (US$2,535) 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 37,300 (US$1,567) per sq. m. in 2021, followed by Karlovy Vary near the German border (CZK 41,400 or US$1,739 per sq. m.) and the northeast Moravian region of Ostrava (CZK 44,400 or US$1,865 per sq. m.).
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% real) in 2007, a sharp increase from a growth of 8.4% (5.7% real) in 2006.
The crisis bites 2009-2013. After 17.1% (10.5% real) 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 to a cumulative house price fall of 14% (-21% real) in 2010-13.
Housing market recovery 2014-2021. The property market finally recovered, with the house price index rising by 13% (12% in real terms) between 2014 and 2015, amidst improving economy.
House price growth accelerated in 2016 to 2019, rising by almost 10% (7% in real terms) annually. Despite the pandemic, house prices continue to rise 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).
Demand remains robust
Demand continues to rise last year, amidst improved economic conditions. During 2021, the total number of apartments sold in Prague reached 7,170 units, up by 19% from a year earlier and 22% above the five-year average sales, according to JLL’s H2 2021 Prague Residential Market. In fact, it was the best showing since 2016 when 7,700 apartments were sold in the capital city.
Yet figures from Deloitte showed mixed results in Q4 2021. Nationwide:
- Development projects: there were about 3,024 sales, down by 6.1% from a year earlier, according to Deloitte. Though the volume of sales actually increased 8.9% to CZK 19.5 billion (US$829.6 million).
- Brick houses: sales fell slightly by 1.3% y-o-y to 1,872 units in Q4 2021 but transaction volume surged 22.4% to CZK 10.4 billion (US$442.3 million).
- Apartment buildings: sales rose by 4.8% y-o-y to 2,454 units while transaction volume increased strongly by 34.2% to CZK 10.2 billion (US$433.8 million).
- Development projects: sales fell by 12% y-o-y to 1,744 units in Q4 2021 but transaction volume increased 7% to CZK 13.8 billion (US$587.2 million).
- Brick houses: sales increased 10% y-o-y to 850 units and transaction volume rose by 25% y-o-y to CZK 6.5 billion (US$276.6 million).
- Apartment buildings: sales rose by 15.3% to 872 units in Q4 2021 from a year earlier and transaction volume increased strongly by 40% to CZK 4.9 billion (US$208.5 million) over the same period.
Residential construction activity improving
In 2021, dwelling completions in the country rose slightly by 0.5% to 34,581 units from a year earlier, following a 5.5% decline in the prior year, according to the Czech Statistical Office (CZSO). It was the second highest level since 2010.
Likewise, dwelling starts soared 27.6% to 44,992 units in 2021 from a year earlier, in contrast to an 8.9% fall in 2020 and far higher than the average annual growth of less than 10% from 2014 to 2019.
The recovery in the residential construction sector continues in Q1 2022:
- Dwelling starts: up by 28.3% to 10,832 units from a year ago
- Dwelling completions: up by 1% to 9,110 units from a year earlier
Prague seems to be more resilient than the rest of the country. During 2021, the construction of over 7,100 apartments started in the capital city, up by 23% from the prior year and its best result on record since 2008, according to JLL’s H2 2021 Prague Residential Market report. But even during the onset of the pandemic, new housing starts still managed to increase by a modest 3% in 2020 from a year earlier.
As a result of strong commencement levels, the total number of apartments in under construction phase in Prague rose to 12,630 units by end-2021, up by 36% from a year ago.
Mortgage interest rates rising sharply
The average interest rate for new mortgage loans was 3.53% in Q1 2022, up from 2.07% a year earlier and the highest level since 2012, according to the CNB.
For new mortgage loans, average interest rates in Q1 2022 were:
- Floating and interest rate fixation (IRF) under 1 year: 3.48%, up from from 2.14% a year earlier.
- IRF over 1 and up to 5 years: 3.73%, sharply up from 2.1% in the previous year.
- IRF over 5 years and up to 10 years: 3.36%, up from 1.99% in the previous year.
- IRF over 10 years: 3.51%, up from 2.35% a year earlier.
For outstanding mortgage loans, the average interest rate was 2.81% in Q1 2022, up from 2.34% the previous year. Over the same period:
- Floating and IRF under 1 year: 4.38%, sharply up from 2.19% a year earlier.
- IRF over 1 and up to 5 years: 2.46%, slightly up from 2.4% in the same period last year.
- IRF over 5 years and up to 10 years: 2.28%, unchanged from a year ago.
- IRF over 10 years: 2.91%, slightly down from 2.98% a year earlier.
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.
Previously, the CNB had continuously cut its key interest rates to cushion the impact of the Covid-19 pandemic.
Mortgage market continues to expand
In 2021, the size of the residential mortgage market was around 26% of GDP, 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 7.3% from 2010 to 2021, a slowdown from almost 30% growth annually from 2003 to 2009.
In April 2022, the total amount of housing loan outstanding rose by 9.2% to about CZK 1.61 trillion (US$68.86 billion) from a year earlier, according to the Czech National Bank (CNB).
An increasing number of borrowers now prefer shorter-term loans. New loans with initial rate fixation (IRF) of 5 years and below accounted for almost 62% share in Q1 2022.
Mortgage loans in the Czech Republic are typically granted with 20-year maturities, with a maximum LTV ratio of 85%.
Lending regulations tightened
Effective 1 April 2022, the CNB has decided to set limits on credit ratios for the provision of mortgage loans.
- 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.
“These measures take into account the across-the-board easing of credit standards by banks and the increasing overvaluation of apartment prices in the Czech Republic,” said the CNB.
“Apartment prices in the Czech Republic were about 40% higher at the end of 2021 than the level consistent with the income of the median household and with minimum required rental yields,” the central bank noted.
The CNB also decided to increase the countercyclical capital buffer rate to 2.5%; banks will be required to maintain the buffer at the said level from 1 April 2023. Until then, the buffer will rise gradually. From 0.50% by end-2o21, the rate would increase to 1% from 1 July 2022. A rate of 1.5% will be applied from 1 October 2022. From 1 January 2023 to 31 March 2023, the CNB will require 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.
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 3%, according to a Global Property Guide research conducted March 2022. Prague is the most expensive of any significant Czech city to buy or rent a property. Prices in Prague range from EUR 4,000 to EUR 6,000 per square metre (sq. m.).
- In Prague 2, a district popular for expats with quick access to the city centre, apartment prices cost an average of €6,335 per square metre (sq. m.) and rent is around €16 per square metre (sq. m.), earning a rental yield of 2.94%.
- In Prague 1, a 60 square metre (sq. m.) apartment costs around €6,799 per sq. m. and rents at €15 per sq. m., generating a rental yield of 2.32%. Most expensive flats are located in Prague 1 and Prague 2.
- Prague 5, one of the largest districts of Prague, is another district favoured by expats. A 60 square metre (sq. m.) apartment in this area typically costs €4,991 and rents at €14 per sq. m., generating a rental yields of 3.29%. Apartment prices here are much more affordable than in the city centre.
- Prague 6, the largest Prague district, has a very high cost of living. But there is a relatively available options where a 60 square meter (sq. m.) apartment costs around €4,895 and rents at €12 per sq. m., generating a rental yield of 2.76%.
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.
Apartments in Prague have monthly rents ranging from €11 to €20 per sq. m., 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).
As the situation normalizes, foreign buyers are now starting to return to the market to purchase properties for investment purposes. A high proportion of luxury buyers 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 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.
Economy to slow this year, inflation surging
The Czech economy expanded by 4.8% year-on-year in Q1 2022, up from the previous quarter’s 3.6% growth, buoyed by strong domestic consumption, gross capital formation and inventories, according to the Czech Statistical Office.
Despite this, economic growth is expected to slow this year to 2.3%, amidst the Ukraine crisis and heightened inflationary pressures, according to the International Monetary Fund (IMF). The European Commission released a more pessimistic 2022 growth projection for Czech Republic of just 1.9%, following a 3.3% expansion in 2021.
“Annual GDP growth reached 3.3% in 2021 and is forecast to slow down to 1.9% in 2022, driven by exacerbating supply chain disruptions resulting from new bottlenecks created in relation to the Russian invasion of Ukraine and lockdowns in China, as well as an elevated inflation rate caused by higher energy and commodity prices,” said the European Commission.
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 2021, the government’s budget deficit hit a record CZK 420 billion (US$17.93 billion), the biggest shortfall since the establishment of the Czech Republic, as public spending surge to cushion the impact of the coronavirus to the domestic economy. The deficit was equivalent to about 5.9% of GDP in 2021, slightly up from the previous year’s shortfall of 5.8% of GDP and almost twice the EU’s mandated ceiling of 3%, according to Czech Statistical Office.
The deficit is expected to remain high this year and will surpass CZK 300 billion (US$12.81 billion), as Czech Republic takes in hundreds of thousands of refugees fleeing the Russia-Ukraine war, and as the state spends more on defense and increases pensions.
In April 2022, the general unemployment rate was 2.4%, unchanged from the previous month but down from 3.4% a year earlier, according to Czech Statistical Office.
Inflation accelerated to 16% in May 2022, up from 14.2% in April and the highest level since December 1993, driven by a surge in energy and commodity prices. Headline inflation is expected to reach 13.1% this year, based on the latest forecast released by the CNB.
- Real estate prices (Czech National Bank): https://www.cnb.cz/cnb/STAT.ARADY_PKG.PARAMETRY_SESTAVY?p_sestuid=51269&p_strid=ACBH&p_lang=EN
- Prague Residential Market H2 2021 (JLL): https://www.jll.cz/content/dam/jll-com/documents/pdf/research/emea/czechrepublic/en/jll-cz-prague-residential-market.pdf
- Deloitte Real Index Q4 2021 Actual prices of apartments sold in the CR (Deloitte): https://www2.deloitte.com/content/dam/Deloitte/cz/Documents/real-estate/EN_21_4Q_Real-index.pdf
- Rates of employment, unemployment and economic activity - April 2022 (Czech Statistical Office): https://www.czso.cz/csu/czso/ari/rates-of-employment-unemployment-and-economic-activity-april-2022
- Prague property is expensive, and rental yields are poor (Global Property Guide): https://www.globalpropertyguide.com/Europe/Czech-Republic/Rental-Yields
- Czech Republic At a Glance (International Monetary Fund): https://www.imf.org/en/Countries/CZE
- Economic forecast for Czechia (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/czechia/economic-forecast-czechia_en
- Czech finance minister seeks to keep 2022 budget deficit below $14.1 billion (Reuters): https://www.reuters.com/markets/europe/czech-finance-minister-seeks-keep-2022-budget-deficit-below-141-bln-2022-06-26/
- Czech budget deficit to surpass CZK 300 billion in 2022 amid Ukraine war -minister (Reuters): https://www.reuters.com/article/czech-budget-idUSKBN2NM06E
- CNB forecast – Spring 2022 (Czech National Bank): https://www.cnb.cz/en/monetary-policy/forecast/
- Czech central bank raises key rate again to tackle inflation (ABC News): https://abcnews.go.com/Business/wireStory/czech-central-bank-raises-key-rate-tackle-inflation-85554682
- CNB Board decision on financial stability (Czech National Bank): https://www.cnb.cz/en/monetary-policy/bank-board-decisions/CNB-Board-decision-on-financial-stability-1655390520000/
- CNB confirms mortgage limits and leaves countercyclical capital buffer rate at 2.5% (Czech National Bank): https://www.cnb.cz/en/cnb-news/press-releases/CNB-confirms-mortgage-limits-and-leaves-countercyclical-capital-buffer-rate-at-2.5/
- CNB to reintroduce LTV, DTI and DSTI limits on mortgage loans and increase countercyclical capital buffer rate to 2% (Czech National Bank): https://www.cnb.cz/en/cnb-news/press-releases/CNB-to-reintroduce-LTV-DTI-and-DSTI-limits-on-mortgage-loans-and-increase-countercyclical-capital-buffer-rate-to-2/