Current News From The Real Estate Market | Part 1
Last year, we experienced a very turbulent period not only on the real estate market, but also in almost every other industry. According to the current situation in the world and in our country, it cannot be assumed that 2022 will be any different. The crisis in Ukraine, rising construction material prices, ever-increasing mortgage rates, high inflation, these are the main driving forces of the real estate market these days. So a quiet period is definitely not waiting for us and there are several scenarios for future development. Let's take a closer look together at the first two areas we have prepared for you today.
The Ukraine crisis
The war in Ukraine has hit the hearts of almost every one of us and what seemed like a Hollywood sci-fi movie just a few weeks ago is now a reality we still can't truly stomach. But which part of the real estate market will this crisis affect the most? Especially the rental market. There are currently 250,000+ newly arrived people from Ukraine and this number will continue to increase. All newcomers who decide to stay with their families in the Czech Republic will look for new accommodation, which will eventually switch from the current support to long-term accommodation. We will therefore witness an enormous pressure on rental housing, which will be amplified by rising mortgages and also greater interest in rental housing from the local Czech population as well. It would be foolish to rely on new development projects, which are 30% made up of purely investment apartments.
Nevertheless, the Czech real estate market has already proved to be very flexible in the past and has been able to respond to various market developments. In the current situation, the secondary housing market (apartments that people own but do not use) could help. We’re talking about up to 100,000 units that, if set up correctly, could accommodate up to 250,000 people. Other capacities are also offered by municipal apartments, but we are talking only about a temporary solution here. However, we must focus on the permanent solution, and the personal setting of the owners, whether they will want to offer their properties or not, will be crucial here. The government could help out a little here, but...?!
And where exactly will climb the prices of rental apartments? Undoubtedly, we will witness a very rapid growth indeed. In the first quarter alone, the rental market is "enjoying" a 40% increase compared to the same period in 2021. With mortgage lending still rising, demand cannot be expected to decline. The pressure to raise prices will therefore be enormous. At Propexa, we expect an average of 10-15% increase in the rental sector in 2022 alone, even more significant in the biggest Czech cities. The factor that will counteract the rapid rise in prices is the lower purchasing power of Ukrainian households, which will probably be the reason for their concentration on regions, instead of large cities, where for most people unbearable in the long run.
Mortgage rate increase and the current mortgage terms
Current mortgage loan market is undergoing a rather turbulent times. Average mortgage rates hovering around 2% level between the years 2016 and 2021 are, at this point, history. As a result, real estate ownership in the Czech republic will gradually become rather difficult to attain for an average household. Right now, we are seeing a mortgage index at 4,6%. Unfortunately, that does not come close to the final number. If we were reminiscing 2% levels just three months ago, we will be happy to be reminiscing in good light to the times when 4-5% was the market standard. Indeed the rates will continue to increase and by the end of the year 2022 we may well become witnesses to surpassing the 6% mark. Some expertises say we may even see the increase well above 7% however we would like for that to keep these numbers for the science fiction authors of our times.
So why does the Czech National Bank keep increasing these rates and is planning to continue to do so? It’s an anti-inflationary brake. During the course of Covid pandemic, the average household consumption in Czech Republic decreased significantly and the national bank decided to give it a boost by decreasing mortgage rates all the way to the 0,25% level. The halt to the anti-pandemic measures meant a significant “boom” in consumption, increase in the demand for products and services. Not only that, but also an increase in the material prices as a result of the supply and manufacturing chain hindrances during the pandemic as well as a compensation for low profits in the course of covid and subsequential pressure for the increase in employee wages. The result of which the commercial banks are borrowing money from the central bank at the interest rate (so called repo sazba) of 4,39%.
Another set of changes comes to effect on 1.4.2022 when the basic credit indicators change. It should be noted that some banks have already taken these steps last year. However, they will now be applied all across the industry.
DTI indicator (debt to income) simulates the amount of credit towards net income. This amount will be 8.5 times the annual salary for applicants over 36 years of age, and 9.5 times the annual salary of applicants up to 36 years of age. The current standard was 10-11 times acceptable for 70% of the market.
DSTI indicator (debt service to income) is represented as the ratio of monthly loan repayment to net salary will be 45% for applicants over 36 years of age and 50% for applicants under 36 years of age. Just an example, Česká spořitelna has been operating at a ratio of 45% since 2020 for all applicants, regardless of age. The most “beaten” will end up the Hypoteční banka (up to 70%) and Moneta money bank with Komerční banka comes in right after with around 55%.
LTV indicator (loan-to-value) will mainly affect applicants over the age of 36, who will have to prepare 20% of their own resources. Applicants under the age of 36 can still opt for 90% of loans, which, however, most banks in the market are at a significant disadvantage in terms of conditions for applicants.
Every situation has a solution, so we propose the following.
We recommend solving the tightening of the DTI and DSTI indicators by joining a co-applicant / accessor to the mortgage loan, who will guarantee with their income. Any family member is possible in this case. However, they do not have to guarantee for the entire maturity of the loan. With your rising salary and declining debt, you can ask the bank to "recalculate" the mortgage at the end of the fixation period (eg after 5 years). In case of a positive answer, it is possible to request the release of the guarantor from the loan. And you are all alone again!
From our point of view, this is also not any breaking news within the LTV indicator. It should be noted that the gradual increase in interest rates created a significant difference between the rates for 80% and 90% of mortgage loans, namely 0.6%. Applicants thus generally preferred 80% loans in order to achieve a better interest rate. But is it even possible for you to deposit 20% of your own resources? We recommend that you think about the possibility of another pledge, which can be replaced by your own resources. The pledge may be the property of, let’s say, your parents, other family members or friends (trust highly required 🙂).
So how does it work? The bank lends money against the total collateral value. By adding another property to the loan, you will increase the total mortgage value, from which the bank will borrow you the above-mentioned 80%. But you can also finance 100% of the property value in this way. So if you buy a property, for example, for CZK 8 million and you get a second property worth CZK 3 million as collateral, the total mortgage value = CZK 11 million. The bank will lend 80% of the collateral value, up to CZK 8.8 million. This will cover the entire purchase price without having to make up your own resources. As in the previous point, you can get out of this situation sooner. The rising price of the property and the declining liability will allow the second property to be detached without any problems even after a few years.
Decline of buyers with mortgage loans
The rise of interest rates and the tightening of indicators will, of course, also affect real estate demand. We predict a 30% decline in interest in mortgage loans this year, therefore less potential buyers and less pressure on the "contest" for real estate and the associated price increase. In addition, the overall market structure of people financing their real estate purchases with a mortgage loan makes up to 60%. However, we still perceive the great purchasing power of Czech households, which, among other things, are trying to find tools to preserve the value of their finances in times of high inflation.
To buy or not to buy? That's what's the real question here.
In our opinion, potential buyers should decide not only based on the interest rate, but also compare it in the context of the current rental options and its future development with a rapid increase in pressure on rental housing. The rent can be described as a "blind costs" for everyone compared to a mortgage loan, but it must be admitted that it is also a more save port from which you can easily set sail and anchor elsewhere at any time. We are talking about personal preferences here, and some will make the decision to "repay the mortgage" to the owner of the property they currently live in rather than to take out a mortgage and finance their own housing. But it is already up to each individual and their financial possibilities as well. Ultimately, we should not forget about the constantly rising real estate prices, which are also entering the decision-making process and influence our decision significantly.