Real estate prices are rising despite the ongoing crisis

The past year, together with the global epidemic, also brought a significant drop in the performance of the world economy. Despite the fact that the Czech economy has shown long-term growth in gross domestic product in recent years, the Ministry of Finance reported a decline in development for 2020 of 6.1% in January this year compared to the previous year. Many expected that the economic recession would cause real estate prices to fall, as they did after the crisis in 2008. However, there was no decline, quite the opposite.

Although the situation in 2008 and 2009, when the crisis slowed down GDP growth and brought about a decline, is similar in some respects to current developments, from a real estate market perspective, this is a very different situation. Twelve years ago, the bursting of the price bubble in the real estate market caused an unprecedented recession, which, of course, led to a sharp drop in their prices. At that time, therefore, the crisis itself was triggered by the financial and real estate markets, and people's confidence in these markets, especially the real estate market, declined for some time. At present, however, we look at real estate as a simple investment and the interest in it therefore depends on the cross-sectional state of the economy, people's incomes and savings and their personal preferences.

Measures of the Czech National Bank and inflation expectations

There are several reasons why real estate prices fall short of expectations. Analysts describe the Czech National Bank's measures to combat coronavirus as one of the main reasons. It reduced the key interest rate repo rate from 2.25 percent in February to 0.25 percent in May. There was also a reduction in the other two rates, which now reach a record low level, namely 0.05 percent at the discount rate and 1 percent at the Lombard rate. This has led to a fall in interest rates on mortgages, which have become more affordable for people. According to the Kurzy.cz portal, the average rate was a record 2.07 percent at the end of January 2021.

Another reason is the already mentioned performance of the Czech economy in the period before the coronavirus crisis. With the onset of the crisis, one can expect an early rise in inflation, against which people with sufficient savings are trying to insure themselves in some way. And real estate is an ideal stable and long-term profitable investment with a low level of risk. Investors therefore prefer them to term or savings accounts. In addition, in September last year, the government abolished the property acquisition tax. Although this measure might seem to lead to lower prices, the resulting effect has been an increase in demand for real estate and thus a rise in prices.

The Czechia has been plagued by a lack of housing for a long time

The last reason for the increase in prices is the fact that the Czechia, and especially Prague, has been struggling with a shortage of housing units for a long time and, according to Deloitte's analysis, is more average than the rest of the European Union. In its work dealing with the development of housing on the European market for the period of 2019, Deloitte states that at that time the Czechia had 465.2 housing units per thousand inhabitants. Regarding newly completed residential buildings, in 2019 3.41 dwellings per thousand inhabitants were completed in the Czech Republic, in total approximately 36.4 thousand dwellings. At the same time, the fastest pace of construction is in Luxembourg, with 11.45 completed dwellings per thousand inhabitants, which is twice or more compared to other countries.

The combination of all the above phenomena creates ideal conditions for the growth of housing prices despite the ongoing crisis. According to the Czech National Bank, prices are overvalued by an average of 17 percent, in selected localities and in investment flats by as much as 25 percent. In the future, we can expect a further increase in prices, which, according to Jan Křiváček, CEO of the real estate company Homeland.cz, will mainly concern more premium real estate. "Real estate as an investment opportunity is a matter especially for more affluent clients. The initial investment pressure pushing up price growth for less lucrative properties can be expected to slowly subside due to the ongoing epidemic situation. However, in our experience, exclusive flats and houses in attractive locations, especially in Prague, will not be affected by the fall in prices," comments Křiváček on the current situation.

However, he adds that in the long run, the growing trend of real estate is attracting more and more investors. "Above all, they are changing their investment strategies on a larger scale and investing in the purchase of real estate for the purpose of future returns. From this point of view, no dramatic changes can be expected in the coming years, especially in connection with the slow construction of new flats. However, the current generous supply of mortgages may be slowing down and rising. Therefore, if people are thinking about investing in real estate, now is the ideal time," says Křiváček.

The decline in demand is pushing for rental prices

However, a different situation occurred in the rental housing market. While real estate sales are enjoying prominent investment opportunities, the crisis has had a full effect on rents. Despite the government's measures, a large number of people have lost a significant part of their income, the future is marked by uncertainty, population movements have been reduced and the demand for sublease housing has fallen rapidly. In most cities in the Czech Republic, this has led to the stagnation of long-term rising rental prices. According to Deloitte's analysis, rental housing prices at the end of last year averaged around 220 crowns per square meter in regional cities and 180 crowns in the rest of the country.

An exception, however, is Prague as a city heavily affected by the outflow of tourists. Thanks to the pandemic, thousands of flats were released for long-term rent, which their owners used to provide short-term rentals, especially to tourists. Thanks to this, the areas affected by Prague 1 and Prague 2 are the most affected, followed by other parts forming the wider center. This led to a sharp drop in rental prices, which reached an average of CZK 330 per m2 at the beginning of last year. At the end of the year, the decline was already below the level of 300 crowns per square meter, and a further decline can be expected in the near future.