According to the latest analyses, at the end of the first half of the year there were 5,500 new flats on offer in Prague, 50 fewer than at the end of the first quarter. This is the first decline in this indicator after a year and a half of relatively rapid growth. Moreover, supply can be expected to continue to decline due to a number of factors. This may put upward pressure on prices and further deteriorate housing affordability.
The supply of new apartments in the capital reached its bottom at the end of the third quarter of 2021, when only 2,750 apartments remained on developers’ price lists after a period of record sales. Since then, the number of available apartments has risen quite rapidly to 5,550 at the end of March this year. But now the tide is turning and supply is starting to fall again. This is due to a combination of several factors.
Long-term insufficient permitting of new construction
In the last 15 years, Prague has not once managed to permit as many flats as the metropolis needs for its development. According to expert estimates, at least 10,000 new flats should be permitted and built in the capital every year to cover the needs of the metropolis associated with, for example, population growth, demographic changes or housing stock renewal. However, Prague came close to this target only once, in 2021, when 8,000 flats in apartment buildings were permitted (9,500 if we count all flats including family houses, extensions, additions, etc.). The average over the last 15 years is 3,600 (or 4,800) dwellings permitted per year, less than half the number needed. And the positive news from the building authorities is not coming this year either. In April, for example, only 48 flats in apartment buildings were permitted for the whole of Prague, and in May only 17.
“Complicated permitting processes have long hindered flexible supply replenishment and are the main reason why our country has the worst housing affordability in Europe. It is also a major drag on our economy. At the same time, more than 140,000 flats are in the pipeline in Prague. With faster permitting and higher construction volumes, the prices of new flats could fall by up to 15%. And the state would gain billions in taxes,” says Michaela Tomášková, executive director of Central Group.
Part of the supply is being siphoned off by rental housing
Under the influence of sharply rising costs and reduced sales, some developers are turning to the construction of rental flats, or selling entire phases or projects to institutional investors, who then lease the flats. The expansion of the rental housing market, which, like the primary market, is suffering from a severe shortage, is certainly needed. Rental housing is sometimes even seen as a kind of self-sustaining mechanism that will improve housing affordability. However, it should be remembered that the rental market draws on the same set of building permits as the primary market and therefore projects that were originally intended for sale are directed into it. This means a further weakening of the supply of apartments for purchase, which may in turn put upward pressure on prices. The question is also whether this development will lead to an improvement in affordability, at least for rental housing. According to statistics, institutional investors are renting out their flats for an average of more than CZK 550 per sqm/month, which is roughly a third more expensive than the market average.
Part of the postponed demand is returning to the market
Another significant effect on the decline in the number of vacant flats is the growing demand for the purchase of new housing. Already in the first quarter of this year, there was an almost 20% increase in sales compared to the last quarter of 2022. In the second quarter of this year, demand became even stronger and 1,000 new flats were sold, which meant a quarter-on-quarter increase of 54%. It is evident that the shock and uncertainty of last year’s future development has largely worn off and people have already got used to the new situation. Temporary sales incentives, marketing bonuses and introductory prices with special payment terms in newly launched projects have also had an impact. The mortgage market has also recovered, where interest rates have stopped rising sharply and are expected to fall gradually. The lower interest rates, together with the easing of mortgage conditions, will lead to the return of a further part of pent-up demand and hence an increase in sales.
“According to our surveys, there is a huge potential demand in Prague. Around half a million people are considering buying a new apartment in Prague in the next 5 years, so we could very well see new sales records soon. We expect the main trigger to be a drop in mortgage interest rates to around three percent, which could happen within the next two years,” Tomášková added.
Insufficient supply may bring further sharp rise in housing prices
The low supply and the associated low volume of new construction may not only mean a renewed rapid rise in the price of new housing, lower revenues for the state, towns and municipalities in taxes and subsidies, but in combination with the decline in other segments of the construction industry may also lead to layoffs in construction companies and a decline in construction capacity.
The planned reduction of the tax rate on housing from 15% to 12% as part of the government’s consolidation package could help to revive new construction. The abolition of the DSTI on new mortgage loans may also contribute to some extent. However, a more significant drop in interest rates on mortgage and commercial loans will provide a more substantial impetus. However, the necessary conditions for a more noticeable start in construction production are the introduction of the new construction law, including high-quality implementing regulations, into practice and, above all, a substantial reduction in the prices of construction supplies.
“Central Group is ready to start the construction of up to 1,600 new apartments in 6 locations, but only if we manage to agree with the contractors on significantly better prices for building supplies. The prices have to go down by more than 10% compared to the critical last year,” concludes Tomášková.
