According to the sociologist, apartments can become cheaper by up to a third. Prague is not in a price decline
The idea that the prices of Prague apartments cannot expect to fall is naive. Housing sociologist Martin Lux states this in an interview with the weekly Ekonom. It is reminiscent of the development after 2008, when domestic apartment prices were on average 22 percent higher, and Prague was just below the average. “On the contrary, Brno like that was still poor at the time, during the crisis period the decline in apartment prices was the smallest of all large Czech cities,” says Lux.
Real estate prices in the Czech Republic have risen significantly in recent years, do you think there is a real estate bubble that will burst with the economic cooling?
Yes, I think she’s bloated. The overvaluation of prices has been evident since 2018, however, since 2020, i.e. since the covid years, this is a textbook example of a price bubble. The increase in apartments in our country was a record compared to all the countries of the European Union, and their overvaluation already exceeded the rate of overvaluation of apartment prices in 2008 in the first year.
The pressure to burst a bubble usually decreases during an economic recession accompanied by an increase in unemployment and household incomes. So it is not about the development of GDP, but about the development of employment and income.
If the labor market in our country continues to be as tight as it is today, then even if the GDP falls slightly, such a recession can only affect the housing market in the short term and moderately. But if we are facing a really deep recession similar to the one in 2008, then on the contrary, we can witness a relatively deep decline in apartment prices, even below their equilibrium level. In that case, prices could drop by up to a third on average.
Unfortunately, the housing market is very volatile, and moreover, this volatility increases over time and deepens in countries dominantly based on owner-occupied housing. There, then, sharp price increases occur during booms and equally sharp declines during recessions.
Can you see from the data in the Czech Republic that prices are already falling?
According to the indices we create on shared bank data, we have seen stagnation rather than decline in prices in the third quarter of the year. At the same time, prices were still rising in the first two quarters of this year. However, it is clear that the market is turning and a drop in prices, if not already visible in some segments and in some regions, is close.
In the case of Prague, it is said that prices can stagnate at most, or fall only in peripheral parts and in panel housing estates, because the demand for housing will continue to exceed the supply in the coming years. Do you agree with that, or do you think that the drop in prices can affect Prague real estate in general?
There is no Prague, that was shown by the last crisis after 2008. At that time, apartment prices fell by an average of 22 percent in the Czech Republic, and Prague just belonged to the average. On the contrary, Brno was such a bad place at the time, during the crisis period the drop in apartment prices was the smallest of all large Czech cities. People who move to Prague for work can return home the moment they lose it, or move somewhere else entirely. It will not go unnoticed in the market.
In addition, in Prague, the amount of investment purchases usually results in high price volatility. Investors are not interested in waiting 10 years for the price of an apartment to return to its original level, and 15 years if you include inflation. During that time, they can earn in other ways, for example, they get more than five percent a year today just on savings accounts.
What do you think drove property prices up? How big a share do real estate investment purchases have in the current situation?
At least since 2019, investment purchases of real estate have been the main driver of price development and their overvaluation. The scope of investment purchases in such a short period is, in my opinion, a novelty in the Czech Republic. Therefore, more and more people began to talk about the so-called financial situation of housing and its harmful consequences. This includes the fact that housing has ceased to be perceived primarily as a home, it has become an investment.
too many economists attribute the unhealthy development of apartment prices to bad building regulations, i.e. that it takes a relatively long time to process a building permit here. We devoted quite a lot of time to testing various factors on the development of apartment prices in the country, and the results show us that the influence of the scale of housing construction on the development of apartment prices is marginal. That doesn’t mean it isn’t. But the additional two thousand apartments built annually will not solve anything if more than half of them end up in the hands of investors. Conversely, factors on the demand side, such as interest rates, incomes, demographics, have a dominant influence on price development. After all, it is showing beautifully today.
How much influence does the Czech desire to live in one’s own home have on price growth?
Very favorable. Our research, including foreign data, confirmed that the standard owned its behavior to the reasonable behavior of buyers in the market. And such behavior then increases the volatility of apartment prices. If everyone is throwing bricks as soon as their income and employment situation allows, regardless of whether or not it is reasonable at the time, then I have to have an effect.
Where does this desire actually come from in us? And why is rental housing perceived as a failure in life?
That is a question for the historian. The truth is that even in the previous regime, where the majority of households in cities lived in rent, it was not a rental housing as we know it today, but a certain form of quasi-ownership. People received decrees for apartments and practically considered the apartments as their own. So home ownership has been with us for a long time, even if it formally looked different. Sociologists use the term social construct for such a situation. Home ownership is not necessarily a better option than renting, but I believe it is. This is how we created the reality around us, so that the world was clearer and we could breathe better.
However, the fact that it is only a social construct will inevitably show itself sooner or later. First, by visiting, for example, Germany or Switzerland, where people do not share similar beliefs. And above all, time itself will weaken the power of the norm to such an extent that we will still experience how people throw off its shackles and suddenly find new possibilities that will give them a life without thirty years of mortgage repayments.
Will this attitude change among the younger generation, will they be more willing to go into rental housing?
Perhaps so, but it certainly won’t happen overnight. According to our research, the ideal of the young generation is still living in one’s own home, but this is slowly changing as living in one’s own home remains only an ideal. Real aspirations can thus move elsewhere and these could be the first swallows of change. Generally, to change the norm rather in some tragic moments, when, for example, apartment prices drop by half and people realize that they believed in a chimera. The norm of owning your home can thus destroy itself.
By the way, are Czechs unique in the aforementioned desire to own real estate, or is it typical for post-communist countries?
It is typical for other post-socialist countries as well as countries in the south of Europe. The obsession with own housing is also in Anglo-Saxon countries. In other words, we are definitely not alone. However, it is precisely in Eastern Europe, including our country, that the share of owner-occupied housing in the country’s housing stock is the highest.
Full interview you can read in the current edition of the weekly Ekonom.
Complete edition of the current issue of the Ekonom magazine
Photo: Economia
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