Sales of new flats in Prague have almost doubled year-on-year. However, they are still far from the values that were common in the spring of last year. Demand is stifled mainly by unaffordable mortgages, which are three times more expensive than they were not long ago. In addition to lower demand, developers are also having to contend with unreasonably expensive building supplies and very high interest rates on commercial loans. This is leading to the postponement of most of the projects in the pipeline and the construction industry is gradually sinking into a deeper and deeper crisis. A prerequisite for a stronger start in the construction and sale of new housing is a reduction in the base interest rate by the CNB and a reduction in the unjustifiably high prices of building contractors.
Demand for new housing fell significantly in the second half of last year. The market was mainly frozen by the rapid rise in interest rates, which resulted in the most expensive mortgages and commercial loans in 15 years. Interest rates on mortgages have been around 6% per annum for more than a year, three times higher than was common until recently. Because of this, a large proportion of mortgage clients have postponed their purchase decisions until a time when rates are more favourable again. In normal times, mortgage holders accounted for more than half of all buyers.
Commercial loans have become more expensive at a similar rate to mortgages. These are now around 8.5% per annum, whereas not long ago they were below 2%. The fall in demand and significantly more expensive financing has been compounded by unsustainably rising prices for building supplies due to the heated and unpredictable market situation, with prices for some materials rising by tens of percent per month. Due to a combination of these factors, most investors postponed a number of upcoming projects because the economics were no longer working out to make construction worthwhile.
New home sales doubled year-on-year.
This year, demand has already recovered significantly. The number of apartments sold has been rising for three quarters in a row. In the latest quarter, 1,050 new flats were sold in Prague, almost twice as many (+91%) as in the same period last year. However, developers have to work with many costly client bonuses and financing assistance to boost sales, including, for example, subsidizing clients’ mortgage payments. And despite the high sales growth, they are still far from the levels that were common at the beginning of last year.
“A very positive trend is the gradual return of deferred demand. Since the beginning of the year we have seen a significant increase in the number of flats sold. At Central Group, we expect to sell half as many apartments this year as last year,” says Dušan Kunovský, founder and head of Central Group, the largest residential builder.
Falling interest rates will bring a new sales boom.
Only a more substantial drop in mortgage interest rates will bring more significant sales growth. Only then will pent-up demand return to the market in a big way. According to some CNB board members, the first interest rate cut in almost a year and a half could happen by the end of this year. And it is possible that the CNB will take this step at its meeting on Thursday, November 2.
When the interest rate on mortgages is lowered, the mortgage payment and the monthly rent will be gradually equalized and people will switch from renting to owning their own home again. “The breakthrough that should bring a renewed boom in home sales, according to our analysis, is a reduction in mortgage interest rates to 3% per annum. This is already the threshold where the monthly mortgage payment is close to the monthly rent. At that moment, the preference to own a home again prevails significantly, because common sense says that after years it is better to have paid off your own apartment than to have a box full of bills for rent payments,” explains Kunovský.
This is also confirmed by a recent survey conducted by Central Group through the Instant Research application of IPSOS on a sample of 1,000 respondents. It shows that the majority of people (82%) prefer living in their own home with a mortgage to renting. For more than three-quarters (77%) of them, this is true even if the mortgage repayment would be higher than the rent.
Four-fifths of people prefer living in their own home with a mortgage to renting, according to the Central Group survey. More than three-quarters prefer to live in their own home even if the mortgage repayments would be higher than the rent
Central Group plans to build 2,700 apartments in 11 locations.
Lowering the interest rate is one of the key prerequisites for kick-starting new construction. But the main one is a significant reduction in the price of building supplies.
Last year, Central Group was the first to announce the postponement of the ongoing phases of two of its largest projects with a total of 730 apartments, and most of the market followed suit. Now the company has again been the first to announce that it is ready to meet the increased demand and plans to start massive construction. By the end of next year, it plans to launch and start construction of approximately 2,700 apartments in 11 Prague locations. However, the condition is a significant price reduction from construction companies.
“According to our analyses, in order for the construction to pay off, prices from construction companies must fall by at least 15% compared to last year’s “nervous” prices. And the prices of now unjustifiably overpriced building materials must be reduced by up to tens of percent. Without this, new construction will not get off the ground and projects will be further delayed,” Kunovský warns.
Central Group plans to start construction of 2,700 new apartments in 11 Prague locations by the end of 2024.
The first contract that Central Group has currently awarded to Metrostav, thanks to an agreement on acceptable terms a few days ago, is the construction of the second apartment block of the large Tesla Hloubětín project with approximately 370 apartments. The company intends to conclude another tender for two large apartment buildings in the Harfa Living project with almost 400 apartments and several commercial spaces by the end of November.
Another large apartment block in the Park district in Prague 3 should follow next year, as well as several completely new projects and ongoing phases in Horní Měcholupy, Dolní Počernice, Pitkovice, Uhříněves, Michle, Záběhlice, Hájích and Břevnov.
Author: Central Group
