Czech inflation and loans are behind low construction of flats, older flats will be more expensive

7 August 2023

Despite a one percent year-on-year increase in construction output in June this year, as reported today by the Czech Statistical Office (ČSÚ), the number of housing starts fell by 18.3 percent year-on-year. 2,469 flats were completed, up four per cent year-on-year. According to experts, the reduced housing construction has been evident since last spring. It is mainly caused by worsening access to financing due to high inflation and bank loans. However, the high price of building materials and construction work is also to blame. Reduced construction will also have an impact on the rising prices of older apartments, experts believe.

“Residential construction unsurprisingly continues to decline. The trend of its slowdown has been evident since last spring, when investors started to put the brakes on their plans due to the worsening economy and high prices of building materials. This will undoubtedly stabilise the whole market and also create pressure for cheaper inputs,” said Bank Creditas chief economist Petr Dufek.

The reduced residential construction is mainly due to high mortgage lending, said Martin Gürtler, economist at Komerční banka. Difficult financing is the main reason for the cooling of the housing market, he said, and residential construction may not be a profitable investment for developers. “According to available information, a number of developers have reduced construction due to the current low demand. Given the length of the permitting procedure, this will not contribute to improving the poor housing situation in larger cities and will lead to a resumption of property price growth once demand recovers,” Gürtler added.

According to Marcel Soural, chairman of the board of directors of the developer Trigema, the unavailability of financing and the associated reduced demand for new apartments will put pressure on prices in the future. “Market reports indicate that we are going to see significant global growth in property prices over the next ten years. For example, according to a study by the foreign organisations ifo Institute and the Institute for Swiss Economic Policy (IWP), the average annual nominal growth rate of property prices will be nine per cent and even around 15 per cent in Eastern Europe,” Soural added.

According to František Brož, spokesman for Bezrealitky.cz, the fewer new flats will be available, the higher the prices of flats on the secondary market will rise. “We believe that there could be a significant diversification of prices on the market of older flats now. Flats in good locations, after renovations and in good condition will start to approach new buildings even faster in their prices, especially if they are in central parts of cities,” Brož said.

According to Brož, some flats in prefabricated buildings that have been maintained for a long time and their owners have managed to invest in the building will also become more expensive. According to Brož, flats in worse locations that require major reconstruction, without which they are often uninhabitable, will continue to decline in value.

According to Ondřej Boreš of Velux, high real estate prices, inflation and mortgage interest rates are more likely to motivate many people to renovate existing older properties. Renovations should lead to greater sustainability and lower energy consumption, he believes.

Source: ČSÚ and ČTK

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