Strong house price rises continue in Czech Republic
Lalaine C. Delmendo | March 02, 2019
Czech house prices are rising strongly, as demand continues to outstrip supply. The average price of apartments in the Czech Republic surged by 8.75% (6.21% inflation-adjusted) during the year to Q3 2018, after y-o-y rises of 8.06% in Q2 2018, 7.57% in Q1 2018, 8.42% in Q4 2017 and 12.53% in Q3 2017, according to the European Central Bank (ECB).
During the first half of 2018:
- The average price of new dwellings soared by 13.23% (10.72% inflation-adjusted), according to the Bank for International Settlements (BIS) - almost 40% higher than the previous Q3 2008 peak.
- The average price of existing dwellings rose by 6.73% (4.36% inflation-adjusted) from a year earlier, or 22.7% above the previous Q3 2008 peak.
The strong growth was mainly driven by the country’s favourable lending conditions, a growing economy, and rising real wages.
This was supported by figures from consultancy Deloitte, showing sales prices of flats in Czech Republic’s regional capitals, including Prague, rose by 10.1% in Q3 2018 from a year earlier, to an average of CZK 56,800 (US$ 2,500) per square metre (sq. m.).
In Prague the average price of flats increased 6.5% y-o-y in Q3 2018, to CZK76,500 (US$3,366) per sq. m., according to Deloitte. Prague accounts for about two-thirds of the country´s total property sales volumes.
Demand remains strong. In the first half of 2018, about 2,817 apartments were sold in new buildings and fully refurbished projects in Prague, up from sales of just below 2,500 units in H2 2017, according to Jones Lang La Salle.
“Demand has been driven mainly by migration within the country and strong demand for prime properties by foreigners; demand for investment properties is also believed to play a significant role,” according to a 2018 report released by the International Monetary Fund (IMF).
Demand outstripping supply
Residential construction activity is increasing rapidly, but is still below peak levels. In 2018, dwelling completions rose by 18.5% to 33,868 units from the previous year, following annual increases of 4.6% in 2017, 8.9% in 2016 and 4.8% in 2015, according to the Czech Statistical Office (CZSO). Likewise, dwelling starts were up 5.1% to 33,121 units in 2018.
“Demand has consistently outstripped supply, especially in Prague,” said the IMF. “Planning and zoning laws contribute to housing supply constraints that add to pressures on prices. Some progress has been made in streamlining procedures for building permits, but construction levels remain below pre-crisis highs.”
The Czech Republic’s housing market is expected to remain tight in the coming years, with house prices projected to continue rising strongly.
The Czech economy is believed to have expanded by 3% in 2018, and is expected to grow further by another 3% this year, according to the IMF.
Local house price variations
Within the capital city, Prague, the most expensive flats were located in Prague 1 and Prague 2, with average prices of CZK 150,300 (US$ 6,614) and CZK 107,000 (US$ 4,708) per sq. m., respectively. On the other hand, the cheapest housing in the capital were in Prague 9 with an average price of CZK 69,600 (US$ 3,063) per sq. m. and Prague 10 with an average price of CZK 71,200 (US$ 3,133) per sq. m.
In the second largest city, Brno, flats are sold for an average price of CZK 55,800 (US$ 2,457) per sq. m. in Q3 2018, according to Deloitte. In the Central Bohemian region, the average price of flats reached CZK 47,100 (US$ 2,074) per sq. m. while in Olomouc, it increased to CZK 40,200 (US$ 1,770) 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 15,300 (US$ 674) per sq. m. in Q3 2018, followed by the northeast Moravian region of Ostrava (CZK 22,200 or US$978 per sq. m.) and Karlovy Vary near the German border (CZK 26,500 or US$ 1,167 per sq. m.).
A little housing market history
The 1998-2003 boom. From 1998 to 2003 the Czech Republic’s house price index rose by 64% in anticipation of EU entry in 2004, according to the CNB, and 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%.
Stagnation from 2004-2005. 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. The housing market stagnated from 2004 to 2005, with measures to cut the budget deficit probably the key factor. 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.
Brief boom 2006-2008. Thanks to lower interest rates in 2006, the house price index rose by 8.4% (5.7% in real terms). Housing completions shot up in 2007 by almost 38% to 41,649 units anticipating a VAT increase from 5% to 19%, and the house price index skyrocketed by 31.2% (27.1% real) in 2007.
The crisis bites 2009-2013. In 2009 apartment prices fell 12.3% (-13.3% in real terms), after 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. House prices fell by 2.74% (-4.68% in real terms) in 2010 and by 4.92% (-7.18% in real terms) in 2011, based on figures from the CZSO. In 2013, house prices dropped 1.68% (-2.80% in real terms), after falling by 5.39% (-7.97% in real terms) in 2012.
Housing market recovery 2014-2017. The property market finally recovered 2014, with the house price index rising by 5.24% (4.75% in real terms) and by another 4.59% (4.46% in real terms) in 2015, amidst improving economy. It was followed by amazing growth of 13.91% (12.3% in real terms) in 2016 and 10.66% (7.85% in real terms) in 2017.
Increased residential construction activity
In 2018, dwelling completions rose strongly by 18.5% to 33,868 units from the previous year, following annual increases of 4.6% in 2017, 8.9% in 2016 and 4.8% in 2015, according to the Czech Statistical Office (CZSO). In fact, it was the fastest growth since 2007.
Likewise, dwelling starts were up 5.1% to 33,121 units in 2018, the fifth consecutive year of strong growth.
Mortgage interest rates rising gradually
The average interest rate for new mortgage loans increased to 2.58% in Q3 2018, from 2.17% a year earlier, according to the Czech National Bank (CNB).
Average interest rates for new mortgage loans in Q3 2018 were:
- Floating and interest rate fixation (IRF) under 1 year: 2.88%, up from 2.25% a year earlier.
- IRF over 1 and up to 5 years: 2.53%, up from 2.14% last year.
- IRF over 5 years and up to 10 years: 2.51%, up from 2.13% the previous year.
- IRF over 10 years: 2.48%, slightly up from 2.44% a year earlier.
For outstanding mortgage loans, the average interest rate was 2.47% in Q3 2018, slightly down from 2.51% in the previous year. Over the same period:
- Floating and IRF under 1 year: 2.94%, up from 2.48% a year earlier.
- IRF over 1 and up to 5 years: 2.34%, slightly down from 2.48% last year.
- IRF over 5 years and up to 10 years: 2.25%, down from 2.35% a year earlier.
- IRF over 10 years: 3.38%, down from 3.7% a year earlier.
Starting August 2017, the central bank has shifted gear and decided to raise the key rates several times, in an effort to curb inflationary pressures and protect the domestic currency. In November 2018, the CNB raised its 2-week repo rate to 1.75%, the seventh consecutive rate hike in just 15 months. It is the highest level since April 2009.
Previously, the CNB had continuously lowered its key interest rate since 2009. From above 3% before the crisis, the CNB slashed its 2-week repo rate many times to reach a record low of 0.05% in December 2012, which rmained unchanged till July 2017.
Moreover, a new consumer loan law became effective on December 1, 2016, in response to the EU directive 2014/17/EU. New rules related to mortgages include:
- Early repayment penalties are now limited for new mortgages starting December 1, 2016 or for existing mortgages with fixation renewed after December 1, 2016.
- Banks should now inform their clients of their renewal offers on fixed length mortgages 3 months before the fixation ends.
- Banks are also obliged to show the total cost of mortgage or APR (annual percentage rate) to clients.
These regulations entailed costs to banks, which they then passed onto the consumers, causing banks to increase mortgage interest rates by up to 0.5%.
The CNB also introduced tighter lending regulations to prevent the formation of a real estate bubble. Banks must now include income requirements in their mortgage lending criteria, and applicants’ debts should not exceed nine times net annual income (DTI ratio). In addition, applicants should spend no more than 45% of their net monthly income on debt service (DSTI ratio).
Mortgage market expanding rapidly
In 2018, the size of the residential mortgage market was around 23.8% of GDP, up from 20.9% in 2014, 15.2% in 2008, and 4.2% in 2002.
In December 2018, the total outstanding housing loan amounts rose by 8.5% to almost CZK 1.25 trillion (US$ 54.82 billion) from a year earlier, according to the Czech National Bank (CNB).
Loans with interest rate fixation (IRF) of between 1 and 5 years dominate the mortgage market, capturing about 52% share in Q3 2018, followed by loans with IRF of between 5 to 10 years (25% market share).
Mortgage loans in the Czech Republic are typically granted with 20 year maturities, the maximum LTV ratio being 85%.
Poor rental yields; foreigners buy-to-let
Prague has poor gross rental yields, based on Global Property Guide research released in July 2018. A 120 sq. m. apartment has an average yield of 3.7%, while a smaller apartment of around 70 sq. m. has a slightly lower rental yield of 3.6%.
Current yields are 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 (US$ 12.43) to €16.50 (US$ 18.64) per sq. m. as of July 2018, according to the Global Property Guide.
In recent years, foreign buyers have returned to the market to purchase properties for investment purposes. A high 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.
Rent deregulation led to higher rents
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.
The deregulation law has fuelled higher rents throughout the country in recent years. According to Nova.cz, the average cost of renting a two-bedroom flat in or near the city center has already reached more than CZK 25,000 (US$ 1,102) in 2018 – higher than the average Czech net salary of CZK 22,915 (US$ 1,010) per month.
Modest economic growth; record-low unemployment
The Czech economy is believed to have expanded by 3% in 2018, and is expected to grow further by 3% this year, according to the International Monetary Fund (IMF).
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 5.3% in 2015, 2.5% in 2016 and 4.3% in 2017, thanks to increased private consumption and robust growth in the real estate market.
In 2018, the government unexpectedly recorded a budget surplus of CZK 2.9 billion (US$129 million), the second best result since 1996, according to Finance Minister Alena Schillerová, thanks to higher tax and social insurance collections. The surplus is equivalent to about 0.1% of GDP last year.
Unemployment in the Czech Republic reached a record low of 2% in Q4 2018, down from 2.3% in the previous quarter and 2.4% a year earlier, according to the CZSO.
Inflation rose to 2.5% in January 2019, up from 2% in both November and December 2018, according to the CZSO. This increase was still within the CNB’s target range between 1% to 3%. Inflation is expected to remain within target this year.
CNB introduces new mortgage limits (Czech National Bank): https://www.cnb.cz/en/public/media_service/press_releases_cnb/2018/20180612_zfs.html
Monetary and financial statistics (Czech National Bank): http://www.cnb.cz/cnb/STAT.ARADY_PKG.STROM_DRILL?p_strid=AA&p_lang=EN
About property price statistics (Bank for International Settlements): https://www.bis.org/statistics/pp.htm?m=6%7C288%7C640
Czech property prices rose 10 pct by Sept. last year, among steepest increase in EU (Czech Radio): https://www.radio.cz/en/section/business/czech-property-prise-rose-10-pct-by-sept-last-year-among-steepest-increase-in-eu
Basic characteristics of activity status of population aged 15 or more (Czech Statistical Office): https://vdb.czso.cz/vdbvo2/faces/en/index.jsf?page=vystup-objekt&pvo=ZAM01-D&skupId=426&z=T&f=TABULKA&katalog=30853&pvo=ZAM01-D&str=v467&u=v413__VUZEMI__97__19#fx=0&w=
Employment, unemployment (Czech Statistical Office): https://www.czso.cz/csu/czso/zamestnanost_nezamestnanost_prace
Housing construction, building permits and building orders – time series (Czech Statistical Office.): https://www.czso.cz/csu/czso/bvz_cr
Property Index: Overview of European Residential Markets (Deloitte): https://www2.deloitte.com/content/dam/Deloitte/cz/Documents/survey/Property_Index_2018_EN.pdf
Czech housing is the least affordable in Europe, says new study (Expats.cz): https://news.expats.cz/praguejobs/czech-housing-is-the-least-affordable-in-europe-says-new-study/
Prague rent prices are now higher than the average Czech salary (Expats.cz): https://news.expats.cz/praguejobs/prague-rent-prices-are-now-higher-than-the-average-czech-salary/
Property prices (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691220
Czech Republic : 2018 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for the Czech Republic (International Monetary Fund): https://www.imf.org/en/Publications/CR/Issues/2018/06/26/Czech-Republic-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46019
World Economic Outlook Database October
2018 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/index.aspx
Prague Residential Market H1 2018 (Jones Lang La Salle): http://www.jll.cz/czech-republic/en-gb/research/244/prague-residential-market-h1-2018
The crisis in the towns: Flat rents exceed the average Czech salary! (Nova.cz): http://tn.nova.cz/clanek/lide-zuri-najmy-bytu-ve-mestech-prevysuji-prumerny-cesky-plat.html
Czech budget finishes with a surprising surplus (Remix): https://rmx.news/czech-republic/czech-budget-finishes-surprising-surplus
Czech banking group: New rules would deny mortgage to 20 pct of 2017 applicants (Reuters): https://www.reuters.com/article/czech-cenbank-mortgages/czech-banking-group-new-rules-would-deny-mortgage-to-20-pct-of-2017-applicants-idUSP7N1RP00G