Buyers rush to beat rising mortgage interest rates in Czechia

Buying a house is a huge life moment. It’s also one of the most important investments you’ll ever make. Buying at the right time and in the right place can make a big difference to your future finances.

As inflation grips the Czech economy, many are rushing on to the housing market fearing that the price of houses is only going to increase in coming months and years. But is this the right thing to do?

In late December, the Czech National Bank approved a further increase in the base interest rate from which mortgage interest rates are calculated by loan providers. The base rate now stands at 3.75 per cent. After years in which the base rate stood close to zero, the ČNB decided to raise interest rates to combat inflation, which reached 6 per cent in November.

The inevitable result of this policy was a raising of mortgage loan interest rates by individual banks. With the Governor of the ČNB Jiří Rusnok predicting more interest rate increases in 2022, it’s possible that mortgage rates are now more advantageous than they will be in six months’ time.

Further interest rate hikes are made likely by inflation, which shows little sign of slowing. Shoppers have noticed a range of price increases for everyday products at the start of this year. In 2021, three quarters of Czech companies raised prices, with almost a third recording increases by more than 10 per cent.

“The outlook for the coming months does not indicate that inflation is about to fall,” warned Petr Kříž, a partner at professional services firm PwC.

Indeed, it’s possible that the ČNB’s attempt to discourage spending by increasing interest rates could backfire. Pandemic-related uncertainty continues to hang over the economy. Those thinking about taking out a significant loan may be put off by higher interest rates; but they may also be scared that things will only get worse, not better.

Such attitudes may be behind the record number of mortgages provided in the Czech Republic last year, with house ownership seen as a secure investment in times of great short-term uncertainty. Banks provided mortgages worth a record CZK 430 billion in 2021, 69 per cent more than in 2020. Jan Sadil, a member of the board of directors at bank ČSOB, said fears of interest rate increases were partly responsible for the high demand.

If mortgage interest rates do increase as predicted, complicated times could be in store. Experts recently warned that the housing market in Prague is “out of control,” with homes in the Czech capital among Europe’s most unaffordable. Higher interest rates would lower demand, but inflation means house prices will remain exorbitant. Developers are having to factor in higher energy and raw material costs when setting prices for new projects.

This combination of high prices and reduced demand could eventually threaten a crisis for Czech real estate. But for now, potential buyers are spurred on to buy a home by the fact that mortgages are likely to get more expensive, not cheaper, in the short term.