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.

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.

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.

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.

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.

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%.