Over 200+ years of documenting real estate has shown that real estate prices go in cycles. Knowing how the cycles work can help property investors not to work in tandem with the masses who get the timing wrong.

For existing property owners it can help them to forecast what to expect in terms of their rents and timing an exit from a property.

The funny thing is that what we generally read in the media conveys the general opinion of the masses but can mislead an investor as to what point in the cycle that the market actually is.

To illustrate this here is a fantastic depiction of how to tell where a market is in the real estate cycle (credit to Michael A. Kupritz) according to the headlines from the New York Times.

The media can counter-intuitively help a person pinpoint the real estate cycle.

Real estate a cause rather than victim of a recession?

Henry George (1839 to 1897) was one of the earliest to propose that land prices and a drive up in prices based on speculation were the causes of economic recessions. In fact he asserted that land speculation was always the cause of economic downturns.

Largely ignored in today's discussions it has gained recognition as the most recent economic contraction has involved a huge speculative real estate bubble.

There is an excellent well-researched paper from 1991 that examines Henry George's theory (view it here). It was published and printed by Fred Foldvary (born 1946).

Fred Foldvary is a lecturer in economics at Santa Clara University in California and is credited with predicting in 1998 that there would be a real estate-related recession in 2008. He even published a booklet in 2007 entitled The Depression of 2008.

The key parts of the above paper which caught my attention specifically regarding a real estate cycle were the following:

"During the downswing, the net income of real estate falls due to falling rents and increased vacancies, while mortgages and other operating costs remain rigid in the short term. There are widespread defaults on mortgages and other loans. The foreclosure rate increases. Unemployment and lower real wages further reduces demand for real estate. Some residents 'double up.' To secure occupants, rents decrease. Many banks fail, having loaned large amounts to illiquid and fallen real estate."

"The low point of the cycle is characterized by high vacancies, low building rates, foreclosures, and an absence of speculation."

"After the old obligations such as mortgages and contracts are gone and the wreckage of the collapse is cleared away, shrewd investors pick up real estate bargains. With debt reduced and prices, including interest rates down, lower costs induce a renewed rise in business and the recovery phase of the cycle."

The US 18 Year Real Estate Cycle

Fred Foldvary makes an interesting observation in his analysis that bears all serious investors investigating closer:

"A distinctive feature of fluctuations of both construction and real estate prices over the last 100 years in the U.S., Great Britain, and other countries is their regularity in long cycles of roughly 20 years (Matthews, 1967, p. 98). Clarence Long (1940, p. 155) observed that a decline in building precedes general business declines in major downturns, and also that the long building cycles have different durations in different countries (p. 159)."

He went on to identify the typical cycle in the United States being roughly 18 years as shown in the following chart. The one exception being the 1943 which would have been the peak of a real estate cycle had building not been dampened by war measures.

The 18-year cycle is well documented in the US.

Regarding the stages of this 18 year cycle there was an excellent real estate 'clock' that was put together by Phil Anderson from Economic Indicator Services. It is chockfull of little indicators which help a person to pinpoint where they would be in the cycle.

Interestingly their research showed that typically there was 14 years of growth followed by 4 years of price decreases.

This analysis proposes 14 years up then 4 years down

Where is the Czech real estate market currently in the cycle?

The million dollar question is to take this knowledge and apply it to our current situation in Czech Republic.

So, based on the above information where would you assess we currently are in the real estate cycle?

Using only the proposal of 4 years of property prices going down we could conclude that the end of 2012 would be the last full year since the price decreases started in late 2008/early 2009.

In early 2009 banks strongly restricted their lending criteria (hour 19). We have also had the economic activity stall (hour 20) with a major contraction in 2009, 2010, 2011 and now going into 2012.

Looking at the descriptive steps on the clock I would personally say that we are in the 21st or 22nd hour since it seems that many Czech banks still have an amount of bad loans on their books although a recent KPMG report proved to me that it is much less severe in Czech Republic than I had originally thought. It is, in fact, 50% better off than the regional averages.

Another extrapolation from the cycle is that existing owners should be able to expect gross rents to be increasing over the next part of the cycle.

What are your thoughts? Where do you think we are right now in the Czech real estate cycle? Weigh in by commenting below or sending me an email at: nathan@czechpoint101.com

Nathan Brown www.czechpoint101.com

Interested in Investing in the Czech Market? Have a property in Czech Republic? Click here to ask Nathan a question on Czech Property.

With headlines of doom for the EU and even Czech Republic being thrown around like airport baggage is there sound reason for concern about the Czech economy in 2012 and beyond?

I am far from an economist but consider myself fairly pragmatic. Here are a few things I found about the Czech economy that you may find interesting.

Doom and gloom in the headlines

First of all, I should outline some of the articles which I am speaking about so you can get a sense of the ‘doom and gloom’. They are headlines such as Double dip recession threat looms over Czech Republic or Czech economy has good reasons to fear Greek default.

There are also constant downgrades of the forecast GDP growth for 2012 including one predicted to be released by the Czech finance ministry on Monday, October 31st. The general consensus now is that GDP growth might hover around 1% similar to what is now predicted for Germany, Czech Republic’s biggest trade partner.

I am not denying that a double-dip recession could hit Czech Republic or that the collapse of the EURO zone would have a huge consequence for the country but often the fundamentals can be lost in the media-generated scare.

Czech debt to GDP

The fact is, Czech Republic sits in a very enviable position, economy-wise. Why can I say this?

One thing is the very low gross debt that the government holds as opposed to GDP. In 2010 this was around 38%, below all the neighboring countries and much, much better than the EU-27 average of 80%.

Czech Debt to GDP Ratio Best in Region

Germany, as Czech Republic’s biggest importer by far, is also very healthy fiscally and although their debt is slightly higher than the EU-27 average at 83%, has a very strong manufacturing sector, fantastic infrastructure and, in general, seem to have their heads screwed on right when it comes to running the finances in their country.

If you were going to go into business with a partner, which other EU country would you rather chose than Germany? I can’t think of a better one.

Why does debt to GDP make a difference?

Well, excess debt like we see in many developed countries forces them over the long-term to take steps which slow down the economy such as higher taxation and less government spending.

IMD Prof. Stephane Garelli, Director of IMD’s World Competitiveness Center said regarding this: “Government spending has reached new highs since the recession: on average 47% of the GDPs in the most advanced economies. 12 European countries are already above the 50% threshold. The 23 biggest spenders are all European governments. How long can it last? In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing.”

Governments are spending desperately to try to stimulate their economies as well as propping up banks and key industries. There is a finish line for each one of them with regard to how much debt they can handle as opposed to when it will start to seriously hamper long-term growth.

In this regard it’s as if Czech Republic got a head start.

There is still head room where other countries are at the point where they can’t move.

IMD estimated the time it would take for the higher indebted countries to pay down their existing debt to a point where it was sustainable (calculated at 60% of GDP). The numbers are appalling. Here are some examples: Japan in 2084, Italy in 2060, Portugal in 2037, U.S. in 2033, etc.

Will this affect these countries’ ability to grow in comparison with countries with low debt loads like the Czech Republic? Absolutely.

Czech inflation

Czech Republic's Inflation Best in Region

Czech Republic has had very muted inflation compared to the EU as a whole.

Different than in the case of many countries with high debt loads, using inflation to reduce government debt should never have to be considered by Czech Republic.

Lower inflation means that the buying power of consumers and business will not deteriorate, further stimulating the economy.

It also means that the Central Bank will have wiggle room with regard to interest rates, allowing them to effectively control the CZK’s exchange rate, such a key factor for the export-driven economy.

Czech unemployment

Czech Republic Unemployment Among Best in Region

Czech Republic’s unemployment seemed to reach it’s scariest point in December of 2010 but has since improved.

The prospects look good also with the IMF, for example, predicting Czech Republic’s unemployment to continue to be reduced through 2015.

Low unemployment means stronger consumer spending, better tax revenue for the government and a number of benefits to society socially as well.

Conclusion

In today’s economic instability it is really hard to know what will happen from day to day, let alone a year or two in advance.

Really though, any economic news we receive has to be considered in context. Are surrounding countries faring better? Will surrounding countries be affected less than Czech Republic to a new crisis? What are the long-term prospects?

If I was a betting man, I would say that the odds are stacked in Czech Republic’s favor to outperform

Nathan Brown www.czechpoint101.com

The numbers on RealityMorava.cz for the average price of listed property in Czech Republic shows the average price up 5% over the same month last year. It definitely looks like the Czech housing market hit the bottom in 06/2010.

Average Czech property price is up 5% over 08/2010

Here is a chart that is being updated with the latest average prices from RealityMorava.cz.

Nathan Brown www.czechpoint101.com

See below for the second part of Nathan Brown's video blog on making the most of selling your property in the Czech Republic.

Stay tuned for Part Three - Coming Soon!

Data from the real estate servers of realitycechy.cz and realitymorava.cz seem to indicate that the overall prices of property in Czech Republic bottomed in 06/2010 and we have seen a price gain of about 2.7% to the end of 04/2011.

Of course, these are the listed prices so do not reflect actual sale values but with a large volume of data, in my opinion, still represent accurate movements on the market.

Here is a chart that is being updated with the latest average prices from RealityMorava.cz.

The average flat price in Czech Republic in 2010.

The average flat price in Czech Republic so far in 2011.

You can view more details including a breakdown per city on their website here: http://www.realitymorava.cz/informace/statistiky

Nathan Brown www.czechpoint101.com

I earned 45,000 CZK/hr (€1,850 or £1,650) by renegotiating our Czech mortgage using the tactics given below. It is not rocket science but I hope this story will motivate you to do the same.

Our Czech Mortgage – The History

In 2007 my wife and I together with family bought a rental house in Brno with 4 flats in it and the potential for a fifth to go in the attic. We got a 90% LTV mortgage for a total of 5,500,000 CZK. With a 3.5% interest rate over 30 years the initial cash flow was fantastic. Our gross rent was close to 40,000 CZK and mortgage payments 25,800 CZK. It had a 7.3% gross rental yield with potential for additional increases in value by developing the attic space and dividing the building into separate living units to be sold individually.

*We purchased the above building in 2007 and then divided it into separate living units.

We only fixed the mortgage for 1 year because we planned to divide the flats into separate living units (in Canada we call this ‘condo-izing’) and this would cause a change to the mortgage agreement. Changes made to a mortgage agreement at the time of fixation don’t carry the high penalties of those done outside fixation.

What a shock we received in year 2 when the interest rate jumped to 5.58%, increasing our mortgage payments to 31,500 CZK.

In the subsequent years we managed to get the flats legally divided, re-evaluated and then the liens lifted off all of the flats except for two. This lowered the actual LTV based on the new valuations to 71%.

You would think this would mean a greatly reduced risk assessment by the bank and subsequently better mortgage rates. Well, think again.

Even with the base mortgage rate moving lower the banks in Czech Republic continue to keep their lending rates at the same level or at a higher level than before. Especially with foreigners and any who were getting or had mortgages for investment properties they kept the rates very high.

Our Czech Bank’s Mortgage Offer – 2011

This spring, with the news everywhere that mortgage rates were heading down, I waited eagerly for our yearly mortgage renewal offer, hoping for a much better rate.

My wife and I have a lot of mortgage debt (we own or co-own 39 residential or commercial rental units) much of which is attached to the base rate (or floating interest rates) so I am keen to lock down some of them for a longer period to mitigate our inflation risks. Our Czech property was one we had earmarked for locking down.

*Overall the base rate has decreased by 1.75% but our Czech mortgage rate has actually increased by 1.59%!

Imagine my disgust when our offer came in at 5.5% for a one year fixed. 6.09% for a 5 year fixed. Only slightly lower than the year before. I was choked!

If there is one thing I can’t stand and am very vocal about, it is the blatant greed of the major Czech banks and this was just another example, in my mind.

At this point came one hour of my four hours spent on this renegotiation as I ranted to my wife about the greed of Czech banks. She is an expert on the subject even though I manage all our banking.

The good thing is that our company has a mortgage advisor in-house who is experienced in handling mortgages for foreigners. I immediately spoke with him to get an idea if we could move our mortgage elsewhere.

Unfortunately for us and many other foreigners, there is a strong barrier to changing mortgage providers because:

1. There are not many mortgage providers now who will lend to foreign investors.

2. Any who do lend require personal presence at least one time in the process, really a pain for us, with investors living in Canada and probably for our readers also.

3. The longest mortgage now offered for an investment property is 20 years, compared to the 30 years previously possible.

Renegotiating our Czech Mortgage – Lessons

After determining that the mortgage offer we had received was very high, in fact, extremely high based on the LTV and good repayment history, I set about trying to renegotiate the mortgage or change mortgage providers.

First, our mortgage broker sent out our basic finance details to those banks who would possibly give us a mortgage to see what offers we would receive.

Second, I wrote a polite but very strong email to our current mortgage bank stating the reasons we considered the offer poor, why we were good clients for them (LTV was now low and we were always on time with our payments) and that we were in the process of getting offers from other banks. In my email I plainly stated that we thought a mortgage offer 1% less would be in line with other current offers.

Imagine my surprise when I received a phone call the next day from someone at the bank saying that they could offer me a reduction of .8%. After a few more days of negotiations we settled at a 1% discount for the 5 year fixed.

The 1% difference worked out to 3,000 CZK (approx. €125 or £110) a month of interest which we will save by not accepting their first offer. Over a 5 year period this saves us 180,000 CZK (approx. €7,400 or £6,600).

I estimate I spent a total of four hours on the renegotiation. One hour ranting to my wife after receiving the first offer. One hour spent with our mortgage broker talking about alternatives and two hours negotiating with our current bank.

This works out to payment of the 45,000 CZK per hour (€1,850 or £1,650) mentioned at the start!

What lessons did this experience reinforce in my mind and I want to emphasize to all investors who currently have mortgages in the Czech Republic?

1. Acknowledge that the bank’s first offer is often trying to see what they can achieve.

Most clients just renew at the first offered rates and the banks know and misuse this. They are in no way interested in the success of your investment or that you achieve the goals you set out with your property. They are only interested in returning profits for their shareholders. Period.

2. Determine if it is worth your time.

Calculate the difference it would make to negotiate a, for example, 0.5% discount over your fixation period and how much time it would take to get this discount. Perhaps if you plan to fix for just one year more and then sell it might not be worth spending the time on it. In most cases the effort is very well paid!

3. Be informed of your options.

Well in advance of the deadline to renew your fixation period be informed about your mortgage options and the current offers from competitive banks (we offer a free refinancing service so please contact us immediately if you would like to take advantage of this).

4. Start negotiations immediately if your current provider’s offer is poor.

If your current mortgage provider’s offer is not in line with competitors, inform them plainly with the following details:

a. that you are looking at alternatives (best is if you can inform them of potential competitive offers with specifics)

b. why you are a good client for them (repayments on time, property holding value, etc.)

c. what you would consider as a good offer prompting you to stop pursuing other offers

Be realistic but determine that you would follow through in changing mortgage providers if they don’t reduce the rate by a certain amount.

5. Offer your current bank an acceptable rate whereupon you would stop looking at competitors

If the bank starts negotiations and make a counter offer, let them know that you appreciate the offer. If it is still not in line with other offers, again inform them but say that you would stop pursuing other mortgage offers if they were to give you a rate of ….%.

I sincerely hope these steps will help you as it helped us, to get the best possible offer for your Czech mortgage! You will most likely be extremely well paid for the time you spend on it.

Nathan Brown www.czechpoint101.com

I enjoyed a recent webcast by Deloitte Czech Republic on the theme: Expected Real Estate Market Development in Central Europe. I think it is still possible to go to this link and download the presentation.

GDP vs Rental Growth – UK Statistics

Although most of it focused on the office and commercial real estate markets, some of it touched on the residential. One particularly interesting chart was this one showing the relationship in the UK over the last years between GDP growth and rental growth.

Could the same be said for Czech Republic?

It is hard to say if you also take into account all the commercial rental rates but I would say the general trends hold true. During 2006 and 2007 when GDP was taking off we saw also increase of rents in residential properties, although not to the same degree as actual GDP.

In 2009 when Czech GDP fell 4.1% we also saw residential rents fall over the next six to nine months into 2010.

It will be interesting to see if this trend also holds true over the next couple of years as GDP recovers.

*This chart shows the direct correlation between overall rental growth and the UK's GDP.

Available Housing per 1000 Inhabitants

The second chart which I found very interesting was this one which shows the available housing units per 1000 inhabitants. Czech Republic is the highest of the new members of the EU but still below most Western European countries.

*Czech Republic has the highest number of housing units per 1,000 inhabitants of the new EU members.

What are your thoughts? Do you think that these indicators point to the future rent and price trends in Czech real estate?

Have your say on our forum page here

Nathan Brown www.czechpoint101.com

Watch how Nathan got into property via this exclusive youtube video interview here

In many Western Countries there is a publicly or, at least, paid access to a database of real estate transactions. This is advantageous for a number of reasons and assists a number of institutes. Some of the beneficiaries include:

1. Home sellers or buyers: It allows them to accurately price their home for sale or see trends in sale prices.

2. Real estate agents: It helps them to be an authority and accurately estimate pricing for sellers.

3. Banks: It is easy to see if there are areas where prices are moving downwards or upwards which helps banks to fine-tune lending and prepare their business offers in accordance to this.

4. Governments: It assists housing departments to get a handle on the real cost of housing for their citizens and where there are needs.

5. Courts: In the case of settlements where real estate is involved, it is possible to accurately and transparently calculate the value of a property in question.

However, in Czech Republic, there exists no such database.

An interesting recent article gave some reasons why this does not exist:

1. It would be against the current Civil Code and law on protection of private data to force property sellers to register the sale price of their property.

2. According to Skalický, president of the Czech Chamber of Real Estate Agencies (ČKRK), only 40% of residential real estate transactions happen through a real estate agent. Thus for the database to be accurate it could not just include transactions through agencies. (For more information on why so many transactions happen outside the real estate industry please see a previous article of ours: Are Czech Republic real estate agents accredited?)

It seems apparent that the benefits of having such a database would be a huge benefit to all industries and individuals whose lives are affected by the price of real estate. In most countries, this is a vast majority of the citizens in the country.

Nathan Brown www.czechpoint101.com

Our very own Nathan Brown talks to Pavel Parizek of Czech Point 101's Brno Office on the local Property & Real Estate Market in this short video interview.

You can see all of Czech Point 101's YouTube video blogs by clicking here