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Czech real estate market

After the fall of Communism in 1989, the Czech economy started out on the road of transition from a centrally planned economy to a free market. The development was accompanied by large-scale changes in the structure of property ownership as well as a massive influx of foreign investment. At the same time, property that had been nationalized under the Communist regime was gradually returned to its original owners. A large portion of state property was sold in privatisation. Legislation concerning property had to be adapted to the new conditions from a Communist rehash of the model used in the Austro-Hungarian empire. The process was relatively slow and new laws were far from ideal. For example, the cadastre was only established as late as 1993.

After the initial boom, the real estate market began to stagnate as the whole economy went into recession in the second half of the 1990s. Currently, the situation can be described as more or less balanced and the market now resembles that of other European countries. Jan Boruvka is the Secretary General of the Czech Republic's Association of Real Estate Agencies. As we have mentioned before, it has taken a long time for property legislation to patch over the major loopholes and shortcomings. Although it has improved tremendously, a source in the property business who wished to remain anonymous told me that real estate agencies simply cannot always abide by the law, otherwise they would soon be out of business. However, Mr. Boruvka strictly denied that this was true. One of the most painful issues in the area of real estate has been government-imposed rent regulation. Although it applies only to about one third of households in the Czech Republic, it distorts prices and has caused the housing market to develop into a semi-legal business. This legacy of the Communist regime paradoxically allows people whose income would suffice for a decent family house to live in municipal flats and pay cheap, government-regulated rent.

Rent has been index-linked every six months and the paradox of the rent regulation is witnessed by the fact that in some places, such as in the Northern industrial regions that suffer from high unemployment, the regulated rent is higher than it would be if free market principles were applied there. On the other hand, in larger cities the regulated rent is a fraction of the market value.

The regulation was stipulated by a government directive which the Constitutional Court last year found unconstitutional and annulled it as of January 1, 2002. The government and parliament have been trying to find a way round to preserve the current low rents so that they do not anger the voters while obeying the Constitutional Court's verdict. Since no new legislation has been passed, it is certain that in attractive areas, such as the capital Prague, regulated rents will grow significantly after the new year until the supply matches the demand.

Experts agree that some kind of state supervision is necessary, but that it should be in the form of social benefits granted to those who are really in need. Real estate has also been one of the stumbling blocks in the process of the Czech Republic's accession to the EU. While EU member states want a transition period on the free movement of labour from the Czech Republic, Czech politicians in turn are trying to prevent foreigners from buying land in the country because of the difference in purchasing power which would disadvantage Czechs on the market. Some Czech politicians argue that if the market opened after the country joins the EU, prices would rocket and foreigners would simply buy up the Czech Republic.

The current Czech law bans foreign nationals and companies from acquiring property in the Czech Republic unless they establish a subsidiary here. As Mr. Boruvka pointed out, there is also a simple way around the law - a foreigner can pay a Czech citizen to buy property, so that in theory it is in Czech hands but in practice it is owned by a foreigner. He is convinced that foreign firms who were interested in acquiring property in the Czech Republic have already done so either way. Besides that, he doubts individuals from the West will be interested in buying property in the Czech Republic, except for a few attractive areas, such as the Giant Mountains or the capital Prague. That is why Mr. Boruvka does not believe that EU accession will make any significant difference to the real estate market.