News for January 2024
Description:
▶ Developers will take advantage of the situation, and prices for new apartments may rise by a tenth.
▶ Tax benefits in mortgages
▶ Mortgages are becoming more affordable
▶ Developers are starting construction again
▶ Mortgages have become the cheapest for the last 18 months
▶ Most developers in Prague are ready for new construction but are awaiting the right moment in the market
▶ Sales of new buildings will grow up by the end of this year? The real estate market anticipates recovery.
Developers will take advantage of the situation, and prices for new apartments may rise by a tenth.
Delays in the construction of apartments have led to a decrease in supply in Prague’s new building market. Developers are leveraging the expected reduction in interest rates and a revival in demand to increase prices. Towards the end of last year, some projects faced delays due to slow sales in the first half and high costs, primarily for construction materials. As of the end of last year, there were 5 500 new apartments available in the Czech capital, representing a 2% decrease compared to the previous quarter. The current situation of the supply of new apartments in Prague has also been affected by the conversion of some projects into rental properties and the ongoing slow issuance of permits for new constructions.
«For a long time the supply of new apartments remains stagnant. Over the past year, fewer apartments have been available for sale than before. Given the challenges around organizing new construction, the supply is not expected to increase in the future, which will lead to additional price increases not only in the primary market,» noted Marcel Soural, Chairman of the Board of Directors of the investment group Trigema. Prices remain stable, but there is a prospect of their increase. From the perspective of new apartment prices, the market responded with a slight decrease towards the end of last year. The average selling price slightly decreased by 2.7% to 142 511 czk per square meter compared to the previous quarter, a 6% decrease compared to the previous year.
«Last year was a year of marketing bonuses, from which buyers could gain significantly. This year, a completely different situation can be expected. I assume that with a decrease in the supply of new apartments on the market and thanks to cheaper and more accessible mortgages, demand will increase, and apartment prices will start to rise from this spring,» commented Dusan Kunovsky, Chairman of the Board of Directors of Central Group. According to him, prices for new apartments could increase by up to ten percent already next year. The anticipated increase in demand is also confirmed by the slight revival in the market observed in recent months at the end of last year. Demand for new apartments in Prague increased every quarter of last year, with 1 300 units sold in the last quarter. Last year, four thousand new apartments were sold, representing a 29% increase compared to the previous year.
«A revival in the new buildings market has been felt since the second half of last year. After a period of waiting, clients with mortgages are returning to the purchase of new apartments, which is due to a clear easing of mortgage conditions and lower rates,» noted Petr Mihalek, Chairman of the Board of Skanska Residential. According to current information from the Czech Banking Association Hypomonitor, the interest rate on new mortgages decreased to 5.65 % in December 2023. The Czech National Bank also provided a positive signal by lowering the base interest rate to 6.75 % by the end of 2023.
Tax benefits in mortgages
Today more and more Czech taxpayers are utilizing the maximum tax deduction for mortgage interest. The rising mortgage rates over the past 2 years have become an obstacle to homebuying, as buyers faced an over 3-x increase in rates, leading to paying thousands of Czech crowns more on mortgage payments. However, as the annual amount of paid interest increases, so does the tax deduction that taxpayers can claim.
Previously, with a mortgage of 3 000 000 crowns at an annual rate of 2.29%, the interest would amount to 68 000 Czech crowns, and the loan owner could claim a deduction of up to 10 200 Czech crowns.
«For such a mortgage, the monthly payment would be around 11 500 Czech crowns, and the tax deduction would ‘’cover up’’ approximately one payment,» — said David Eim, an expert in mortgage lending at Gepard Finance.
For example, now, with a mortgage rate of 5.89%, interest payments would be around 176 000 crowns per year. However, the size of the tax deduction will be linked to the date of property acquisition. For property acquired before the end of 2020, taxpayers are entitled to an interest deduction of up to 300 000 crowns, and the total tax deduction can be up to 45 000 crowns, meaning a deduction after tax payment of 26 400 crowns.
For real estate purchased after 01.01.2021, the maximum deduction is only 150 000 crowns. In this case, a client wishing to take advantage of the deduction will receive the maximum tax discount: 22 500 crowns.
According to the chief economist of Creditas, Petr Dufek, given the situation in the mortgage market, the state can expect lower tax revenues due to the mortgage interest deduction.
«The total amount of applied tax benefits will increase because refinancing and interest rates on new mortgages have significantly increased,» — confirms the economist.
According to Michal Skorepa, an economist from Česká spořitelna, the state is already loosing billions of crowns per year due to this tax benefit. In his opinion, the tax deduction for mortgage interest also reduces the overall expenses of property owners who have taken out a mortgage to buy real estate, thereby increasing demand for real estate.
Mortgages are becoming more affordable.
Last year, Czech banks clients borrowed 150 billion crowns for housing. Compared to the previous year, when interest rates remained below 5% in the first half of the year, this is a decrease of about a quarter. Recently, there have been initial signs of thaw in the mortgage market, according to the Czech Banking Association. For example, in December 2023, residents of the Czech Republic took out over 15 billion crowns in housing loans. The volume of mortgages issued decreased compared to November, but experts say that December is seasonally a weaker month in the mortgage market.
«The mortgage market continues to recover, linked to the relaxation of rules by the Czech National Bank, a slight decrease in interest rates, and pent-up demand,» said R. Shalsha, a spokesperson for the Czech Banking Association. According to banking experts, interest in mortgages is expected to continue growing this year.
«The year 2024 will be associated with a decline in interest rates and market recovery. We expect a revival of mortgage refinancing, especially for clients with interest rates around 6%, who can still take advantage of free additional payments,» — says M. Richter, head of the mortgage services department at Air Bank.
According to M. Zetko, deputy chairman of the board of directors of Hypoteční banka, the bank’s interest rate may drop slightly below the five percent mark from its current level by the end of this year. However, how much banks will ultimately lower mortgage rates depends on the strategy of the Czech National Bank, which in December finally reduced the base interest rate, according to P. Gapek, chief economist at Moneta Money Bank.
«We can expect that this year the CNB will continue to lower rates, and over the year, mortgage rates will decrease as market rates fall for longer-term maturities, leading to an increase in demand for housing loans,» — Gapek added.
Developers are starting construction again
Developers are once again starting construction after more than a year, as they see the prospect of cheaper mortgages, which is expected to increase interest in new homes. In Prague development companies are preparing to start building of several thousand new apartments.
«We have big plans for this year. We expect further significant sales growth, so we plan to increase construction volumes by almost three times,» said Ondrej Shtastny, Chief Economist at Central Group. According to him, this year the company intends to gradually start construction on up to 2 700 apartments in eleven districts of Prague. Skanska Residential also plans to launch the second phase of the «Modřanský cukrovar» project, with approximately a billion dollars invested in the construction of 126 residential and six non-residential buildings. About a third of the properties have already been sold.
«The revival in the market for new apartments is starting to be felt, and we expect the growth rates to increase significantly in 2024, mainly due to expectations of lower interest rates and more affordable mortgages,» — said a representative of Skanska Residential.
Other developers also plan to increase construction volumes this year. For example, the company Finep stated:
«This year we will start construction on the next stages of several of our development projects, for example, in Barrandov, Opatov, Nad Krocínkou, U Sarky, Malá Háj, and Kralupy nad Vltavou,» — said Tomáš Pardubický, CEO of Finep.
According to Petr Palicka, CEO for the Czech Republic at Penta Real Estate, which is currently completing the construction of new residential projects in Prague, the overall market supply should grow.
«We expect the supply of new housing to grow slightly, which will be accompanied by a decrease in the inflation rate and mortgage rates, which, according to the market’s general opinion, should fall below five percent,» — he said.
According to these data, the increase in demand will lead to a rise in apartment prices again. Therefore, those considering buying a flat may currently find the most favorable conditions.
Mortgages have become the cheapest for the last 18 months
Mortgages have become the cheapest in the last 18 months after the base interest rate reduction in December 2023. Despite the quarter percentage point decrease in the Czech National Bank’s base interest rate, mortgage rates have only slightly dropped to 5.96 percent, according to the Swiss Life Hypoindex portal.
«Mortgage interest rates continue to decrease slowly, even after the Czech National Bank’s base interest rate cut in December. In the first month of this year, the Swiss Life Hypoindex bank offered rate decreased by six basis points. Thus, it’s evident that the base interest rate reduction by the Czech National Bank doesn’t persuade banks to sharply cut mortgage rates,» — noted Jiri Sykora, a mortgage analyst at Swiss Life Select.
In a specific example, for an average loan of 3 500 000 crowns at 80% of the property’s appraised value, with a 25-year term and an average offered rate of 5.96% in January, the monthly payment decreased by 117 crowns to 22 472 crowns compared to December. However, compared to January of the previous year, this reduction is more noticeable, exceeding 800 crowns. In comparison with June 2022, when the average offered rate was 5.71%, the last time it dropped below the 6% level, the difference is still almost 550 crowns higher.
More significant reductions in interest rates have been observed in mortgages for individuals under 36 years old, to whom banks can provide even more than 80% of the property’s collateral value (LTV). Mortgages with fixed terms of three and five years have become cheaper at 6% and 5.93%, respectively.
The decrease in mortgages provided up to 80% of the collateral value was more moderate. Mortgages with annual and ten-year fixed terms have decreased to 6.31% and 6%.
Rates for the most popular five-year fixed-rate mortgages have dropped to 5.74%, making them the cheapest mortgage option on the market.
«Expect the mortgage interest rate to continue to slowly decrease in the coming months,» — said Jiri Sykora, a mortgage analyst at Swiss Life Select.
Most developers in Prague are ready for new construction but are awaiting the right moment in the market
Most developers in Prague are ready for new construction but are awaiting for the right moment in the market. The main reasons include current completed but unsold projects and high mortgage rates, deterring those interested in owning their own homes.
«From the developers’ perspective, the current market situation looks like the calm before the storm. Most of them have ready projects that need to be put up for sale together with the announcement of their construction. However, they are currently waiting for more favorable conditions in the market. Many interesting new construction projects were supposed to open for sale in the first quarter of 2024 but are being postponed again until summer,» — says Jan Vitvera, director of Home Portal.
Prague faces an annual deficit of new buildings, which continues to grow in the current situation. In addition to construction delays, permitting processes in the Czech Republic take too much time. It becomes evident that, due to these factors, apartment prices will remain stable or more likely increase once there is some revival in the real estate market. Market analysts expect that a critical moment may come with a decrease in mortgage rates to 4%. This level could be a key factor indicating market direction and encouraging buyers to decide to invest in new housing. However, given current trends, it is challenging to predict when exactly such a rate reduction will occure, considering economic uncertainty and global impacts on financial markets.
«Personally, I think we can expect changes in the residential real estate market in the second quarter of 2024. We believe that with a possible reduction in mortgage rates to 4%, the situation will change, and our projects will attract potential buyers. We are just waiting for the right time,» — added Jan Vitvera.
Sales of new buildings will grow up by the end of this year? The real estate market anticipates recovery.
Development company Neocity anticipates a revival in housing construction in 2024 and an increase in demand for new apartments. A key factor in motivating investors will be stimulating the mortgage market and improving financing accessibility. The reduction of interest rates to around 4% is considered a key factor in motivating investors who postpone their purchase, awaiting better real estate financing conditions.
«It remains to be expected that the reduction of interest rates will continue. This will be a stimulus for investors waiting for more favorable real estate financing conditions. The reduction of interest rates to around 4% is considered a key factor; however, any decrease below 5% will be perceived by investors as positive news,» — says Oded Ber, CEO of Neocity.
Neocity expects the active construction of apartments to recover in 2024. The company already notices the first positive signals from the market, and according to its data, sales have increased by 40% over the last two quarters of 2023 compared to the first two quarters of 2023. Moreover, the company views with optimism the long-awaited step of the Czech National Bank in December 2023, when interest rates were lowered by a quarter of a percentage point for the first time in several months. This is the first step aimed at boosting sales and a renewed increase in investor demand for new apartments.
During this year, Neocity expects a slight decrease in prices for new apartments due to the reduction of VAT rates to 12%. The market for new apartments is starting to balance, so according to the company’s expectations, apartment prices will not change significantly.
«At present, we notice an increase in sales and stabilization of demand. Moreover, with the expected decrease in interest rates in the coming months, we expect people’s willingness to invest in new apartments, so we anticipate a renewed increase in prices. The current situation creates interesting investment opportunities,» adds Oded Ber from Neocity. This year, Neocity plans to introduce two new residential projects to the market, offering over 200 new apartments.
«In 2024, we will offer investors two projects that differ significantly in their charakter. We have already launched pre-sales of apartments in the Prague Vinohrady area, which stands out for its scale. Our second project is a residential property in the Prosek area, which is more suitable for investors considering the purchase of their first apartment,» — says Oded Ber.