Prague’s Residential Real Estate Market Is The Most Expensive and Overheated In The EU
According to the latest census, there are approximately 721,300 flats in Prague. Photo credit: Colliers.cz.
Prague, Dec 6 (BD) – According to the latest census, there are approximately 721,300 flats in Prague. The number of new flats completed annually is, on average, approximately 5,500 units per year, around half of what the city needs.
“This deficiency is mainly caused by lengthy permitting procedures, especially that the time required to obtain a zoning decision is extremely long,” said Josef Stanko, Senior Research Analyst at Colliers, a firm providing services for commercial real estate and investment management..
According to the World Bank’s Doing Business Index from 2019, the Czech Republic ranked 156th out of 190 economies in the world when it came to the length of permitting processes for a simple warehouse project. In practice, some projects in Prague can take up to 8 years to obtain a zoning permit. Stanko added that the growing scarcity of residential space is driving up apartment prices.
Sales prices for flats have been increasing constantly since 2014. In Q3 2022, the average asking price for a newly built flat anywhere in Prague was approximately CZK 155,000 (approximately EUR 6,310) per square metre. This represents an increase of 7% just since the beginning of 2022. Pre-pandemic, the average price was only CZK 106,000 per square metre in Q3 2019, suggesting an increase of 46% over 3 years. The main driver of price increases was the significant excess of demand over supply, which has still not been satisfied.
Analysts agree that with current prices and rules for mortgages, the Prague residential real estate market has basically hit a barrier for what prices are possible and reasonable to ask for a new flat.
“According to the CG-Index (made by one of the largest developers), at this moment, any single person thinking of buying an average 70 square metre flat in Prague in cash would have to save their entire annual average earnings for 17.3 years,” said Stanko. “This is currently the worst result across the entire European Union. In comparison, the same index reports only 8.8 years of saving needed in Warsaw. In Berlin, where the housing situation is often described as critical, the figure is 9.2 years.”
A significant increase in prices is also visible on the market for previously-owned apartments. The current price in Q3 2022 stood at an average of CZK 124,000 (EUR 5,050) per square metre. After the rapid rise of prices in the market over the past three years, 2022 will see diminishing returns for the sector. Since the beginning of the year, average price increases have slowed significantly to 2%, indicating that the market is approaching its price ceiling, as reflected in the current total volume of new mortgages.
The rental sector has experienced several leapfrog changes condensed into a short period of time. These changes were first triggered by the pandemic and the consequent release of apartments previously offered through unregulated Airbnb platforms. Then came the wave of refugees arriving from Ukraine. Before the pandemic struck in 2020, the estimated number of rented apartments offered through platforms such as Airbnb reached over 14,000 units. Shortly after the outbreak of Covid-19, with the sudden vanishing of students and tourists, many of these flats entered the mid- and long-term rental market, pushing down the average asking rate for rents to approximately CZK 310 (EUR 12.6) per square metre in Q1 2021.
Since then, with the pandemic waning, rents have started to increase again, reaching approximately CZK 385 (EUR 15.70) in Q3 2022. Despite this, the availability of flats since Q1 2021 has decreased rapidly, from over 13,400 units in Q2 2021 to just 6,100 units in Q3 2022. One of the reasons for this is the impact of the Russian invasion of Ukraine.
The lack of rental apartments on Prague’s rental market has begun to attract the attention of new institutional rental operators. After that, even traditional developers started to openly consider “new” PRS projects where adding some project branding and extra services for tenants could justify above-average prices, usually higher than the classic public market rate. Available data shows that the required rent for PRS projects ranges from CZK 350 to 750 per square metre. At locations in the city centre, it ranges from approximately CZK 450 to 650 per square metre.
“In our research, we estimate that the number of apartments ranges from 5,000 to 7,500, including what is currently under construction,” said Stanko. “Even though Czechs will continue to maintain a preference for owner-occupied housing, the market for rental apartments will continue to grow, especially given the current economic situation and conditions for securing a mortgage to acquire an apartment. PRS will thus increasingly become one of the few options Prague citizens have to be able to live and work directly in the capital.”