The new apartments market ended 2022 where we expected. Bid and sales prices in 4Q 2022 continued to show slight growth, by almost 10 % year-on-year, but stagnating in the quarter-term, or rather displaying minimum growth. Due to the significant increase in the costs of key inputs, price reductions across the board are not anticipated this year either. In the final three months of last year, 550 new apartments were sold in Prague. The threshold of 3,000 new apartments sold was exceeded for the whole of the year. This is revealed in a joint market analysis by Trigema, Skanska and Central Group.
The latest housing market data suggests that the bid price for new homes in Prague grew by more than 7 % year-on-year in the final quarter of last year, with the average bid price reaching 154,881 CZK/m2 in 4Q 2022. This represents stagnation in the quarter-term, or specifically 0.5 % growth. The sales price of new apartments grew by almost 10 % year-on-year, from 137,946 CZK/m2 in the final quarter of 2021 to 151,643 CZK/m2 in the final quarter of last year, representing a slight 2.5 % growth in the quarter-term.
A reduction in the price of new homes across the board is not expected this year either. This is mainly due to the massive increase in costs, with the prices of some construction materials last year increasing by dozens of percent in just a single month. The total financial costs for construction materials, labour and energy saw unprecedented growth, taken alongside interest rate levels.
“Investors and developers are facing greater financial costs, reflecting the sudden increase in price of certain construction materials, labour and energy. Interest rates also tripled. Land, financial and overheads costs related to excess bureaucracy and the slow approval-granting process are also higher, while there is also a labour shortage in construction. The investor can detect all of this in construction, and this is also the main reason why a reduction in the price of new apartments is not expected across the board,”,“ explains Marcel Soural, Chairman of the Board at Trigema Investment Group.
Any fall in prices that may occur would apply mainly to second-hand property, mostly of a lower-standard, such as in old concrete apartment blocks or in less attractive neighbourhoods.
Slight market recovery may come this year
550 new apartments were sold in the final quarter of last year in Prague, a similar amount to the previous quarter. Over the whole of last year, 3,100 new apartments were sold in Prague, roughly a 60 % fall in sales compared to 2021. This data should be interpreted in the context of the fact that 2021, when 7,450 apartments were sold in Prague, was the strongest year in modern history. 2021’s record demand was stimulated by uncertainties in the Covid situation, fears of high inflation and efforts to securely invest money to protect it against devaluation. Comparing last year to 2020 gives us a 47 % fall in sales.
This fall in sales last year is almost identical to the fall in mortgages granted. The huge fall in interest in mortgages is mainly the result of rising interest rates – while the average interest rate for new mortgages in early 2022 stood at just over three percent, by November this had risen to around six percent. Very strict rules for actually being granted a mortgage are also increasingly having an impact.
The demand for new homes remains, however, and current circumstances can be perceived as postponing purchase decisions until the situation becomes more stable and interest rates fall. Some economists predict that rates could fall slightly this year, resulting in market recovery. The fall in clients with mortgages could be compensated for to some extent by demand from institutional investors. A recovery in sales could also be anticipated with consistently high inflation, with money left in bank accounts rapidly depreciating.
“The demand for new homes remains high, and there is a long-term lack of new apartments on the market. But with current extremely expensive mortgages and general uncertainty people are currently postponing purchase decisions. This led to a significant slowdown in sales last year. We expect some market recovery in spring. A greater market recovery is not expected until next year, when mortgage interest rates may fall to 3 % per annum. This could make monthly mortgage repayments lower than rental payments,” explains Dušan Kunovský, founder and head of Central Group.
Some developers may halt projects: supply may thin out
There were 5,100 new apartments available to purchase at the end of the final quarter last year in Prague, almost the same figure as at the end of 2020. This is an 8.5 % increase quarter-on-quarter, while compared to last year when the market was practically entirely sold out and the supply was at a record minimum, supply is currently 79 % higher.
“In the last quarter, just 950 new apartments were added to the market, which is the second worst quarterly result since 2017. At the end of the year, supply settled at the level of the long-term average, although this is still not sufficient for the needs of the capital city. Thus very few apartment approvals are granted. While in 2021 construction of almost ten thousand apartments was ongoing, last year the figure was around half this,” says Petr Michálek, Chairman of the Board at Skanska Residential a.s.
The trend of recent months suggests that we can anticipate a stable level, or else reduction in supply this year. On the basis of open discussions, we can expect some developers to halt the construction of new apartments due to a slowdown in sales. This postponement of construction will reduce the number of projects on the market, and so logically also the supply of new homes. Once the market recovers in one to two years (as interest rates fall back to 3 %), there will be a large jump in demand, and the limited supply may put further pressure on prices.