In our 2011 forecast we predicted a 3% overall increase in property prices and the market met our expectations. 2012 looks like a very different situation than we had envisioned at the end of 2010 and different in a bad way.
In almost all areas of Czech Republic we saw a strong surge in buying in the first half of 2011.
Pent-up demand as well as record low mortgage rates prompted buyers sitting on the sidelines to jump into the market.
As we enter 2012 the horizon definitely looks gloomy and we expect a number of new factors to play on the residential market this year.
The biggest factors we can see affecting property prices are eurozone crisis paralysis and the sinking realization of sellers, including banks, that the market is not recovering as swiftly as they’d hoped.
There are a number of scenarios for how the eurozone crisis will play out but most certainly now every one of them will see Czech Republic’s economy slow markedly in step with Germany.
However, everything is not negative and there are some very positive things for Czech Republic including it’s enviable position of having comparatively little government indebtedness, a strong banking system and never having joined the euro currency.
In our report we’ve tried to present all the major factor which we feel will impact the Czech property market in 2012 and what effect we feel it will have on the residential market.
Eurozone crisis and buyer paralysis
Developers were hoping for an upturn in the economy to bring the buyers back to the market.
With a strong improvement in the real estate market looking still in the future and economists talking about a ‘lost decade’ in terms of economic growth for the EU, many sellers will feel that it is time to do what is necessary to sell their property.
Developers are also going to take some of the hit from the 10% to 14% VAT in January of 2012 and with another VAT increase looming they will not be keen to repeat that process.
We see this as a strong negative factor on the residential market in 2012, especially if the eurozone crisis deepens.
Lending Criteria Tightening
Many of the mother companies of the Czech banks have risk tied to loans to countries like Greece and Italy. Although there are regulations in place governing the level of capitalization required for the Czech banks, the mother companies may very well draw capital from Czech Republic to deal with the crisis to this minimum level.
This will have the effect of the Czech banks again constricting their lending criteria and lowering their LTV offered.
Most likely, however, the withdrawing of capital will be limited as the Czech branches are great generators of revenue. The mother companies don’t want to stop that flow in the middle of a crisis.
In addition to the reduction of capital there is again a likelihood of property prices going down. This will increase the caution of the banks in their lending.
Banks Executing on Bad Loans
Some researchers are claiming a devastating quantity of bad loans on the books of CEE banks (Czech Republic included) who refuse to deal with them.
In many cases the property values are under the amount of the loans. With the time and cost of execution quite high, the banks may have also been in the party of those hoping for a quick and strong recovery.
When a property is executed to repay creditors it can be sold by the executers for as little as 67% (2/3rds) of the valuation price. If banks all of a sudden decided they needed to do something about these debts this could have a negative influence on the market in 2012.
Many banks will instead sell the debt to third parties at a reduced price and allow these to deal with the execution. In either case, the sale of a large number of properties via execution is a negative factor on the residential market.
Softening Currency
CZK vs. EUR - Last 5 Years
The CZK has fallen quite a bit in conjunction with the Eurozone crisis.
Although we don’t understand the logics behind this (most EU countries are being equally or even more affected by the crisis), it is a good thing for the property market as it prompts large international companies to invest or reinvest in Czech Republic. Rather than look father east for the new production hall of their factory they invest where they already know the rules and the money goes further.
Although the effects of this are for the longer term when considering residential property prices, this investment will have a slightly positive effect in 2012.
Overall Economic Health
Czech Republic GDP (blue) vs. Euro area (17 countries) through 2009 crisis
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?
There is every reason to be confident that Czech Republic will go into a recession in 2012. This is not good news.
However, when viewed in relation to its neighbors we feel the situation in will not be critical, because of factors such as the government debt to GDP ratio, as well as the inflation and unemployment rates.
We expect a pattern through the crisis similar to the one through the 2009/2010 crisis of a stronger contraction than Western Europe but then a stronger recovery also.
End Conclusion – Short Term (2012)
There are some major negative influences on the residential property market for 2012. They outweigh the positive aspects and we feel there is more potential for a further downside than an upside.
Based on the factors above we expect property prices in 2012 to go down by roughly 4%.
In giving this prediction we see lots of economic uncertainty which could make the downturn greater.
In a best case scenario we would have stagnation for the year but our assessment is that there is a stronger likelihood of prices going down.
End Conclusion – Longer Term (2013/14)
With the instability currently on the European continent there is much uncertainty as to how deep or how long the eurozone crisis will be.
On the basis of supply and demand developers upped output in 2011 (about 28,000 new residential units in 2011 – source: Český statistický úřad) expecting a stronger recovery on the market than there was. The quantity was still very much reduced from the peak years of 2007 and 2008.
Even though net population growth is not strong in Czech Republic (about 25,000 in 2011 vs 2010 – source: Český statistický úřad) the latest 2011 census showed a big increase in separate households either from divorce or young adults living in their own properties vs living with family.
Based on supply and demand we expect over the longer term to see property prices increase.
Nathan Brown www.czechpoint101.com
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