Summer is over and Prague is busy again! Even before the summer, however, the market situation was already changing, with rentals gaining momentum while sales were not as fast as they used to be in recent years. At that time, almost everything that was advertised was sold, and this situation lasted until the beginning of spring this year (we are more or less talking about the time before the conflict in Ukraine). Things started to change with the rise in mortgage interest rates, which caused a gradual cooling of the market in terms of sales. During the spring I managed to reserve a house for sale in Lidman town quite quickly, but since then, i.e. since March, the drop in demand has been more and more noticeable, with some stagnation in the summer. That’s not to say that there have been no sales, but we’re definitely talking about a much slower process now than we’ve been used to for the last two years in particular. There are, of course, several reasons why there has been such a turnaround. But to understand everything, even for someone who is not very familiar with the subject, it is necessary to look back again a few months into the past.
First of all, it should be mentioned that interest rates on mortgage loans began to rise more noticeably at the beginning of 2022 in connection with the fight against rising inflation. The Czech National Bank thus had to stop lending so-called “cheap money”, which, among other things, caused the growth of the real estate bubble in the Czech Republic in the first place. Another reason for the rise in prices was one of the steps taken by the former government to abolish the tax on the acquisition of real estate, which accounted for 4% of the purchase price. In retrospect, it is difficult to judge whether this was a bad move or not, as the main idea behind this act was to support the economy after the first hit of the covid pandemic. However, it undoubtedly played its part. However, in the context of the ever-worsening national debt, the aforementioned inflation gradually began to increase, which had an impact on the prices of almost all goods. Rising inflation basically means that the same amount of money buys fewer goods. In other words, money loses value. And since the normal inflation rate used to be around 3% a year and suddenly climbed to double digits in a matter of months (as recently as August 2022, it was 17.2% – see www.cnb.cz), the CNB decided to pull the trigger by gradually raising the base interest rate at more or less regular monthly intervals. And here it is worth mentioning that after today’s meeting of the CNB Bank Board (it is Thursday 29.09.2022) the base interest rate was left at 7%, and the CNB wants to act against inflation until it is fully under control, which should mean taming the inflation rate to 2%. Thus, we are probably talking about staying in this state over the next year or two. If I were to summarise this in a nutshell, over the last two years we have gone from property sales at so-called auctions, where many people were overpaying by hundreds of thousands (and largely thanks to cheap mortgages) to a situation where mortgages are now noticeably more expensive, which has led to a fall in purchasing power and therefore a cooling of the market for property sales.
Another significant matter that has contributed to the change in property market conditions has been the onset of the ongoing conflict in Ukraine. And to make matters worse, the other thing to deal with has been a harsh rise in energy prices (electricity and gas). As an example, I can give one of my cases where a supplier raised my client’s advance payments from about 2.500,-/month to 12.500,-/month because the client went to Innogy as a Supplier of Last Resort after the collapse of Bohemia Energy. Specifically here we are talking about an increase of 500%, which for many can mean economic murder. Therefore, putting everything together, we can draw several conclusions.
The first is that the time to sell is generally getting longer because there are now noticeably fewer bidders responding to properties being sold. They generally finance either in cash. Exceptionally, they also use mortgages, but in this case it is usually for properties worth up to about 4.000.000 CZK or for mortgages where the interested parties were still able to pre-negotiate the loan on better terms, e.g. at 2%, which is not realistic today. Alternatively, we can also meet those who, despite the pitfalls of today’s times, still apply for a mortgage with an interest rate of around 6%, but there is really a minimum of such people… And along with this, I also meet another form of financing, which has recently become more and more common, namely the sale of a property in order to buy another. Here, many brokers can see the potential of gaining new business, as those interested parties who have not yet started selling and are only at the stage of looking for a new home, in the vast majority entrust the sale of their property to the broker who sells the one they would eventually like to buy.
But there is a certain pitfall here, because if you think about the possible effects in the longer term, brokers or self-sellers can get into a tricky situation, because if the property is approached again by those who first need to sell, then such a “domino” (meaning the linking of several deals on each other) may not lead to success. Last year, it was still relatively safe to bring two interdependent cases to a close, but as is obvious, it is a much harder discipline today.
The second conclusion is that property prices are stagnating and even working with advertised amounts can already be observed. This is due to the increasing number of properties for sale, in addition to weak buying power. However, this is also inherently caused by expensive mortgages, as many people have had their mortgages fixed for a certain period of time, some of whom have already or will be coming to the end of the interest rate fixation on their previously agreed mortgage. And if these individuals had a fixed rate of, say, 1.5% and are now facing or will soon face a rate of around 5.5% – 6%, we are talking about an increase in the amount of the payment in the order of several thousand per month (if not outright tens of thousands depending on the purchase price of the property in question). We can therefore expect to see a lot of new properties for sale gradually appearing on the market, but if demand is not high, then there will probably be a gradual lowering of prices in order to actually sell the property in question. If the seller has to get out of debt to the bank, for example, he will not have many other options, unless of course he is lucky and his property impresses a particular creditworthy buyer with something specific.
But since we are encountering other types of transactions in the real estate market, it is appropriate to write a few more lines on the situation with rentals. These have started to pick up again after a pause of about two years. They were basically stagnant during the crash and were getting cheaper, as is now the case with sales. Particularly in the big cities, many people needed to fill empty flats (remember that thousands of flats originally intended for short-term rental became available after the covid hit), and we could therefore see prices falling by thousands of crowns. The biggest breakthrough, however, came in recent months in connection with the war in Ukraine, which brought with it a wave of refugees from that region. Even before the war, prices had already started to rise slowly as life gradually began to return to the country as the pandemic faded. But it was only after the outbreak of the conflict that things really picked up. Therefore, just as it used to be common for twenty bidders to bid for one property to be sold, five of whom bid a substantial amount extra and one of these bidders won the auction, we now see this in the case of rentals. And this applies not only to the number of people who come to view, but even to the auction in question. What is really happening is that potential tenants are bidding higher amounts in terms of monthly rent in order to outbid others and increase their chances of signing a lease. It is therefore interesting to see how much and how quickly the whole market situation has turned around. In other words, property prices have been rising drastically over the last few years while rents have been cooling, whereas now rental prices are rising, purchase prices of properties being sold are stagnating and we may even be seeing a reduction, and in Prague we are talking about 10% – 15%. Personally, I have a fresh experience when I advertised an apartment for rent in a family house (it was a ground floor unit) worth 15.000,-/month + fees (i.e. in total it was about 18.100,-/month without internet). On Sunday evening I let the apartment out to the world and on Monday after lunch I had to take it off the offer through unceasing calls from interested parties. And within a week the lease was signed and the keys to the apartment were handed over. One might wonder how this is possible when there are no more crowds of people from Ukraine coming here. That is true, but there are those who have settled in the Czech Republic with the understanding that they will not return home. And now these people, who have been using asylum either in institutions designed for this purpose or with citizens of the Republic, want to find their own places to live, which logically means a noticeably increased demand, i.e. high prices. And we are now talking purely about renting, without calculating the cost of utilities.
In conclusion, the question is, where is this all going? Well, it is hard to say, but even if we are in a worse economic situation now, there is always growth again after that. We will probably have to cut back in some way for a while, but as an eternal optimist I believe that one day better times will come again. Personally, I just hope it will be sooner rather than later. One thing is certain, however, and that is that we have been experiencing extremes in recent years. But, as in any industry, real estate is a normal economic sinusoid, where for a while properties go on sale, but then demand goes into decline. This is the case for both sales and rentals. But the main thing is not to lose your mind, because even if it is not every day that is bright, with the right approach in the given market circumstances it is possible and of course necessary to do the absolute maximum for clients. Thinking about the right sales strategy is definitely in order, but the most important thing is to communicate properly and honestly with everyone. The days of making sales easier have been gone for a while, but that doesn’t mean it can’t be done. There is no such word in my vocabulary, so if perhaps you too are struggling with real estate matters and are not sure how to properly grasp the issue at this time, drop me a message or give me a call and together we will find the most ideal solution. I will make sure that you do not have to worry at all! Have a great day!