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Czech Zero Percent Lending Rate Feeds Home-Buying Frenzy

August 28, 2013

Czech Zero Benchmark Rate Feeds Home-Buying Frenzy

Czech homebuyers are back in the market, from the baroque facades of Prague’s Old Town to the trendy former working-class district of riverside Karlin and the grittier outer neighborhoods with their towering communist-era apartment blocks to the home of Pilsner Urquell beer in Western Bohemia. Photographer: Frank Bienewald/LightRocket via Getty Images

Petra Key’s dream of buying a home for her growing family was stymied for two years as her one-bedroom loft in Prague languished on the market during the country’s real-estate crisis.

Now that she’s finally sold the apartment, Key is finding that plunging mortgage rates and improved consumer confidence have turned around the Czech housing market so quickly that other buyers are scooping up properties before she can arrange a second viewing.

“I just found a beautiful house with a great garden that’s been on and off the market for three years,” she said. “I went home to show my husband, but it had already been taken off the website.”

Czech homebuyers are back in the market, from the baroque facades of Prague’s Old Town to the trendy former working-class district of riverside Karlin and the grittier outer neighborhoods with their towering communist-era apartment blocks to the home of Pilsner Urquell beer in Western Bohemia. The Czech National Bank’s decision to slash interest rates to virtually zero has given rise to the fastest-growing mortgage and property market in Prague since 2007, even as real estate still flounders elsewhere in Eastern Europe.

Unlike in past booms, when Czechs and long-term foreign workers fought to jump on the property ladder to take advantage of rising values as prices surged, the current spree is mostly about cheap mortgages, industry analysts and executives say.

The average mortgage rate reached an all-time-low of 2.95 percent in June, down from 3.61 percent a year earlier, according to Fincentrum Hypoindex, a financial consultancy that has tracked mortgage data from the country’s nine largest mortgage providers since 2003.

Unexpected Boom

By comparison, the average Hungarian forint and Romanian mortgage rates top 8 percent, while those in Ukraine exceed 20 percent.

“We didn’t expect such a jump in transactions at the beginning of the year,” said Jan Sadil, chief executive officer of CSOB AS unit Hypotecni Banka, the largest provider of mortgages in the country. “We never imagined we could get that close to records from 2007.”

Lenders granted 45,543 loans totaling 74.3 billion koruna ($3.9 billion) in the first half, up from 35,780 at 59.8 billion koruna a year earlier, according to data compiled by Hypoindex. In the first half of 2007, the market’s peak, 45,405 mortgages worth 75.7 billion koruna were taken out.

No Bubble

The figures include both new and refinanced mortgages, with about a quarter of them sold as refinanced loans, according to industry estimates.

“Lower rates are just one of the reasons why we’re doing well,” Sadil said. “Property prices have remained relatively stable during the last few years and we don’t see any bubble on the market.”

Hypotecni Banka had assets worth 201.2 billion koruna by the end of 2012, compared with 181 billion a year earlier, making it the sixth largest bank in the country, according to its annual report. Czech bank CSOB is fully owned by KBC Groep NV (KBC), Belgium’s biggest bank by market value.

The Ceska Narodni Banka in Prague left its 2-week repurchase rate unchanged for a sixth meeting on Aug. 1, almost half a point below the European Central Bank’s and the lowest benchmark rate in post-communist Europe.

Improved Sentiment

Czech manufacturing performance rose for a fourth month in July and the economy ended a record-long recession in the second quarter, growing 0.7 percent from the previous three-month period.

“Sentiment has improved and people are again seeing the real-estate market as a good investment, partly because there aren’t many alternatives at the moment,” Jones Lang LaSalle Inc. associate director Ondrej Novotny said in an interview in Prague. “These days, buyers don’t expect to make a profit by selling their apartment a couple of years later. It’s more like a safe haven.”

As economic activity picks up, builders are seeing renewed interest in new apartments, which have been built in neighborhoods such as the leafy south-Prague area of Modrany close to the Vltava and the hilly district around the Barrandov Film studios, where films such as action-adventure film “Mission Impossible,” starring Tom Cruise and “xXx” with Vin Diesel, were produced.

Cement Demand

Cemex SAB, the biggest cement maker in the Americas, expects Czech demand for the material to grow by as much as 4 percent annually in the next few years, compared with 2.5 percent in Germany, according to Juan Pablo San Agustin, the Monterrey, Mexico-based company’s executive vice president of strategic planning and new business development.

“If you take a look at homeownership, per-capita consumption of homes, the percentage of mortgages to GDP, it’s super low,” Maher Al-Haffar, Cemex’s investor relations chief, said in a telephone interview from Madrid. “We’re coming into the Czech Republic after a big correction from the peak in 2008. That’s what makes it frankly interesting.”

New apartment sales in Prague may rise by as much as 15 percent this year, Novotny said. Most of the properties on the market in the outskirts of the city can be bought for less than 40,000 koruna a square meter, or about $193 per square foot. That pushes the average price-per-meter for the city to below 50,000 koruna, according to Novotny.

That compares with an average of up to 60,000 koruna per meter in 2007 and the beginning of 2008, Novotny said. Jones Lang only tracks sales of new apartments in the city.

New York

In New York, the average price per square foot for a Manhattan condo is $1,381. Homes in the best parts of central London sell for about $3,100 a square foot, according to CBRE Group Inc.

As Czech buyers take advantage of record-low mortgage rates, new apartment sales are exceeding the pace of construction in Prague. Some developers may lack financing or don’t have enough land and projects in the pipeline after the crisis to start work immediately, Novotny said.

About 5,200 new apartments may be sold in Prague this year, while construction started in 2013 will probably total 3,500 homes. In 2012, sales of 4,650 units exceeded the number of projects started that year by about 1,000, Novotny said.

Upwardly Mobile

A refurbished two-bedroom 96 square-meter flat in an art nouveau building in the formerly blue-collar riverside Zizkov neighborhood is being offered for 6.24 million koruna on the Remax Czech website. A similar property would have sold for about half that price 15 years ago.

“The early nineties were a time of big opportunities as the prices rocketed since then,” Peter Visnovsky, the director of real-estate agent Lexxus AS, said. “But today, the market is pretty stable, purchasing and renting prices are transparent so it’s still a good investment.”

While in the past, Prague apartments were popular among British, Irish or Italian buyers, today about 5 percent of total purchases comes from Russians or others from former Soviet Republics, Visnovsky said.

“The Czech market is ready for more residential projects,” Doron Klein, chief executive officer of AFI Europe Czech Republic, said in an interview. “Some new properties are selling very well, even relatively basic ones.”

Vysocany Project

Afi, which focuses more on commercial or office properties, finished the second part of a housing project in Prague’s Vysocany neighborhood seven months ago and has sold about 75 of the 92 apartments, according to Doron.

Afi Europe owns shopping malls, retail, logistics and office properties in seven eastern European countries including Romania, Poland or Serbia. It’s part of real-estate investment Afi Group, with assets in Israel or Russia. In 2003, Afi built Prague’s Palace Flora shopping mall, the site of the city’s only IMAX theater.

A few weeks ago, Afi also purchased the Cerveny Dvur project close to Prague’s Zizkov freight-rail terminal site, which has space for 630 apartments alongside retail and office properties. Construction work will start as Afi obtains the relevant permits, Doron said.

“Whatever we have in the pipeline is being prepared in terms of permits and we want to start development as soon as we can,” he said.

Rising Rates

Rising longer-term interest-rate swaps, securities used to speculate on future borrowing costs, in the second quarter suggests that mortgage rates may start rising by between 20 and 30 basis points in the second half, said Veronika Jancova, director for retail products at Ceska Sporitelna AS.

Still, mortgage rates won’t go back to 2008’s levels of almost 6 percent anytime soon, she said.

Petra Key, meanwhile, is still hunting for a house with a garden and looks through the “for sale” ads every day. She and her husband Andy, an IT engineer from Texas, are renting an apartment, having kept the proceeds from the sale of their old home for a down payment.

“You have to react really quickly because the good properties go pretty quick,” Key said. “But I can’t wait to have my husband’s parents stay at our house, instead of sending them to a hotel.”

To contact the reporter on this story: Lenka Ponikelska in Prague at lponikelska1@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Rob Urban at robprag@bloomberg.net


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