Czech National Bank says flat prices rose too high and should fall

A new report by the Czech National Bank warns that flats in the Czech Republic are overpriced in spite of recent falls and prices could slide still further. The report says rent and wage rises failed to keep pace with that price explosion, which started to put flats out of reach of ordinary earners.

The Czech National Bank decided to put the spotlight on the sharp surge in flat prices between 2002 and 2003 and the latest flat price fever between 2007 and 2008. The analysis forms part of a bigger study covering the financial stability of the country which is to be released on Friday. The bank points out that real estate bubbles have the capacity to disrupt the whole economy.

The findings should be welcomed by those pondering a flat purchase but make sobering reading for existing investors in bricks and mortar. Basically, the bank says that Czech flats are still too expensive and prices should probably drop further.

Prices in Prague, the country’s second city Brno, Liberec and other main cities are out of sync with economic fundamentals, according to the bank.

The national bank’s conclusions are based on two main pillars. The first is that the cost of renting flats has seriously trailed the expense of owning them. Figures from real estate companies show that it would take 27 years for rental income from a Prague flat to cover the initial purchase price. In comparison, in the Germany city of Stuttgart, the time frame would be just 19 years.

The second factor is that purchase prices as a multiple of earnings increased so much in the Czech Republic that flats started to become unaffordable for anyone earning anything like average wages.

The Institute for Regional Information is a Brno-based data collection and processing company which has been following Czech real estate prices for many years. Director Milada Kadlecová agrees with the bank’s conclusions that flat prices were exaggerated and should fall.

“Flat prices almost doubled from 2006. It is currently more advantageous to rent than buy. Nonetheless, the wave is over and prices have fallen since the end of 2008 by almost 14 percent. And we expect that they could fall by that amount again.”

That, she says, is the top of the range for price cuts, with 10 percent the least that flat prices could still fall over the next year or so.

She adds that expectations of spending cuts by an incoming coalition government and continued relatively high unemployment will also put a damper on the local real estate market.