Last year, 7,450 flats were sold in Prague. It was 28% more year-on-year and it was the strongest year in modern history. The record demand, when apartments listed for sale were still disappearing on paper, led to some developers having nothing left to offer. The supply of new flats was the lowest in 10 years. With the current slowdown in sales, the market is gradually returning to normal functioning.
Enormous interest in housing in the capital, driven mainly by the desire to safely store their savings, favourable interest rates and surplus savings in households. The combination of these factors has led to the majority of residential projects in the capital selling before completion over the past two years.
“In recent years, it has been the case that almost all new homes have sold out ‘on paper’ or during construction. Previously, in the normal state of the market, only a part of the flats were sold during construction and some were sold after completion,” points out Dušan Kunovský, the founder and head of Central Group.
Slow permitting blocks billions in state budget revenues.
The slowdown in apartment sales is gradually returning the market to its long-term normal. However, the pace of permitting new flats has also slowed down in recent months. In October, only 71 flats in apartment buildings were permitted in Prague and in September only 16. That’s half the number from last year’s record-breaking year, and it turns out that last year was a bright exception. Meanwhile, faster permitting is badly needed in Prague to give new residents a place to live and erase the deficit from previous years, which already exceeds 30,000 apartments. There is also a need for new flats to have building permits and be ready for construction quickly when construction costs return to normal and the market recovers.
Yet there is nowhere to take. The number of flats in the pipeline continues to rise and now stands at a record 137,000. However, only around 3,500 are permitted in Prague annually on a long-term average, so it would take 39 years to permit this portion. But without systemic change, there is no chance of improvement.
Slow permitting is also costing the Czech budget billions in taxes. “Each new flat in Prague brings the state an average of CZK 1.5 million in VAT alone. Prague collects another CZK 250,000 in ‘voluntary’ contributions from investors,” Kunovský reminds us of the economic benefits of new housing construction. All 137,000 flats in the pipeline, with a total value of almost CZK 1.5 trillion, could bring the state over CZK 190 billion in VAT alone.
Three times more expensive mortgages have fundamentally slowed down apartment sales
There is a long-term shortage of new flats on the market, while demand for new housing is still high. Only with expensive mortgages and the current general uncertainty are people postponing their purchase decisions.
Mortgage interest rates, on which apartment sales depend, were still around 2% last year, but are now over 6%. The Czech National Bank has also tightened the conditions for obtaining a mortgage. The majority of new home buyers used to be able to take out mortgages, but now it is only a few percent.
In spring, which is traditionally the period of the strongest sales of new flats, the residential market is expected to revive. “It can be assumed that people will have overcome the current shock of the energy crisis, inflation and general uncertainty, which will boost their appetite to buy a new home or invest safely,” adds Kunovský. The most important impetus for a renewed boom in new home sales will be a significant reduction in mortgage rates and their approaching 3% per annum, which could occur as early as 2024/2025.
Source: Central Group
