Czech mortgage rates increase dramatically as inflation kicks in

Recent months have seen huge demand for mortgages in the Czech Republic, with concerns growing that a coming economic hammer blow resulting from the pandemic will see prices spiral. But for those who haven’t already picked up a cheap mortgage, it could already be too late.

New data from Fincentrum Hypoindex shows that the average mortgage rate saw its biggest jump since 2003 last month. The average rate rose to 2.99 per cent from a previous level of 2.70 per cent in November. This was the tenth increase in a row, making it clear that the days of extremely low mortgage interest rates are now a thing of the past.

This will make it even more difficult for many living in the Czech Republic to get on the housing market. Prague is already one of Europe’s most expensive cities for buying a house, so home ownership in the capital city is set to become even more unattainable. But the increase is being driven by wider economic forces causing serious concern among analysts.

Inflation rose to 6.6 per cent in December and the Czech National Bank is now openly discussing the possibility that it will reach double figures this year. In this context, the bank has progressively raised the base interest rate in the hope that doing so will take money out of circulation: providing a bigger incentive for people to save money while making loans from banks more expensive.

In the short term, though, this means mortgages are becoming more expensive in line with price rises for smaller consumer expenditures. The bank's policy of raising interest rates was criticized by the previous Czech government for this reason; but economists agreed that it was a necessary step to keep a lid on inflation. Now, a pessimistic tone is growing more common, due to expectations that rates will continue to rise.

“This is the highest month-on-month increase in the history of the Hypoindex. And given the ever-increasing offer rates, it’s clear that they will continue to rise. We should expect this trend to continue for the whole year,” said Fincentrum & Swiss Life Select analyst Jiří Sýkora.

Mortgages provided in 2021 had a total value of CZK 430 billion, a huge increase of almost 70 per cent from 2020. As rates rise, demand is expected to start falling. Indeed, last December saw 5.5 per cent fewer mortgages taken out than the previous month. This trend could continue, with Sýkora expecting mortgage rates to hit the 4 per cent mark this year for the first time since August 2011.

Lower demand could eventually put an end to the spiraling cost of real estate which has led some to describe the market as “out of control.” But in the short term, times will get harder for those hoping to buy a new home.