Residential real estate market in Prague is reviving, but prices of new flats will rise

31 August 2023

The real estate market in Prague is starting to revive thanks to a slight reduction in mortgage rates, according to developers. However, the lack of supply of new flats caused by high construction costs and complicated permitting processes is likely to lead to a renewed rise in apartment prices, according to an analysis by Central Group.

According to the report, developers in Prague started offering 5,500 flats in the first half of this year, which is 50 fewer than this time last year and is the first decline after the previous year and a half of growth.

In July, the average interest rate on new mortgages was 5.8 percent, the lowest since last August, according to the Czech Banking Association’s Hypomonitor. At the turn of the year, the average rate was nearly 6 percent, and in December it was 5.98 percent. Yet a few years ago, interest rates well below two per cent were not uncommon.

“The first half of this year was marked by a slight recovery in the real estate market. Although the current reduction is of a rather cosmetic nature, it is a positive signal, as are the increases in the volume of mortgage loans taken out. In July, banks granted mortgages worth CZK 9.5 billion. Compared to June, this is a drop of a fifth, but it is a standard seasonal fluctuation caused by the holiday season,” said Creditas Real Estate sales director Tomáš Drábek.

The reduction in the interest rate will be a significant impetus for the improvement of the housing market, according to the analysis of the Central Group. New construction could be helped by a planned reduction in the tax rate on flats from 15 per cent to 12 per cent as part of the government’s consolidation package under discussion, it said, and the abolition of the DSTI indicator for new mortgage loans could also help in part. The DSTI limit, which determined the maximum percentage of the total amount of all monthly loan repayments on the net monthly income of the loan applicant, was abolished by the CNB with effect from the start of the holiday season. Thus, more people will be able to get a mortgage from July.

According to developers, the problem that will lead to an increase in the prices of new flats is the decreasing supply of new flats on the Prague market. Michaela Tomášková, executive director of Central Group, said that with faster permitting processes and higher construction volumes, prices of new flats could fall by up to 15 percent. Tomáš Kadeřábek, director of the Association of Developers of the Czech Republic, also agrees that the insufficient supply of new flats will result in a price increase.

“Developers are worried about the economics of implementation and sales. This is already now, but much more so in the coming months and years, will lead to a decline in the supply of new apartments on the market. The already insufficient construction capacity will slow down even more, even though the need for housing is not decreasing,” Kadeřábek said.

Martin Gürtler, an analyst and economist at Komerční banka, thinks that despite the simplification of the legislation, there might not be a reduction in price. “It would also depend on other factors such as the overall state of the economy and the related level of demand for real estate, prices of construction work and materials, as well as the strategies of individual developers,” Gürtler said.

At the beginning of August, the average selling price of new Prague apartments was CZK 150,835 per square metre, down 0.7 per cent quarter-on-quarter, according to an analysis by Skanska Residential, Trigema and Central Group.

According to Central Group, an average of 4,800 flats have been permitted in Prague annually over the last 15 years. According to data from the Czech Statistical Office (ČSÚ), the number of permitted flats in Prague is rather stagnant. In May this year, as in April, 24 flats were permitted in Prague and 26 in June. In total, the construction of 2,853 flats started in the capital in the first half of this year, which is the lowest number since the second half of 2020. 2,927 flats were completed.

Source: CTK

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