The market for new flats has recovered significantly. In the first quarter of this year, almost 2.5 times more apartments were sold in Prague than in the same period last year. However, the supply of new flats is lagging significantly behind and prices have therefore started to rise again. This is despite the fact that the number of flats that investors plan to build in Prague is constantly growing. According to an analysis published today by Central Group, the largest residential builder, the number of apartments in the capital has already reached almost 145,000. However, due to the long-standing dysfunctional system of permitting new buildings, they are not being put on the market in sufficient numbers.
The first quarter of this year brought another significant recovery in demand on the Prague market for new flats. Roughly 1,600 apartments were sold, almost 2.5 times as many as in the same period last year. A significant impact was mainly due to falling interest rates and improved availability of mortgages. The January reduction of VAT on new flats from 15% to 12% also played a positive role in boosting demand, which saved buyers around a quarter of a million crowns on the average Prague flat.
By contrast, the supply of new flats on the Prague market remains significantly insufficient. The number of new flats for purchase has been stagnating at around 5,500 for more than a year and even fell slightly towards the end of the first quarter of this year.
“Thanks to cheaper and more accessible mortgages, the demand that was postponed for two years is returning to the new apartment market and the number of apartments sold is growing significantly. It has even returned to pre-pandemic levels. However, the sharply increasing demand is running into very limited supply due to dysfunctional permitting, and prices of apartments on the market are therefore already starting to rise slightly again,” says Dušan Kunovský, founder and head of Central Group.
The number of flats in the pipeline has already grown to 145,000, but they are failing to reach the market.
The supply of new flats for purchase remains insufficient despite the fact that the number of new flats that investors are planning to build in Prague is constantly growing. According to the current analysis of the largest residential builder Central Group, the number of apartments has increased by about 5,000 year-on-year to almost 145,000.
However, the problem is that these flats are not coming to the market in sufficient numbers due to the dysfunctional system of permitting new buildings. In the long term, only around 5,000 of them are permitted annually, while the annual need of the capital is at least twice as high. Therefore, the housing deficit is growing rapidly in Prague. Only since 2006, when the Czech Statistical Office has been publishing data on permitted flats for Prague, Prague’s housing deficit has increased by more than 85,000 flats.
The upcoming flats could bring housing for 300,000 people and 165 billion in taxes.
Meanwhile, faster permitting and construction is in the state’s strong economic interest. At current prices, the value of all the apartments in the pipeline exceeds CZK 1.5 trillion. At a 12% rate, the state could raise over CZK 165 billion in VAT alone. Tens of billions more would be brought to the capital in the form of the recently introduced contributions, i.e. “voluntary” contributions of investors to the city.
The 145,000 flats in the pipeline could also provide housing for around 300,000 people and thus significantly help to solve Prague’s housing crisis. Central Group’s analyses also show that due to slow permitting and low construction volumes, prices are unnecessarily higher by at least 15%, making housing less affordable.
The new building law – a light at the end of the tunnel?
The tragic situation with the permitting of new construction was promised to be solved by the new Building Act, which is due to come into full force on 1 July. However, mainly due to a large number of changes, as well as the late introduction of implementing regulations and digitalisation, there are a number of doubts and concerns as to whether a short-term collapse of the permitting system will occur once it is put into practice. Therefore, the system needs to be monitored and evaluated very closely after its full launch in order to debug the ‘birth pangs’ as soon as possible and minimise any damage. The Czech Republic cannot afford any major collapse and further delays in construction permitting.
“The new Construction Act, although it does not meet the original high expectations after the last approved amendment, still has the potential to bring a number of positive things to the approval process. And digitalisation is also absolutely essential. So let’s all keep our fingers crossed that the introduction of the new Building Act and digitisation into practice will go well and any minor problems at the beginning will be overcome as soon as possible”, concludes Kunovský.
Source: Central Group analysis, May 2024
Chart 1 – Number of apartments in the pipeline in Prague between 2017 and 2024
Chart 2 – Graph 2006 to 2023 showing a deficit of 86,998 flats
