Real Estate Prices Continue To Rise. Will Anything Stop Them?

Residential real estate prices will grow double in the last quarter of 2022. Can they continue to rise, or will they be stopped by rising mortgage rates or the war in Ukraine? 

Did prices rise by 11 or 22 percent? 

Residential real estate prices continued to grow strongly even in last year’s last quarter. However, its exact pace is not easy to quantify.

Data from the National Bank speak of up to 22.1% year-on-year growth, while according to recent figures from the Statistical Office (SU SR), there was “only” a 10.7% year-on-year increase. This is a relatively significant difference, the cause of which is methodological differences. 

When analyzing the growth of real estate prices, the NBS is based on the offer prices of real estate listed in advertisements, while the SU SR works with the actual realization prices of real estate based on sales contracts from the real estate cadastre. 

A significantly faster rate of growth of real estate offer prices than real estate prices indicates that sellers are too optimistic and offer real estate at higher prices than what they are sold for. 

However, both methodologies have significant shortcomings that somewhat “distort” reality. Therefore, it is not possible to determine which of these numbers is correct. 

Real estate prices can, for example, be distorted downwards due to sales at lower than market prices, which occur between relatives or to minimize tax with a “paper” lower price. 

The actual year-on-year price growth rate at the end of last year was higher than 10.7% but at the same time lower than 22.1%. 

In any case, this is a robust and double-digit increase in prices. It is increasingly driven by investment demand and a significant increase in the prices of building materials that occurred during the past year. 

However, the essential factor pushing price growth continues to be the insufficient long-term supply, unable to cover the strong demand supported by meager mortgage rates.  

Will higher mortgage rates drive prices down?

The mortgage interest rates have fallen significantly over the past few years and have become among the lowest in the European Union. This, of course, was a factor that greatly supported the demand for real estate.   

There is (also)  a slight increase in mortgage rates from record-low levels in the market. The reason is the expected increase in rates by the European Central Bank (ECB), which in the last two months has already been reflected in an increase in long-term market interest rates, which also affect mortgage rates.  

However, this rate increase is only very moderate so far, you can read the guide here. Given the expected development of ECB rates and solid competition in the banking market, there is no reason to expect it to accelerate significantly shortly. Five percent mortgage rates currently on the Czech market are not threatening us anytime soon.

The introductory interest rate of the Czech National Bank is currently at the level of 4.5%. In comparison, the introductory interest rate of the ECB is still 0%, and this year it is expected to increase to only 0.5%. 

We do not consider the current increase in mortgage rates to be a factor that could lead to a significant weakening of demand shortly. In the long term, it can push for a gradual slowdown in the growth of real estate prices, while in the short term, the exact opposite effect is also possible. If people expect further increases in mortgages, they may try to “take the last chance” and increase demand even more in the short term.   

Will the war next door affect real estate prices?

However, the ongoing military aggression in Ukraine may affect real estate prices more than the increase in mortgage rates. Today, no one dares to predict the further development of the situation with certainty. We hope, of course, that the horrors of war will soon end and peace will return.  

However, if the war were to last for a more extended period or there was a military takeover of Ukraine by Putin’s Russia, people would feel uncertain about the future. They may lose interest in purchasing domestic real estate, a long-term investment. In such a scenario, which is not our basic one, real estate prices could also fall.  

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