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The Impact of the Global Pandemic on the Czech Real Estate Market

When the news of COVID-19 started to surface in the media at the beginning of 2020, hardly anyone was able to foresee the impact of the disease on the world population and economy. The Czech Republic has been fighting to contain the virus since March, and, although it has been largely successful in minimising the spread, virtually no aspect of everyday life has remained unaffected, the real estate market being no exception.

The beginning of the epidemic in the Czech Republic

The first positive cases of the coronavirus were confirmed on 1 March this year. The Czech Republic was among the first countries to respond to the threat, declaring a national state of emergency on 13 March, followed in quick succession by the closing of its borders at midnight on 15 March.

All the restrictions later implemented, coupled with the threat of the disease itself, plunged people’s lives and the entire economy into a state of limbo, bringing most of the country to a halt.

This paralysed the housing market, especially during the first month of the epidemic – those who did not have to move were no longer searching for a place to rent. Consequently, this stifled the demand for buying properties.

 

Sale and purchase of real estate

During the pandemic, buyers’ demand for apartments slightly decreased. However, even after the decrease it is still higher than the supply. This is noticeable especially in Prague and other large cities, which is mainly due to the slow authorisation of building permits and a lack of land for new buildings.

It is not recommended to panic-sell your property immediately because of the fear of falling prices. However, if you’re certain that you would still like to sell your property in the foreseeable future (within half a year or so), you should sell now, as there are only two possible short-term outcomes: prices could either fall further or very slightly increase, meaning that owners will not stand to gain much from a delayed sale.

The other extreme of speculating and waiting on real estate prices to start growing again is not an ideal course of action either. Instead, it is better to buy now because one will seldom hit the ideal price. If real estate prices were pushed further down by the economic slowdown, they would probably remain at the same level anyway due to the housing shortage, which is not expected to subside in the near future, as the demand will continue to be much higher than the supply.

What might currently play into the hands of potential buyers is the abolition of the real estate acquisition tax. The Czech finance minister’s proposal for abolition of the tax was approved by the government in April 2020 and it was already supported by the Chamber of Deputies in the first reading. However, as the opposition did not agree with some parts of the law,it is now being adjusted for the second reading. Once finally approved, the abolition of the tax will save buyers 4% of the property’s price and it should also have a retroactive effect. It will even apply to buyers who bought properties back in December 2019, with those who have already paid the tax to get their money back.

The abolition of the tax is a great thing, but the fact that it was, for a long time, only a promise, slowed down the market since everyone decided to wait for further developments. It is expected that the abolition of the tax will motivate a lot of previously hesitant buyers into purchasing a property, which might put the market in motion again.

Some of the best real estate investment opportunities in the Czech Republic are in the Central Bohemian region or Ústí nad Labem. That is, if you aim for a bigger profit and are willing to take a risk. If not, Prague or Brno would be better options. Ostrava is also a great place to invest, since it still offers low prices despite being a big city with a potential for growth.

 

Mortgages

Regarding mortgages, there are two significant changes that have come with the pandemic: the deferring of mortgage repayments and the relaxation of the rules for granting new mortgages.

As for the former: It is now possible to defer repayments for loans provided to clients prior to 26 March for three or six months.

What does the relaxation of the rules mean? As of 1 April this year, the Czech National Bank relaxed its recommendations for assessing new mortgages and so the limit for new mortgage loans has been eased from 80% to 90% in the case of LTV (loan to value). Additionally, the condition that the loan can be a maximum value of eight to nine times the annual net income has also been removed. And another change: The installment can now form up to 50% of the applicant’s net monthly income.

These two major changes have the potential to motivate more people into purchasing property, just like the abolition of real estate acquisition tax. This depends on people’s willingness to take a risk and on banks that still remain careful.

 

Rents vs. coronavirus

The act of closing borders has had a significant impact on rentals too. With the number of foreign newcomers plummeting, the entire Airbnb market of over 13,000 rental units froze. Since it is not yet clear how long travel will be suspended for, many owners have opted instead to offer their apartments as long-term rentals, which has increased the supply of new flats on the market. Demand has nevertheless remained low due to decreased tenant mobility.

Prague is the most striking example of disparity between the pre-pandemic period and current rent prices: the number of new rental ads rose to around 2,000 a week, while the four-year median of new weekly offers was around 1,250. At the same time, the median price of rental offers in the city fell by about 10% from mid-March to mid-April. However, this number includes apartments from the outskirts of the capital, where fewer properties are rented through Airbnb, while in the tourist parts of Prague, prices fell by as much as 50%.

 

What to watch out for when renting an Airbnb apartment

There is nothing wrong with renting an apartment originally used for Airbnb business, but not every single one of these owners might have good intentions.

While some of them may have decided to turn away from Airbnb permanently because of the pandemic, others might be just waiting for the tourists to start coming back. Once this happens, their tenants might be forced to search for a new apartment again.

What could help you to protect yourself from such problems? Certainly the lease agreement. Pay attention to what it contains and focus especially on the length of the lease and the terms for termination of the contract. Besides that, it is vital that the lease agreement be in accordance with the Czech civil code, which is legally binding for all civil contracts.

Even if the lease agreement seems to be fine, it is advisable to insist on the inclusion of a fine for early termination in the agreement. Not only will it protect you, but the owner’s reaction to this might also reveal a lot about their true intentions – if they are serious about the long-term contract, they are less likely to reject the inclusion of the fine.

You should also watch out for the rent price. There is a chance the owner will offer you a long-term contract but later increase the rent. It is good to read the contract carefully and perhaps to ask the owner about the rent. If you ask them about their plans on increasing the rent and they brush your question off, trying to convince you that there is no danger of that happening, stay alert.

 

Future market development

At the moment, the situation is slowly improving. In the next few months, the market in Prague will probably still have to cope with a surplus of Airbnb apartments. There are two possible options: Either foreigners will return and the apartments will gradually start being used for Airbnb again, or the apartment owners will decide to sell them, which will again increase supply and thus may possibly lead to a further decrease in their selling price.

Will the pandemic have a long-term impact on real estate? It’s still hard to say. The decline in property prices during the last economic crisis in 2008 did not manifest until around six months after the economic downturn, which could theoretically happen in this case as well, depending on how the world economy develops in the coming months. Even so, a long-term fall in property prices due to the global coronavirus pandemic is not expected.