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