The situation on the real estate market is tighter year by year. There is a shortage of real estate and their prices are constantly rising. This year – thanks to a sharp rise in interest rates and a renewed tightening of the conditions for the provision of mortgage loans by the CNB – there will first be a relatively significant decline in demand for the purchase of real estate. And so the usual question of recent years arises: can we expect real estate prices to fall? My answer is quite clear: there will be no fall in property prices. What reasons lead me to this conclusion?
1. Slow permitting of new constructions – Czech “evergreen”
In the length of the building permit process, despite the gradual amendment of building regulations, we are still at the bottom of the world rankings, somewhere around 160th place, in the society of economically backward countries. E.g. You can wait more than ten years to process a building permit for the construction of an apartment building in Prague. In the long run, we have a situation where barely half of the new flats that the market would take up start to be built annually.
2. Low offer of real estate to buy
Due to low interest rates (especially in the last two years) and also due to the covid-supported trend of saving real estate as a safe investment tool, which has been adopted by many investors, the supply and demand disparity has increased significantly. High demand has pushed prices up at breakneck speed. This created a major shortage of apartments, houses and construction land on the market.
3. Dramatic rise in prices of building materials and their shortage
The shortfall in retail chains and the rise in the price of energy and emission allowances led to a relatively massive rise in the price of some building materials. These are practically all raw materials and thus also products made from them. In the last year, it has often been a question not for how much, but whether you can procure the given material on the market at a certain moment. At the same time, construction work prices rose. All this, of course, means a continuous increase in construction prices. Obviously, developers’ margins are not endless. And because I don’t know of anyone who can negotiate a fixed construction price for a period longer than a few months, the increase in costs must be reflected in the prices of new buildings. As with other commodities, the prices of older real estate are linked to the prices of new buildings. Therefore, if the price of new buildings rises, so does the price of older real estate, although this may not always be the same rate.
4. Difficult availability of mortgage loans vs. rising rental prices
Less affordable mortgages are sure to drive a lot of people into rental housing. Quite logically, this (even with regard to the consequences of the migration wave from Ukraine described below) will lead to a relatively significant increase in demand for real estate rents. This will push rental prices higher, definitely faster than real estate prices rise. This will make rental properties even more interesting for investors, and with a steeper rise in rental prices, it will again make more sense to buy your own home on a mortgage, as rising rental prices will be closer to mortgage payments. Overall, therefore, after some shorter period in a number of months, we can expect increased interest in buying real estate.
5. War in Ukraine
The war in Ukraine is manifested in several areas of the market:
a) A sharp increase in the prices of building materials originally imported from Ukraine or Russia, such as wood, steel and their products (fibreboard, OSB boards, steel reinforcements for foundation boards, etc.) again means an increase in real estate construction costs. Among other things, the outcome of the war is the outflow of some construction workers. The lack of building materials will certainly manifest itself even after the end of the war, as soon as the restoration of destroyed buildings and infrastructure begins. This can have an impact not only on the prices of building materials, but also on the capacity of construction workers.
b) The influx of refugees from Ukraine, where the impact on:
– The rental housing market, which fell sharply during 2020 due to the Covid-19 pandemic due to the cessation of tourism and thus virtually zero demand for short-term accommodation, for which a relatively large proportion of real estate in tourist attractions was used in the Czech Republic. As the vast majority of property owners for short-term leases changed their intention and provided these properties to the medium-term rental market, there was first a significant excess of supply over demand, associated with a decrease in the average rent. During 2021, however, the situation on the rental housing market stabilized relatively and rental prices gradually returned to their previous level. Currently, the demand for rental properties has risen sharply – and with it, prices are rising. Rental apartments in the market are declining dramatically, which results in rising rents. To date, I have found only about 7,200 houses and flats for rent on the most well-known real estate server, which is really sadly low during such a large migration wave.
– The real estate market to buy, facing the migration crisis will affect in two respects: first in the form of increased interest in investment apartments for rent, and then in the further rise in prices, which will be caused by the demand of Ukrainian families, who eventually decide to stay in our country permanently. We can now find on the market about 25 to 30 thousand apartments and houses for sale. Some refugees who decide to stay with us will want to buy their own real estate. From all this it can be deduced that the supply on the market can easily fall by half. Ultimately, this will increase the shortage of apartments and houses on the market, which is certainly not a prerequisite for their prices to fall.
So what is the conclusion?
Real estate prices can certainly not be expected to fall this year or in the years to come. In the next few months, the market may stagnate a bit. However, this will be reflected in the length of the sale period, but not in the fall in prices – there is no reason for investors to panic or to excite potential buyers of an apartment or family house. The real estate market has a relatively long inertia and there are no rapid changes. For the reasons described above, there will be a gradual, though perhaps not so dizzying, increase in prices, both for properties sold and rented. Sales prices in Prague and Brno will certainly grow the slowest, and the fastest in localities with the lowest prices, such as in the Ústí nad Labem or Karlovy Vary regions.
Housing trends
As property prices and operating costs increase, the criteria for choosing housing change. People are looking for properties with less usable area and more and more distances from big cities. This also leads to the gradual settlement of municipalities with zero civic amenities, which was previously one of the main criteria in choosing a future home.
Recommendation: how to finance the purchase of real estate?
I recommend to people whose mortgage interest rates end this year to fix interest rates for a year and to arrange them ad hoc according to current developments. For these reasons, they would not have to help themselves with the sale of existing real estate if renting was an alternative housing option for them – on the contrary, they would encounter even higher prices over time when they intended to buy real estate. However, if people have a big problem with repaying the loan, I recommend first consulting the lending bank regarding the possibility of deferral or distribution of installments. If even this option is not a solution for them, I recommend selling the property, as it will certainly monetize it at a significantly higher price than the price they bought it years ago (on average by 30-50%), – they will repay the loan completely and they will still have a lot financial amount.
Source: Statement by Roman Weiser, Director of Development and Construction at BIDLI holding
