“The definition of stupidity is doing the same thing over and over again and expecting different results.” — Albert Einstein

How can this be applied to investment property or investment in general?

Most stock markets reached their lowest point in years in March of 2009. The carnage was widespread and devastating. I would be lying to say that I predicted this fall and had the foresight to sell out all our stock and mutual fund investments.

However, one thing that I did read again and again was that the rallies coming out of stock market crashes were spectacular. Trusting that history repeats itself and knowing that there was no way I could predict the bottom of the market, I systematically invested money in ETFs each time the market had a big drop and hit a new low. I did this from the fall of 2008 until the spring of 2009.

Sure enough history held true and by the time of selling out at the end of 2009 when the money was needed for another venture, these investments had averaged a 30% return over the year. It helped to erase losses I had sustained in the parts of the portfolio I had held from earlier.

S&P 500 Index Prices Since 2007

I will be the first to admit that I am not a guru investor or a huge risk taker but I like to think I am analytical and I always try to learn from history, whether from others history or my own. I don’t want to fall into Einstein’s definition of a stupid person by doing the same mistakes through my life (or repeating the mistakes of others) with exactly the same consequences.

What did I learn (or hope I learned) from the above experience in terms of investing in stocks? A contrarian viewpoint is valuable in terms of investing. It takes guts and you have to really believe in what you are doing in order not to sell short. In retrospect I wish I had trusted my research, had a lot more guts and invested a LOT more money.

I am also glad I did not sell my existing portfolio at the bottom of the market even with fear raging that markets would fall far, far lower. Because of the holdings contained in the portfolio, it has actually recovered it’s full value even though it now shows no return or very little over the years it was invested.

Here is a fantastic chart which shows typical investor sentiment swings and when the best opportunities are.

Market Sentiment Cycles

Now, what lessons can we take away from this and apply to the current property investment market?

First of all, I have to emphasis that the factors below are only talking in terms of capital growth. There are many other factors to consider for an investment property and the most important is cash flow but this topic is for a separate discussion.

Also, because of the illiquid nature of property, prices and the cycle move at a much slower pace than do the cycles in a stock market. There is much more time to make a very calculated decision about your investment.

1. Judge market sentiment

Where would you say that real estate investors now fall on the chart of Market Sentiment Cycles? For the US real estate market, I would personally venture to say that the average investment owner must be past panic and either at the capitulation or despondency stage.

What about in Czech Republic among those who invest in property (ie. not for personal living)? I would venture to say that we are also somewhere between desperation and capitulation. Personally the majority of comments I hear are that Czech real estate prices will fall still more or that they will be flat for years and years.

Can a person reliably predict the absolute bottom of the market? No.

2. Don’t sell out anywhere near the bottom

After realizing that they bought at the wrong time in the cycle many owners may be tempted to sell out and move their money along. However, by selling at the bottom or close to the bottom they risk missing the recovery which often occurs after a big fall.

3. Invest at regular intervals

We can’t predict the absolute bottom but by purchasing at regular intervals we have a good chance of buying at a great price which will give us a great return over the long run.

With the large amount of money involved (for most investors) this last step can be very difficult and you might be able to make only one purchase at the bottom of the cycle swing. However, this will be a purchase that does you well.

Does anyone want to fit Einstein’s definition of stupidity in terms of our investing by repeating the same mistakes for the same results? The choice lies with each one of us. Have you learned from your past mistakes?

Wow! It appears the worst of the economic firestorm is over.

But, is it really? Or is this economic uptick we are seeing in late 2009 just a sugar-high on stimulus money which is bound to collapse soon? Once again, the factors affecting the property market in Czech Republic are complex.

The factors which we feel will influence the property market the most in 2010 which also affected our predictions for 2009 are the global credit crisis, Czech wages and unemployment vs. housing prices, the overall economic health of the country as well as rents vs. housing prices. We’ve rehashed these sections to see how these elements will apply to investment property in 2010.

New factors which we feel will also play a factor in 2010 and are considered in this article are: pent-up demand, currency trends and the government budget.

Factors which we predicted would affect investment property in 2009 but we feel no longer plays a major role going forward are the US housing market and the potential accession into the EURO currency (pushed off into the indefinite future).

Please remember that each of the topics is discussed on the basis of how it will affect residential property bought with the purpose of investment.

Short of time, tired of our dribble and only want to read the final analysis? Page 6 has our conclusions on how we feel all these factors will affect the Czech investment property market in the short and longer term.

Global Credit Crisis Easing (+)

Czech banks have been demonstrated to be extremely stable in the face of this firestorm. For example, the Czech National Bank reported that overall in Q3 2009 Czech banks as a whole increased net profits by an average of 10%.

Through the crisis the Czech banks have been net lenders to their foreign mother companies and, combined with the general atmosphere of fear in the world-wide banking sector, severely strangled the credit market.

With the global credit crisis easing, the Czech economy holding up comparatively well and loan defaults on the low side of their predictions we expect banks here to ease their purse strings and increase mortgage lending. However, we don’t expect to see this trend in the banks until late in 2010.


Czech Wages & Unemployment vs. Housing Prices (-)

One indicator whether housing is in for more growth or a correction is the difference in earning power versus price appreciation as this affects affordability.

In 2009 we still saw growth in wages which exceeded inflation. For example, the statics from the Czech Statistical Office for Q3 2009 showed that average wages increased 4.7% over 2008 even when adjusted for inflation. This is very positive for the housing market when over the same period housing prices dropped by about 5% overall.

However, analysts agree that this increase was mostly due to dismissal of lower paid employees as businesses tried to cut costs.

From unemployment at 5.3% in 11/2008 to the figure of 8.6% in 11/2009 it is a trend which could continue to exceed 10% in 2010. Still, the unemployment levels are about 2% better than the average in the EU.

Overall we feel that any increase in salaries will be offset by employment making this element overall being a negative factor on the property market.


Overall Economic Health (-)

From growth for 2005, 2006 and 2007 being over 6% to 2008 where it came in at 2.5% and 2009 being forecasted as -4.8% we can see the shocking results of the worldwide economic crisis. 2010 is predicted to fall in the range of 0.8%. So there is not much in the way of good news on this front.

Among the CEE countries which joined the EU in 2004, Czech Republic is clearly a top performer. However, until the core members of the EU, who are the main consumers of Czech products, see substantial growth, the Czech economy will continue to lag.


Rents vs. Housing Prices (++)

Rental demand increased strongly in 2009 while prices decreased. This has made the rent to housing price ratio much better. In many cases the gross rental yields (calculated by dividing one year’s gross rents by the purchase price of the property) increased up to 2% to the 7 or 8% range in many parts of Czech Republic.

We expect this trend of increasing rents to continue which will improve cash flow for those investors who already purchased property and make further purchases attractive for strong buyers.

The threat of increasing rents has been recognized and anticipated by the government which has passed a bill which guarantees loans for rental housing construction. Long-term this will have a negative impact on existing investment property owners but until the effects of this program are felt, it shows concretely where rents will be headed.


Pent up demand (++)

The property resale market has seen pent up demand being satisfied in Q3 and Q4 2009 as buyers who had sat on the sidelines in fear of what would happen to property prices decided to proceed. This has had a positive effect on property prices as there was an increase overall of 2.1% in property prices for Q3 2009. Statistics for Q4 have not been released yet but we expect a similarly positive number.

We expect more and more buyers to come off the sidelines as sentiments about the economy and strength of the property market improve.

A substantial number of the properties which we resold in late 2009 were bought or had interest from Czech ‘buy-to-let’ investors. We expect these buyers also to play more strongly on the market as overall signs continue positive and apparent risk is decreased.


Currency Trends (+)

With the interest rate being dropped one quarter of percent on December 16th, the Czech crown has softened to around 26.5 CZK to the EUR as of this report being written.

As the graph below shows, for 2009 we have the EUR in a little stronger position against the CZK than the same time last year.

Over the year of 2010 we expect that this will strengthen slightly but will not be a major factor as the Czech National Bank wants to keep a weak currency to encourage the export driven economy.

Below is a graph containing the overall currency trend since 1999 which shows a pattern of increasing strength with the last year or so being basically flat.

Government Budget Deficit (-)

With the Czech government running a significant deficit, projected to be 5.3% in 2010, we expect taxes to increase in 2010 or at least be in the process of being increased by the end of the year.

With an election scheduled for spring of 2010 and the balance of power not strongly in favour of one party, we could see a change in the government. Whether or not the current government will change there is already talk from all sides of increasing taxes which had been in the process of being lowered over successive years.

Possible detrimental changes in taxes for investors is that we could possibly see a capital gains tax being imposed and/or current time limits for the tax free period for individual buyers either being increased or abolished in the case of investment property. Nothing has been discussed about something like this to date but it is a possibility.

Increasing of corporate taxes could mean less foreign investment resulting in less jobs being created, smaller wage increases and Czech business owners moving their tax base abroad. Those who purchased property through a Czech company (SRO) would see this affect their profit at the sale of their property and immediately if they have positive cash flow.

We can expect municipalities to also increase property taxes as a way to improve balance sheets. Currently they are a negligible part of a property owner’s calculation but could pay a larger and larger role.


Other Possible Factors (-)

We expect some distressed sales in 2010 which will have a negative effect for other property holders. However, because of the limited number of investment properties on the market the effects will not make a major impact.

Any further news into 2010 which indicates the economy might not recover as soon as expected or that there might be the double-dip which many economists are forecasting will have a negative effect on the market. It will cause pent up demand on the part of sellers to be unleashed as they stop waiting for property prices to get back to their peak and decide to sell at a reduced price.


Conclusion – Short-term (2010)

Weighing all of these factors we believe that the positive aspects for the Czech property market outweigh the negative and we will see property prices grow in 2010. The biggest bump we expect to see in the spring. Overall we would expect prices overall to go up 5 to 7% through the year. By the end of the year prices should equal peak prices which we saw at the end of 2007 and beginning of 2008.

Rents should continue to strengthen as most seeking residences will chose to rent instead of buying because of the difficulty in getting approved for a mortgage as well as the difference between mortgage and rent payments increasingly being in favour of renting.


Conclusion – Longer-term (2011 to 2012)

Most of the factors which will play a role in the property market in 2010 will continue to affect things for the following years. Based on this we feel that property prices should move up each year. Not at the torrid pace which we saw in 2005 to 2007 but at rates between 5 to 10%.