2009 Czech Property Forecast, Part 1

There are many factors to consider regarding where the property market will go in Czech Republic in 2009. The ones that we feel are most relevant and are discussed in this report are the US/UK housing markets, the global credit crisis, Czech wages versus housing prices, the overall health of the Czech economy, rents versus housing prices and accession to the EURO.

Part one covers the US/UK housing markets, the global credit crisis and Czech wages versus housing prices. Part two will discuss the overall health of the Czech economy, rents versus housing prices and accession to the EURO, as well as an overview of the 2009 property forecast.

With the US housing market in a tailspin will Europe’s follow course as it has in history?

Over the past 10 years housing markets in both the eight major European countries and the US have largely moved in sync. Europe’s housing market largely followed the US one with a lag of about 2 years.

Starting in 2007 and continuing through 2008 to date this does seem to be the case as we have seen a similar downturn on the property markets in the UK, Spain and Ireland.

In these countries the news just seems to get bleaker and bleaker. For example, Former MPC member Charles Goodhart warned July 11th, 2008 that with the economy looking ‘dire´, Britain is now facing a recession.

Professor Goodhart, now at the London School of Economics, said: ‘Output is going to fall, unemployment is going to rise, possibly quite sharply. It’s a horrible situation. The British economy is getting into quite a recession. I remember when the Queen had an “annus horribilis,” and this is the annus horribilis for the MPC. The third quarter will show no growth, maybe even a marginal reduction in output,´ he said in an interview with Bloomberg Television. ‘I think it will last rather longer than is going to be comfortable. The situation looks dire.´

The same day the Telegraph also printed the quote from Michael Saunders of Citigroup who said: “The housing market is probably not even close to the bottom, and sizeable further declines in house prices are likely, not necessarily every month, in the rest of this year and in 2009. In turn, plenty more weakness lies ahead for the overall economy as well.”

However, to judge Europe as a whole would be an erroneous thing to do because within Europe lies multiple market situations including availability and cost of credit, currency strengths/weaknesses, migration among EU member nations, investment and consumer mentality of residents, etc.  Already we have seen how housing markets in Spain, the UK and Ireland have performed very differently than markets of central Europe.

When the American banks started major write-downs in 2007, no one expected that the event would balloon into what we see today. The economic system is purging itself from the era of easy credit and in the end things will return to a more balanced credit attitude. In the US a report in 2004 put the average household debt at $79 000 USD. More than ¾ of all households had some sort of debt and 40% had more than $50 000 USD. In the second ½ of 2007, debt servicing in the US hit an all-time high as households were putting 14% of their disposable income to service debt.

“We are going to have to cut back,” said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. think-tank. “We’ve really been living beyond our means.”

In Czech Republic, the level of household credit is nothing compared to the figures in the US or those from Western Europe, who are also at much better levels than the US. The ratio of Czech household debt to gross domestic product increased by seven percentage points to 29 percent in 2007, according to the Czech National Bank (ČNB). However, this is well below the ratio in the euro zone, which is 61 percent. By the end of March, household debt totalled 756.14 billion Kč ($47.4 billion), an amount that could well top 900 billion Kč by 2008´s end, according to GE Money Bank.

So the delay in Czech consumers adopting the Western credit mentality may just be their saving factor as the credit crisis hits Europe.

At present, most of the major Czech banks have changed lending procedures in response to the credit crisis. This will mean a much different report than 2008 when banks such as Raiffeisen had a 20% increase in lending year-on-year to the end of August 2008. Hypoteční banka, reported an 11% year-on-year increase in the volume of mortgages in July and August 2008. This is very surprising considering that 2007 was a boom real estate year because of the increase in VAT rates which took effect January 1, 2008.

Under this VAT rate change, the tax rate on new and totally reconstructed apartments went from 5% to 9% on flats with a total area less than 120 m2. Those flats which are above 120 m2 jumped to 19%.

Zdenek Tuma from the Czech central bank said in an interview October 12, 2008 regarding why he feels the Czech banks are in such good condition in spite of the global credit crisis: “The main reason is that Czech banks were quite recently cleansed (of bad assets) so they started with sound balance sheets a few years ago.”

“They had very good profit opportunities at home and were not looking for profits elsewhere. That is why we are convinced that Czech banks are all right,” said Tuma.

One indicator whether housing is in for more growth or a correction is the difference in earning power versus price appreciation as this affects affordability.

While the average wages of Europeans grew by 8 percent, the wages of Czechs increased by 41 percent in the past seven years.

The average wage in Q2, 2008 was CZK 23,182, which is CZK 1,718 higher (8.0%) when compared with the same period of 2007. As indicated by wage increase, unemployment was reported to be 5.3 in September 2008, much better than neighbours and other European countries. For example, Spain reported the highest rate in Europe of 11.2 percent. Unemployment in Slovakia was at 10 percent in August, according to Eurostat data.

*Graph Compliments of Eurostat

With healthy statistics in both wage growth and unemployment levels, it is a good indicator for continued strength in the housing sector at the present.

Will this change in the near future?

Certainly Czech Republic is an economy based largely on exports. As the world economy slows, so will exports. Already companies in Czech Republic are reporting cuts in production, in particular in the automotive industry but also glass makers and some textile companies. This will definitely have an impact on unemployment in 2009 but should not get out of hand.