One of the few sectors, which in the year of the pandemic saw a strong increase, was that of mortgages. Investments in housing continue to be considered safe and profitable

The arrival of the new Coronavirus pandemic brought up for many of us the memory of the global financial crisis of 2008 – 2010. One of the key attributes of that recession was the significant decline in residential property prices. A similar effect was expected even after the onset of the pandemic, but so far it didn’t arrive.

A record year for mortgages

In March, when the first pandemic restrictions came into force the real estate market stopped as well. In the first phase of the pandemic, real estate agents carried out almost exclusively transactions already underway, as underlined by Deloitte’s Property Index report. However, processing those operations was enough to keep the volumes of the first half of 2020 at higher levels than the previous year. On the other hand, the numbers are eloquent: the value of the sales of residential units in new projects went from 23.5 billion crowns in the first half of 2019 to 27.5 billion crowns in the first half of 2020. Instead, according to Deloitte’s data, volumes registered a stagnation in other sectors of residential real estate.

Additionally, the market restarted in summer. The impact of the second wave of the Coronavirus remains to be assessed. However, one data suggests that in the second half of 2020 the desire for real estate didn’t disappear among the Czechs: one of the few sectors, which in the year of the pandemic saw a strong increase, was that of mortgages for real estate purposes. 2020 is about to close with a record-breaking overall volume of around 250 billion crowns. The number of paid mortgages is also increasing, so the value is not driven solely by the price increase of apartments. Obviously, it takes a few months until the granting of a mortgage becomes a finalized sale, but the market trend suggests that there should be no collapses in this sector in the coming months. And this is confirmed by the official numbers that we have: a 18.8 billion crowns worth of mortgages granted in September, an increase of 40 per cent year on year, and 25.2 billion crowns in October, almost 50 per cent more.

This applies especially to Prague, which alone accounts for over 60 percent of the Czech residential market. The various travel restrictions have certainly had an impact on foreign investors, whose weight had been nonetheless decreasing even before the pandemic. However, the availability of local families and businesses is growing, having reacted to the Coronavirus with a very prudent course of action, in line with what has been happening everywhere else in Europe. Therefore, in 2020 there was a strong increase in savings. If a close exit from the pandemic is expected also due to the vaccine, families and businesses will seek an outlet for the accumulated liquidity. And it would be surprising if a significant part of the liquidities in the current accounts would not be used for residential investments. The Czechs have a strong propensity for real estate, which nowadays is further strengthened by particularly low interest rates. The average interest rate of mortgage loans fell in November for the eighth consecutive month, settling under the estimated two percent, according to data published monthly by the Fincentrum Hypoindex.

On one hand, these rates encourage the use of mortgages by making the investment accessible, even to those who don’t have sufficient savings to cover the entire transaction, and on the other hand they reduce investment opportunities with good returns, for example debt securities.

Money making

Moreover, the real estate continues to be a profitable way to use money. As reported by Eurostat, house prices in the Czech Republic continued to rise above the European average in the first half of 2020 (8.6 percent in the first quarter and 7.7 in the second). Other indicators, such as surveys on offer prices, reveal a growth trend even after the end of June. “Unofficial data from the third quarter show, that the slight slowdown in mid-year was only temporary, and the increase on an annual basis could be close to 10 percent again”, underlines the Czech Central Bank, according to which, however, not even the pandemic has interrupted the potentially dangerous dynamics of high price increase and the rise in the disbursement of mortgages.

Even the feared collapse in rents seems limited for now. “The decline in tourism and short-term rentals occurred throughout entire Prague, but a significant impact on prices was felt mainly in the city center”, mentions Deputy Mayor Petr Hlaváček. In absolute terms, there was a decline and the average rent fell by 2.6 percent to 300 crowns per square meter. However, except Prague 1 and part of Prague 2, the evolution of rentals was more a sign of stagnation than a real decline.

Experts are warning that the effects of the evolution of the economy on real estate prices always has a certain delay. However, the Czech Central Bank seems to disagree, expecting a rise in prices also in 2021. The current and potential demand seems to continue to be well above the offer, and the increase is also affecting local markets outside the capital, which continue to have a good margin of growth. Obviously, the non-residential sectors are another matter, having a relatively low rate of profitability even before the pandemic, while the industrial and logistics real estate sector seems to have a particularly good growth prospect.

Towards a further decrease of the offer?

The market trend is a factor that favors the thesis that residential property prices will not go down. In 2020, construction activities didn’t register an expansion, quite the contrary. “The construction offices are working at a slow pace and the issuance of permits is dragged on” mentions Petra Cuřínová, director of the Building Statistics Department at the Czech Statistical Office. Therefore, not only that companies have built less this year, also due to the lack of manpower from abroad, but also the preparation of future projects has been slow. For these reasons, the Central Bank warns against the risk that the conditions to buy a home will deteriorate for families.

According to Deloitte’s latest annual report, Czechs have to save nearly twelve years to afford a 70 square meter apartment. This is the highest figure in all of Europe. And most likely, the pandemic will not solve this situation, which is becoming a social problem and a potential financial risk factor. On the contrary, it seems that a higher rate of increase in housing compared to the rate of increase in wages will be a trend to continue. In other periods, this situation was eased by the prospect of seeing an increase in salaries in the near future. But, with the pandemic and the consequent economic crisis, a part of society has lost this horizon. And politics doesn’t seem to have any answer to this problem, which risks to become a very heavy burden for the Czech society.

by Giacomo Dei Tamburi