The Czech Republic is experiencing the biggest drop in housing prices in the last decade. The drop of about three percent on average, which Eurostat mentions in its analysis, is not only about sellers of older apartments.
Contrary to the original estimates of experts from the real estate market, who predicted continued moderate price growth or stagnation for new apartments, even developers are starting to retreat from prices.
According to newly published data for the third quarter of this year, the average selling price in Prague fell. In three months, new apartments became cheaper by more than four thousand per square meter. This is the most significant quarter-on-quarter discount of new buildings in recent years.
Compared to previous months, when development companies only attracted customers to marketing events, such as apartment furnishing, a kitchen unit or a free parking space, real discounts on the sales price of real estate are beginning to influence the drop in prices.
Up to ten percent off
“Interest in new apartments is not increasing, or even decreasing. Developers respond to this with various sales promotions or correction of the prices themselves. I don’t really expect the situation to change significantly in the coming months,” says Petr Hána, director of the real estate and construction department at the consulting company Deloitte.
According to the general manager of Skanska Residential, today the developer’s discount usually rises to two to ten percent of the sales price.
“I am convinced that if a person interested in purchasing an apartment comes to the developer and proves that he has secured financing, either through a mortgage or from his own resources, he will negotiate good terms,” says Petr Michálek.
In the case of an apartment that costs ten million crowns, just a two percent discount would mean a discount of 200 thousand crowns.
Compared to Prague, on the other hand, new buildings in Brno managed to increase their prices very slightly. On average, a square meter came to 124,700 crowns. Quarterly, according to Trikaya’s analysis, this is a 2.5% increase.
However, the price of new apartments in the vicinity of Brno went down, just like in the capital. On average, it is possible to purchase an apartment in a new building in larger cities in the South Moravian region for approximately 77,500 crowns per square meter.
New and cheaper
In addition to the discount events themselves, in the middle of this year, new projects also began to appear on the market in the capital, which already have an entry price below the market average.
“There was a 14 percent quarter-on-quarter drop in the offer prices of apartments that were put on the market in the second quarter of this year,” Vít Soural, head of the Flat Zone analytics company, said in August.
The significant decline in the interest of Czechs to buy real estate, which has been going on for about a year, is related to the rise in mortgage prices. Interest rates have doubled in the past year alone, to an average of 6.05 percent.
A major turning point has come for developers in this direction. The share of clients who financed housing with the help of a mortgage loan was roughly 70 to 80 percent even before the rise in interest rates.
40 percent fewer apartments are sold
It is therefore not surprising that their outflow is also reflected in the final sales of apartments. According to the analysis of Prague development companies, 1,700 apartments have been sold so far in the first three quarters of this year. Compared to 2021, when the market was not yet burdened with expensive financing, this is not even half. Developers sold more than three times as much during the same period.
The development on the market is confirmed in its survey by the consulting company Deloitte, which observes a drop in sales of new apartments in Prague by 40 percent for July and August this year. Only 480 apartments were sold in Prague during the two holiday months.
“A 40 percent drop in sales is a really noticeable drop. It is evident that the situation of developers is not easy at the moment. Compared to previous years, when demand exceeded supply, they now have to invest more in marketing and other activities to support sales,” believes a real estate expert from Deloitte.
Apart from Prague, which forms the main base in the Czech Republic from the point of view of new buildings, developers are also feeling the slowdown in sales elsewhere. For example, in Brno, this year’s pace slowed down by three times compared to the figures from 2021.
However, companies in both Prague and Brno remain positive and rejoice even at small steps towards better results. Despite the deep drop, the number of apartments sold is gradually increasing every quarter.
“It is evident that the Brno market for new buildings has started to move again. Sales in the third quarter even exceeded our original forecasts,” says Dalibor Lamka, CEO and Chairman of the Board of Directors of Trikaya.
We get used to worse conditions
According to Jiří Sýkora, a mortgage analyst at Swiss Life Select, those interested in new housing are slowly getting used to interest rates over five percent, which has slightly revived interest in mortgage loans in recent months.
For example, in August, according to data from the Czech National Bank, new mortgages were provided for 10.34 billion crowns and refinancing reached 1.96 billion crowns. For comparison, a year earlier the volume of newly granted mortgages reached 7.41 billion crowns and refinancing reached 1.21 billion crowns.
1 + 1 = ?
At first glance, the cooling of sales could mean good news for the housing market in the Czech Republic. It makes sense in the end – less interest in buying, more apartments available. In practice, this would solve the long-discussed question of how to balance the gap between supply and demand.
However, simple mathematics is complicated by the business strategy of development companies, which are trying to prevent a significant drop in the prices of new buildings at all costs. And it is not surprising that if they continued to sell projects that had been in the works for years, which they would build at expensive construction costs that they contracted with suppliers at a time of high demand, the sale of apartments would logically not be profitable for them.
The pace at which companies are releasing new apartments to the market is therefore slowing down. Looking at specific numbers, it can be seen that every quarter this year, several hundred fewer apartments were added to the market than were actually sold. In the second quarter, the offer did not even increase by a single apartment, and in the following quarter only by 50 apartment units.
In addition to regulating the supply of apartments in Prague, some development companies have completely suspended the construction of upcoming projects over the past 12 months.
“If we don’t collectively try to look for possible optimizations, reserves and reduce profit to a minimum in the entire residential construction industry to get through the period of the next two years, when I expect the market to wake up again, there will be no construction. With such expensive bank financing and little demand, we cannot build,” Dušan Kunovský, head of Central Group, commented on the situation during the Construction Development Summit.
The consequence of these steps is clear. Further restrictions on supply can only have one effect in a country where owner-occupied housing plays an absolute premium. Price increase.
“In the following periods, it is very likely that there will be a decrease in supply, which, combined with the reviving demand, will push prices to rise again,” says Marcel Soural, chairman of the board of the Trigema investment group.
Last chance to negotiate
According to Vít Hradil, Chief Economist of Cyrrus, the increase in demand could come soon. According to him, everything will start with the first easing of monetary policy by the Czech National Bank.
“At the same time, this decrease can be quite drastic, as the base rate at the level of seven percent is really not common by domestic standards, and once the central bank is convinced that it has tamed domestic inflation, we can expect a rapid decrease of two to three percentage points.” clarifies Hradil.
He adds that in the coming year, an increasing activity of interested parties can be expected, which in the future may collide with a subdued supply due to the postponement of a number of residential projects.
“The last quarter of this year may thus be the last when buyers have a relatively strong position in negotiations. After that, the situation will probably turn around again and the prices of Czech real estate will follow the until recently standard trend of robust growth,” he concludes.