What is your outlook for the development of mortgage rates for this year?
At the moment, it appears that mortgage rates could gradually decline slightly. Basic interest rates are, however, quite fluctuating. They are now lower than in the second half of last year, so we see some potential for very modest mortgage discounting. But it will only be by tenths during the whole of this year.
The average mortgage rate will still remain above five percent this year, so significantly more than many households would like. The longer-term outlook suggests that mortgage rates may remain at this higher level for a longer period of time. We already had six percent mortgage rates around 2008.
Yes, but apartments or family houses were three to four times cheaper…
Therefore, it is necessary to look at real estate prices also in comparison with the development of wages. In recent years, the growth of real estate prices has literally been detached from the growth of wages.
The example you gave is breathtaking, namely that for a new three-room apartment in Prague for an average of thirteen million crowns, a family needs a mortgage of ten million crowns, a net income of almost 140 thousand crowns and savings of three million crowns. The installment at a rate of less than six percent amounts to almost 60,000 crowns per month. Does this mean that each of the two applicants, in the case of spouses, must have roughly one hundred thousand crowns gross per month?
More or less yes. Especially since 2020, the discrepancy between household incomes and property prices has increased significantly. While nominal wages and GDP have increased by less than twenty percent since then, prices for older apartments and family homes have risen by 60 percent.
Isn’t it because purchases by investment companies in attractive locations raise demand, and thus the price?
Property prices grew much faster throughout the Czech Republic, not only in attractive locations.
| Development according to CBA |
|---|
| The number of mortgages in 2022 was the lowest in twenty years. |
| For older apartments and family houses, sales fell by half in a year-on-year comparison, and for new apartments by 57 percent. |
| Older flats in panel and brick buildings reached their maximum prices in the middle of the year and then depreciated by an average of only 4.3 percent by the end of the year. |
| The average prices of newly sold apartments increased by 11 percent, to 120,000 crowns per m2. The highest are in Prague, where they reach 151,643 CZK/m2. |
| Source: Czech Banking Association, Dataligence |
So do we have expensive mortgages for expensive apartments? At the same time, it is generally said that with the rise in mortgage rates comes a decrease in demand and thus the price should also decrease…
That’s right, now mortgages and apartments are expensive relative to income. Many households cannot afford a mortgage now with current interest rates. According to the regulations, the monthly installment cannot exceed 45 percent of the total net monthly income of the applicant.
Can people who took out mortgages at low rates and now have them pay off their mortgages, for example, six thousand crowns a month for a three million mortgage?
Despite the noticeable increase in mortgage rates, the share of defaulted mortgage loans remains at very low levels. At the end of 2022, the share of problem loans was 0.57 percent, while in the crisis years of 2011-2013 this value was on average 3.2 percent.
Even the still low number of problematic mortgage loans is the cause of the relatively low decline in real estate prices so far. It cannot be ruled out that the number of defaulted mortgages will worsen. It depends on the development of the economy. The end of last year was very pessimistic in the estimates, now they are more optimistic. Gasoline, gas, electricity became cheaper…
Mortgage rates have decreased slightly, and this is the biggest drop in the last two years
Finance
Energy is currently cheaper on the stock exchanges, but households are still facing high advances this year. A consequence of inertia?
Yes. A number of households will only be affected by expensive energy costs this year, as many were fixed last year. Energy prices will also be felt later, rather next year.
A larger number of unpaid mortgages could get the banks into trouble, because when real estate prices fall, wouldn’t the auctions have to cover the debts?
Forced sales would mostly cover the outstanding mortgages, as they are no longer provided for the entire purchase price of the property, so there is a certain reserve for any drop in the price of the property being sold. Of course, stress sales reduce prices, but many potential buyers from among investors are waiting for that.
At the moment, however, there are no significant discounts and the question is whether this will happen. We do not yet see a reason for large falls in real estate prices. There will be big differences from region to region. It will certainly make energy-intensive, older properties cheaper.
Do you mean cottages?
Yes, cottages and cottages are a very specific real estate segment. They shot up in price during the covid era, when you couldn’t travel, and now many households are dealing with energy expenses again…
The prices of older apartments fell by up to a fifth in a year
Economic
