Czech Republic started to feel the impact of the global economic crisis only as recently as the second half of 2008. Consumption, including spending on property, has now slowed down fairly drastically. Falling housing demand has been mirrored by slower growth in the mortgage lending.

During 2008, banks in Czech reported an increase in mortgage sales, but it was widely believed this was at a lower rate than the year before.

Now we have confirmation. The latest data from the Ministry of Regional Development reveals that mortgage lending in 2008 plunged by some 20%.

The number of mortgages granted to individual clients dropped 23% from 83,444 in 2007 to 64,497 in 2008. Companies obtained 1,930 mortgages in 2008, a 19% over 2,383 loans in 2007.

In terms of mortgage volume, lending to individuals was down by 25%. In 2008, banks lent individuals mortgages worth CZK113,927 million, compared to CZK142,288 million in 2007.

Companies, on the other hand borrowed 55% more in 2008 - CZK64,222 million worth of mortgages, compared to CZK41,485 in 2007.

Jan Sadil, CEO of leading mortgage bank Hypotecni banka says, "There were many reasons for the fall in the volume of mortgage loans provided in the year 2008, including a record comparative base in the previous period, the macroeconomic development and the financial crisis. The result is quite good in this situation".

Hypotecni banka granted more than 21,000 mortgages in 2008 worth CZK39.6bn, a slight drop from CZK40.4bn a year earlier.

Overall, banks in Czech Republic granted 403,486 mortgages between 2000 and 2008. The mortgage debt grew on a yearly basis by 24% and at the end of 2008 the market amounted to CZK583,520, which is around 16% of Czech GDP.

Mortgage markets experts think that it would be success if banks can provide in 2009 mortgages worth CZK100,000 million.

This is strictly linked to the worsening situation on labour market. In general, the Czech property market isn't over-supplied but prices are fairly static.

The Czech Statistical Office reported on 2nd February that apartment prices in the country increased by just 0.2% in Q4 2008.

In Prague, on the other hand, the average flat price declined by 1.7% (quarter-on-quarter) in Q4 2008. Here, the fall in the number of mortgages granted in 2008 was also the highest - 27%.

All the figures above indicate a slowing property market, which, taking into account the global crisis and the sharp slow down of the Czech economy, will inevitably continue through 2009.

Many experts believe the Czech economy is already in recession, although this hasn't been confirmed yet by official data. In 2008, GDP grew by 5.4% in Q1, 4.5% in Q2 and 4.2% in Q3 and for the whole year it is estimated growth was around 4%, down from 6.5% in 2007.

The slow down is mainly a result of a decline in exports as the vast majority of these (85%) go to the EU, with Germany itself accounting for one third of Czech's exports. Another key factor driving down economic growth is sharply decreasing domestic demand, which, according to estimates, grew only 1.2% in 2008 compared to 5.2% in 2007.

These trends will be even more pronounced this year, as most of Czech's trade partners are already in or are heading for recession. Consumption in Czech is almost certain to slow even further as unemployment - and the fear of unemployment - increases.
The latest forecast from the Czech Ministry of Finance assumes 1.4% economic growth in 2009, a slow pick up in 2010 (2.1% GDP growth) and recovery in 2011 (3.8%).

The figures above, even though indicating a sharp decline in economic growth in Czech, are still far better than forecasts for many other EU countries. The Czech government also has room for some important fiscal measures, such as cutting taxes. And we are likely to see further falls in interest rates.

Our view is that, while Czech will clearly not escape the big economic chill, it is highly likely to be one of the first CEE economies to emerge from it and will return rapidly to steady economic growth, probably as early as 2010/2011. However, much will depend on the timing of a recovery on the revival of its key export markets, most importantly Germany.