Many factors have to be taken into account regarding the place of the property market in Czech Republic in 2009. Then there are the US/UK housing markets, the global credit crisis, the Czech wages versus housing prices, the overall health of the Czech economy, rents versus housing prices and EURO membership. News
This is the second part of the series. Part one examined housing markets in the United States and the UK, the global credit crisis and the Czech wages versus home prices.
Economic Health Overall
In 2007, the Czech economy grew by 6.6%.
For the Czech Republic, growth figures for the second quarter in 2008 have been upgraded to 4,6 percent year on year, from the previous estimate of 4,5 percent, which is lower than 6,8 percent in the previous quarter. The last two quarters are also expected to contract GDP. For 2008 as a whole, expectations should fall by 5%.
This might be better than your Western neighbors – the eurozone economy contracted recently by 0.2 percent quarter-on-quarter – but is still a sign that Eastern Canada is not invulnerable to the problems of western economies, affected by a storm of financial market losses and steep food and fuel bills.
The 2009 estimates range from 0.8 to 1.2 per cent and are even lower by the last revision of this report in 01/2009.
"Our great advantage is that we were at the peak of the economic cycle last year (2007), and this year we have expected the slowdown, and what's happening will be a greater slowdown (than expected)," said Tuma.
Although the trend can be seen declining over the last three years, it is certainly much healthier than recessions that are either in full bloom or on the horizon in Western countries.
On the other hand, few people know that the Czech Republic was one of the world's six biggest industrial powers before the Second World War and the events that took place until 1990 and economically outperformed countries such as Japan, Italy and Spain. The country was once on an equal footing with France, which may show where it aspires.
Rent/Home Prices
If we look at the relationship between real estate prices and rent, in most parts of the country it remains good, while Prague, Brno and now Ostrava have decreased overall. While reliable indicators for lending are not always based on income potential pricing, transaction costs and risk premiums all justify fluctuating housing prices differently from rent.
When we look at various areas, we can only see a small increase in rents in Prague, with property prices rising again. The gross rental returns have thus been reduced to between 3 and 5 percent. In Brno the situation is similar, with increases in the price of property not matched by increases in rates from 2005 to 2007. Current gross rental rates are also between 4 and 6 percent and the highest in small studio apartments. Outside cities like Zlin and Olomouc yield slightly higher 5 to 7 percent due to a moderated increase in property prices.
Our 2009 expectation is that rents will begin to increase. This is because of less active home purchasing and a reverse migration trend as Central Europeans who live in Western economies and make better money come closer to home as those economies slow down.
In view of the above, we expect gross rent rates to grow at least 1 to 2 percent in major centers such as Prague, Brno and Ostrava in 2009. This will be a big boon for existing property owners to see their cash flow improved.
Admission to the EURO
What will happen with property prices when the Czech Republic joins the EURO currency is highly anticipated. This date was originally targeted in 2010 but recent statement shows that the proposed state budget contains conditions which could delay Czech Republic's fulfillment of the Maastricht criteria until 2012 or 2013.
The move to EURO in other countries has led to an immediate price increase, but much of the price gain is considered already priced in the Czech market.
With regard to exchange gains, the current Exchange Rate is approximately CZK 24.5 for 1 euro as of the first version in 09/2008 but has been reduced to approximately CZK 27.5 as of this update 01/2009. The CZK gain exceeded the most optimistic expectations, including former Prime Minister Jiri Paroubek, who in 2007 predicted that when the Czech Republic joined EURO in 2012, it would reach a rate of 25 CZK/1 EURO.
Will the trend continue or can we expect a stable exchange?
The continued overall upward trend in the value of the CZK indicates growth in GDP and inflation internally versus European neighbours, although not to the extent that we seen it in 2007/2008.
The export-led economy is now under considerable pressure to stop CZK's appreciation of the importing companies' currencies. However, the overall trend will continue to strengthen the CZK against other major currencies such as USD, Euro and GBP, because the global slowdown and consequent contraction in the Czech economy will prevent the CZK from making further large gains.
Investor speculation was a major factor helping to create real estate bubbles in western countries. Outside Prague, foreign investment is extremely limited, representing only a fraction of the global market.
Czechs have not typically invested in property other than their own residence. Although Czech professionals and companies purchasing investment property overall saw a growing trend back in 2007, it was very limited and not a significant contributor to the rise in housing prices. Had the days of easy credit continued for a few years, we would surely have seen this type of investment accepted much more and a more potential collapse.
Concluding
Due to all of the above factors, our professional view is that 2009 will be a year of property growth that basically corresponds to the GDP growth of 0 to 3% in the whole (excluding older communist construction apartment blocks). We expect stagnant or perhaps small declines in Prague and Brno in general. We expect a low growth range of 2 to 4 per cent for smaller centers that have not seen explosive growth such as Olomouc and Zlin, as other areas have not seen an explosive growth. Ostrava growth is expected to fall in the middle somewhere.
On a very positive side, we expect to see the stagnation trend break in the last few years in terms of rent in 2009. Increasing rental income should be observed by less purchasers with a still healthy work market and reverse migration in all centres, particularly in the major centres, which have a less exportive and diversified economy, such as Prague and Brno. In total, rents in the Czech Republic will rise by 5% and in those areas up to 10%.