Petr Kozojed: Why prices of flats could rise slowly next year

At the end of 2023, optimistic forecasts were also heard on the Czech real estate market, which expect residential property prices to rise. They are associated with optimism or hope for better real estate times. Naturally, there are also opposing views that expect the real estate bubble to burst. It is fair to ask whether there is a real estate housing bubble at all? Could a bubble be a real estate market in the residential construction segment when we know that there is a shortage of about 20,000 apartments on the market?

Developments in recent weeks within the residential housing market have clearly shown that economic developments and the competitive environment have finally generated a fall in interest rates. This is clearly good news for developers that there may be a pick-up in apartment transaction activity. According to available data from public sources, there has been a drop in registered title deeds at the land registry in 2023, as well as a year-on-year historical drop in property and apartment prices.

The geopolitical situation hand in hand with increased cost of living, high energy costs and inflation have transformed the residential real estate market. The popularity of "personal" home ownership has had to give way to harsh interest rate realities, and the mindset of prospective homebuyers has focused on rental housing. The demand and satisfaction of the need to own housing was pushed into the future and the same was true of residential developers' plans to build apartments. Projects were put on hold or partially converted to rental housing, if at all possible in the context of design, financing and implementation associated with increased construction costs and permitting bureaucracy.

Rental housing has become a "trend" and a topic for 2023. In general, the topic of affordable housing has been addressed on many fronts, both in terms of affordable social housing that municipalities would like to provide, market "affordable" rental housing that (strong) real estate funds can include in their portfolios, or as a standard topic of rental housing in apartment buildings. Within rental housing, we can also see a trend in the shift from primary short-term accommodation through intermediary platforms to serviced apartments with lease periods ranging from weeks to months.

At what prices will the buyers' market be willing to buy?

In 2024, with the above slight optimism, we can expect the displaced demand for owner-occupied housing to increase. More favourable interest rates and a lower supply of residential projects should restart the stalled process of new-build home sales. However, the question is at what prices will the buyers' market be willing to buy? Will the new-build residential real estate market move based on the simple fact that financing is more available, or will developers have to reach for real discounts, not just the kitchen sink in the condo price? Let's reckon that more liquidity will come to the market after all, and as mentioned, perhaps a smaller supply of housing units will not be a reason for prices to fall, quite the contrary.

We can count on interest rates not returning to 2021/2022 levels with a high probability, and the question remains how far interest rates can fall in the next two to three years. Although living standards and individuals' willingness to spend have fallen, not least due to high inflation, the resulting cooling in retail demand will certainly not be replicated by a resurgent demand for home ownership.

Another factor in the future recovery of the new-build residential real estate market is the expected decline in interest rates on savings accounts, whose attractiveness and rates have temporarily sidelined home investment and subsequent rental income in 2023. Taking into account the (gross) rental yield of 3.5 to 4.5 per cent p.a., the savings bank account has been a work-free, more efficient and secure investment for many investors, not just private investors, as the capital appreciation of the apartment itself has stopped.

Unlike commercial or industrial real estate, we could also calculate the growth in the capital value of the apartment unit over time in previous years, with a "cumulative" return of over 10 percent p.a. As early as 2024, the total cumulative return could again begin to rival that of "insured" risk-free deposit accounts and other investment vehicles. And this should restart the demand for home investment as a stable investment and home ownership as a satisfaction of the desire to own property.

Despite a possible recovery, the fact remains that flats in Prague's new-build developments in particular are and will remain among the least affordable in Europe in terms of affordability.

The author works at EY Czech Republic as a leader of the Real Estate team in Strategy and Transactions.