International Property News

Czech Property - Prague Property Market Outlook

22nd February 2012

In these uncertain times many of our property investor clients are asking us what to do with their properties in Prague � buy more, hold or sell. This is a perennial question, the answer to which depends on how you view the Prague property market and its future course.

The Prague property market peaked in mid-2008 which happened to coincide with when the worldwide financial crisis really started to bite in the Czech Republic. At this time it was obvious to many that property prices were going to fall, however, it was just very difficult to predict by how much and for how long.

We�ve noticed two patterns of behaviour amongst investors over the last few years. Leading up and into 2009 many investors took our advice and chose to sell up and move money into more profitable assets, such as stocks and commodities. At the same time other investors, quite reasonably, took the view that property is a long term investment and the Czech Republic is not a bad place to hold part of their portfolio.

Over the last 3 years, this second group of investors have had to watch their properties decline in value by around 30-40%. This dramatic drop in prices has been accompanied by a decline in rental prices. This is a painful combination to shoulder, especially for those investors who had leveraged themselves heavily in the later stages of the boom years.

After 3 years of pain, and as property prices in Prague continue to soften with no sign of turn around, increasingly large numbers of investors are choosing to cash out rather than face another 3 years of financial uncertainty. So again, like in 2008/09, we�ve been assisting these property owners to sell their properties in 2011/12 - if properties are reasonably priced and well marketed they still sell in normal timescales.

One of the main reasons that prices continue to fall is there is simply too much supply on the market relative to demand.

On the supply side developers simply built too many properties in the boom years - and seem to continue to build and build! This oversupply is going to take quite some time to sort itself out and is killing any chance the market will recover.

On the demand side there is nothing on the horizon that would lead to increased demand. Wages are not rising significantly, unemployment is unlikely to fall much, the population is not rising very quickly, taxes are unlikely to go much lower and more mortgage rates are already extremely low � and so on.

If it wasn�t for the low mortgage rates currently available property prices would have fallen even more quickly than they already have done.

The big concern here is that inflation is starting to rear its head. Anyone living in the real world buying everyday items such as bread or fuel will know real inflation is certainly above 10% per annum (don�t believe the government massaged figures of just over 2%). This is eroding purchasing power and the central bank could be forced to increase interest rates in an attempt to control prices which would be the final nail in the coffin for the property market (we�ll look at the dangers of rising inflation and the European debt crisis in more detail in future articles and what this means for your property portfolio).

Unfortunately, this all adds up to property prices in Prague continuing to fall.

The market seems to be in a sort of limbo where buyers can see prices falling and feel prices are too high, and yet sellers (particularly many developers) are still living in the past and maintaining high prices hoping the market improves. We don�t know what will remove this blockage (perhaps it will be the banks finally realizing they have to do something about their growing number of non-performing loans) but it needs to happen, and when it does we will see more rapid property price movements until they find their right level, from where a fully functioning market will be able to rebuild itself.

Despite the gloomy conclusion, this is far from a blanket recommendation to sell. Indeed, we still believe Prague is a good place to hold property over the longer term and falling prices means better opportunities for buyers. If you�ve not already done so, it could be a good idea to get rid of the dogs in your property portfolio, raise some cash to be ready for future opportunities and look after your cash cows.