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Czech Republic house price news: low affordability issues, prices up 8.7%

Housing in the Czech Republic has become the least affordable in Europe

Housing sales and prices

Housing in the Czech Republic has become the least affordable in Europe. Deloitte, the international consultancy, carried out a study on the percentage of average annual income required to purchase a home in European countries, and Czechs need 10.9% of their average annual income to buy a home. They are followed by citizens of the UK, who need 9.8%.

Housing prices in the Czech Republic rose by an average of 8.7%, year-on-year in Q3 of 2018; this is well above the average price of 4.3% across the rest of Europe, according to figures released by Eurostat, the statistical office of the European Union.  That makes the average price growth in the country almost twice as much as the rest of the EU average.

All indications are that prices hikes are slowing down, especially in the larger cities like Brno and Prague, where prices grew by 24% in the same period of the previous year. Stagnating or falling prices have also been observed in other parts of the country, such as Moravia-Silesian, Olomouc, Vysocina, Zlín and Ústí regions.

The average cost for a new apartment in Prague is now CZK 100,000 per square meter and it seems that prices will continue to grow through 2019.

Contributing factors

An insufficient supply of new housing in all Czech cities is directly related to the administrative obstacles which hinder new building permits. The country has very low taxes, which according to some is a contributing factor to the surge in institutional investors seeking to enter the market by acquiring large portfolios.

Many of the new property developments in the Czech Republic are intended for student accommodation and for rental housing; leading to a shortage of apartments for sale.

Another crucial factor in the price increases are the long wait for mortgage approvals. This is due to a tightening in regulations, by the Czech National Bank from October 2018.  The approval process now takes longer, with a tighter rein on how much money can be borrowed. The loan to value cannot exceed 80% of the property value and the monthly repayment to the loan cannot exceed 45% of the monthly income. Some banks will loan 90% of the property value, but at a higher interest rate.

EU and non-European citizens are eligible for loans, while non-EU citizens will need a permanent residence permit and a working history in the country. EU citizens can use their income from their home country as a qualifier for a loan.

Rental yields

Rental yields are considered to be low in Prague at approximately 3.6% for a 70 m2 and 3.7% for a 120 m2 apartment.

According to figures published by the Delloitte Property Index of 2018, Prague’s rents are currently at about €13.1 per m2, placing it above other major European cities such as Milan, Frankfurt or Vienna.  The second largest city in the Czech Republic, Brno, had an average rent of € 8.6 per m2, while their analysis showed that the cheapest rents are in Ostrava in the north-east of the Czech Republic, with an average monthly rent of € 6 per m2.

Careful consideration should be given to currency fluctuations by foreigners seeking yields in the Czech Republic.

Even though 90% of the Czech population still lives in the older rent controlled housing, the Czech law is pro-landlord.

Rents can be freely agreed for houses of vacant possession and the parties can freely negotiate the contract length. No maximum deposit is required. At the end of the contract the tenant must vacate, no notice need be given and they won’t qualify for substitute housing.

Purchasing costs

Rental income is taxed at a flat rate of 15%, with deductible income-generating expenses, from the gross income, of up to CZK 600,000.

Capital gains on fixed properties are included into the aggregate taxable income and taxed at the same rate.

Inheritance tax is not applicable to close family or the spouse.

Residents of the Czech Republic are taxed on their worldwide income at a flat rate of 15%.

Transaction costs are moderate at 7.51% to 10.02% of the purchase price, all payable by the buyer. Up until November 2016, 4% of this amount (the real estate acquisition tax) was paid by the seller. Many buyers scrambled to purchase before the implementation of this law, and this was one of the main reasons for the increased demand, that pushed up property prices.

Conclusion

The Czech Republic has enjoyed steady economic growth over the last few years. According to official figures from the Czech Statistical Office (CZSO), it expanded 2.8% in 2016, 2.9% in 2017, and 2.4% in 2018, while the IMF projects that real GDP growth in 2019 will be at 3.1%.

After country, fell into a recession in 2012-2013, due to weak domestic growth but 2014 saw a growth of 4.5%. This robust growth is attributed to higher consumer spending and the continual growth of the property market.

The Czech Republic has managed to keep a low budget deficit, one of the criteria for acceptance into the Eurozone. According to the CZSO it has kept to well below the 3% EU limit and had a deficit of 1.3% in 2013, 1.9% in 2014, and 0.6% in 2015. This trend is expected to continue in 2019 too.

The inflation rate at the end of 2018 was 2.1% and unemployment at 2.2%.

The low interest rates, strong economic growth and the increasing real wages (8.5% in the third quarter of 2018) will continue to boost housing prices, even though many hoped that the bank regulations would cause a decline.

Since there is no pressure on the market, prices are not likely to fall as sellers are not willing to reduce their price in order to sell. According to those in the real estate market fewer properties are changing hands, since buyers are unable to meet the demands of the sellers.

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Rita Monteiro

Rita – After graduating from NYU with a master degree in history, She was also a columnist for many local newspapers. Rita mostly covers business and Technology topics, but at times loves to write about reviews as well.
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