(1) Higher demand than supply: The price of new apartments has been influenced, especially in the last two years, by a number of very diverse factors. The first cause of the current prices of new buildings is the higher demand for apartments and, at the same time, the lower supply of new apartments. It sounds trivial, but neither higher demand nor lower supply occurred by chance. They both are the result of other influences. Higher demand than supply is then the first of twelve reasons why we have high apartment prices in the Czech Republic.

Prague: Average sold apartment in the spring months of 2018
Area: 64 m2
Price: CZK 6,440,000
Unit price: CZK 97,900 per m2
The average offer price of vacant apartments in Prague’s developer projects resumed its rise in the spring months and reached CZK 99,400 per square metre, which means a year-on-year increase of 12%. In March and April 2018, 899 apartments were sold for about CZK 7.6 billion in the Prague development market. Look at the development of apartment prices on the Prague residential market in more detail.

(2) Economic boom: For the last three years, we have been living in an extremely prosperous period, there is no unemployment in our country, income is growing throughout the country and some regions, such as Prague, are among the richest regions in Europe. Income grows across the entire society. Many people are not afraid to spend and, at the same time, want to invest or save money in real estate.

(3) Fast alternation of extremes: The period of boom between 2006 and 2009 was quickly replaced by a period of distrust of people in the future between 2010 and 2013, and this was quickly replaced by the boom period from 2015 onwards. In short cycles this causes an extreme solution to the need of housing. Therefore, the periods change rapidly – typical for the year 2007: “stock up while we can”, typical from 2009 to 2012: “postpone the purchase for a better time”, typical from 2016 to 2017: “I will buy if there is anything to buy”.

(4) Low interest rates: From 2010, interest rates began to fall until they reached their historic bottom in the second half of 2016. They have been holding their record low level, mostly between 2% and 3%, for more than 5 years. When people stopped to be afraid to buy real estate three years ago, higher demand hit a period of historically the lowest rates. In addition to people who postponed the purchase due to fears of the future and who needed to buy residential property, there is another large group of people who did not need to buy a housing property but wanted to invest. As mortgages were extremely cheap, investors were not afraid of selecting this financing option. Therefore, demand increased very rapidly and as there was no big surplus of apartments for sale on the market, the apartments were gradually sold out.

(5) Demography: The current housing market is basically influenced by two population waves – a post-war baby boom, with 2 million children and children of this generation, 1.75 million of the so-called Husak’s children. In the first group, life expectancy was prolonged significantly and in the other group, the age in which they started or start families increased. This has dramatically increased the number of apartments occupied only by one- or two-member households and it puts pressure on the need of more apartments.

(6) Changes in people’s behaviour: For a long period, people have moved from the country to the cities, and the cities are not responding sufficiently to this pressure. 100 years ago, emerging industrial districts also needed residential buildings for their workers but nobody deals with such things today. Many of us live in a one-member household. And it is not just the case of old people for whom it can be a natural condition after the death of the spouse. We went through the singles era, we postpone the time of starting families. Since World War II, divorce rates have increased from 6% to 50% in the 1970s, and that situation is still ongoing. We stopped living “multigenerationally”, even in family houses. Once again, all this puts pressure to have more housing property than previously needed.
Who buys apartments in Prague? Mostly middle-aged people in development projects. A typical buyer in Prague is between 31 and 40 years old, it is more likely a woman of Czech nationality who buys an apartment in a development project as a natural person. What other specific features does the Prague real estate market bring?

(7) Changes in the market caused by the state: Due to its administrative and uncoordinated interventions over the past 15 years, the state has repeatedly evoked the need for people to react to such planned changes. In 2007, the increase in VAT for housing properties drove demand to the extreme and the prices of apartments rose up to 20% per year. A similar situation occurred in 2016, when three major changes of rules came together at the same time and affected the entire housing market. It was a change in the immovable property acquisition tax (the buyer began to pay it), the new Consumer Credit Act that for the first time in 20 years completely changed the functioning of the mortgage market and, at the same time, toughened the conditions for providing mortgages required by the Czech National Bank’s regulations.

(8) Political populism: Municipal elections in 2014 caused part of the political representation to be replaced by a purely anti-developmental political representation, especially in Prague and partly in Brno. After 2014, the construction stopped and all approval processes were significantly prolonged. It was at this time in 2015 and 2016 that the apartments on the older apartments market were quickly sold out and the construction of new dwellings stopped where it was needed, or demanded, the most. Nowadays, politicians bend over backwards to assure that they will “provide affordable housing for young people”. However, no one has proposed any system measures up to now.

Interesting fact: Over the past 10 years, the period of approval for the construction of new housing properties increased from the normal two or three years to today’s 8-10 years.

(9) Tax increase: Since 2007, there has been a gradual and non-systemic increase in various taxes (especially VAT) on new dwellings or in the rules for calculating the area of new dwellings – which results in higher taxes to be paid to the state from the “new apartment”. The tax for one dwelling has increased from 4 to 6 times over the past 11 years, depending on the size and type of the dwelling. Nowadays, it is common that the tax paid by the buyer, included in the apartment price, exceeds CZK 1 million for every new apartment of 70 m2. We can openly say that who profits the most from the construction of new apartments, considering all elements included in the construction, is the state through its taxes. At this time, it is a very strange situation because in the Czech Republic we have the worst access to housing in Europe.

(10) Approval processes: Over the past 10 years, the approval period for the construction of new dwellings has been extended from the normal two or three years to today’s 8-10 years. The administrative deadlines are not being met and all this increases the number of new apartments missing on the market.

In recent years, there has been a growing debate about the need to recodify public building law in the Czech Republic, and not only among the professional public. In the autumn of last year, the Ministry for Regional Development published the basic theories on which new building regulations should be based in the future, and which are now under discussion. The fragmentation of building regulations and the need to obtain a wide range of statements and binding, often uncoordinated, opinions of many affected entities during the territorial and construction procedure contributes to the current unfavourable trend when the construction of commercial and private buildings is prolonged not only by months, but in many cases by years.

(11) Technical regulations for the construction of new apartments: In the case of new dwellings, we cannot forget the impact of ever-increasing standards and regulations. De facto, it is impossible to build low-standard apartments that could be cheap or cheaper. Because from the technical point of view, the houses have to be made technologically very comfortable.

(12) Lack of rental housing: The supply of rental apartments in the Czech Republic is limited, not even the state supplies them, and there is nothing similar to what is common in Western Europe, where the rental apartments portfolio is owned by pension funds, insurance companies or hedge funds. Nothing like that is working in the Czech Republic at the moment. All supplies are actually in the hands of small apartment owners who buy apartments rather for retirement or for children – but for now, they are just renting them. Due to the gradual privatisation of the housing stock, the Czech Republic reached an extreme situation where more than three quarters of the apartments are in personal ownership.