Czech Republic’s housing market remains buoyant despite pandemic

Lalaine C. Delmendo | April 02, 2021

Czech house prices continue to rise strongly, despite a coronavirus-induced economic recession. The average price of apartments in the Czech Republic surged by 8.37% (4.9% inflation-adjusted) during the year to Q3 2020, after y-o-y rises of 7.75% in Q2 2020, 8.6% in Q1 2020, 8.93% in Q4 2019 and 8.72% in Q3 2019, according to the country’s central bank Czech National Bank (CNB).

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.

Czech annual house price change graph

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.

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 148,100 (US$6,681) and CZK 137,900 (US$6,221) per sq. m., respectively. On the other hand, the cheapest housing in the capital were in Prague 4 with an average price of CZK 85,000 (US$3,834) per sq. m. and Prague 9 with an average price of CZK86,600 (US$3,906) per sq. m.

In the second largest city, Brno, flats are sold for an average price of CZK 71,500 (US$ 3,225) per sq. m. in Q3 2020, according to Deloitte. In the Central Bohemian region, the average price of flats reached CZK 59,100 (US$2,666) per sq. m. while in Olomouc, it increased to CZK 48,100 (US$2,170) per sq. m.

Czech Republic house price indices

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 22,800 (US$1,028) per sq. m. in Q3 2020, followed by Karlovy Vary near the German border (CZK 27,600 or US$ 1,245 per sq. m.) and the northeast Moravian region of Ostrava (CZK 29,600 or US$1,335 per sq. m.).

little housing market 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% 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 2014-2019. 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.

Demand remains robust

Demand remained healthy last year despite the pandemic. Nationwide:

  • Development projects: there were about 2,600 sales in 2020, down by 2.7% from a year earlier, according to Deloitte. Though the volume of sales actually increased 21.2% to CZK 14.3 billion (US$645 million).
  • Brick houses: sales rose by 5% y-o-y to 1,611 units last year and transaction volume surged 22.4% to CZK 7.1 billion (US$320 million).
  • Apartment buildings: sales fell slightly by 0.3% y-o-y to 2,073 units while transaction volume increased 18.5% to CZK 6.4 billion (US$289 million).

In Prague:

  • Development projects: sales rose by 8.4% y-o-y to 1,446 units in 2020 and transaction volume increased 28% to CZK 9.6 billion (US$433 million).
  • Brick houses: sales increased 2.7% y-o-y to 650 units last year and transaction volume rose by 20% y-o-y to CZK 4.2 billion (US$189.5 million).
  • Apartment buildings: sales rose by 11.2% to 656 units in 2020 from a year earlier and transaction volume increased strongly by 26.1% to CZK 2.9 billion (US$131 million) over the same period.

Residential construction activity falling

In 2020, dwelling completions in the country fell by 5.4% to 34,432 units from a year earlier, 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). Yet it remains the second highest level since 2010.

Likewise, dwelling starts were down 8.9% to 35,254 units in 2020, in contrast to an almost 10% average annul growth in 2014 to 2019. In fact, it was the first decline since 2013.

Czech residential construction

Yet Prague seems to be more resilient than the rest of the country. During 2020, the construction of 5,180 flats in around 60 projects was started in the capital city, up 3% from a year earlier. In 2021, the number of newly started dwellings in Prague is expected to reach 5,600 units, according to JLL.

Mortgage interest rates falling

The average interest rate for new mortgage loans was 2.07% in Q4 2020, down from 2.55% a year earlier, according to the CNB.

For new mortgage loans, average interest rates in Q4 2020 were:

  • Floating and interest rate fixation (IRF) under 1 year: 1.95%, sharply down from 2.85% a year earlier.
  • IRF over 1 and up to 5 years: 2.19%, down from 2.56% the previous year.
  • IRF over 5 years and up to 10 years: 2.07%, down from 2.32% the previous year.
  • IRF over 10 years: 2.33%, down from 2.42% a year earlier.

For outstanding mortgage loans, the average interest rate was 2.36% in Q4 2020, down from 2.64% the previous year. Over the same period:

  • Floating and IRF under 1 year: 2.21%, sharply down from 3.28% a year earlier.
  • IRF over 1 and up to 5 years: 2.43%, unchanged from a year earlier.
  • IRF over 5 years and up to 10 years: 2.32%, slightly down from 2.35% a year earlier.
  • IRF over 10 years: 2.9%, down from 3.08% a year earlier.

Starting March 2020, the central bank cut key rates to cushion the impact of the pandemic, slashing its 2-week repo rate from 2.25% to 1% in March, and to 0.25% in May, where it remained since.

Czech interest rate new mortgage loans

Previously, the CNB had continuously raised its key interest rate since mid-2017, to curb inflationary pressures.

A new consumer loan law became effective on December 1, 2016:

  • Early repayment penalties are now limited for mortgages starting or renewed on or after December 1, 2016.
  • Banks should now inform their clients of renewal offers on fixed length mortgages 3 months before the fixation ends.
  • Banks are 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%.

Czech key interest rates

The CNB also tightening lending regulations to forestall a real estate bubble. Banks must now include income requirements in 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).

However in April 2020, the government introduced an opt-in moratorium for both individual and corporate borrowers, which enabled repayments to be deferred for a maximum of six months, amidst the COVID-19 pandemic. This is available for consumer and business loans including mortgages that were concluded before March 26, 2020 but drawn down after this date.

Mortgage market expanding rapidly

In 2020, the size of the residential mortgage market was around 25.8% of GDP, up from 23.1% in the prior year, 19.8% in 2012, 15.2% in 2008, and 4.2% in 2002.

The total amount of housing loan outstanding rose by 8% to almost CZK 1.44 trillion (US$64.84 billion) in 2020 from a year earlier, according to the Czech National Bank (CNB).

Housing loans grew by an annual average of 7% from 2010 to 2019, a slowdown from almost 30% growth annually from 2003 to 2009.

Czech housing loans

An increasing number of borrowers now prefer shorter-term loans. New loans with floating rate and up to 1-year initial rate fixation (IRF) dominate the mortgage market, accounting for about 35% share in 2020, followed by loans with IRF of between 1 and 5 years, with 33.5% market share.

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

Moderate rental yields; foreigners buy-to-let

Prague has moderate gross rental yields, at an average of 4%, based on Global Property Guide research. 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%.

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 €10.50 (US$ 12.4) to €17.50 (US$ 20.6) 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).

Before the pandemic, foreign buyers have returned to the market to purchase properties for investment purposes. A high proportion of luxury buyers 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

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.

Record economic contraction

The 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.

Czech gdp inflation

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.

Czech unemployment

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.


Sources:

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