Foreign Direct Investment (+)
With 2009's FDI being about half of 2008's it is not surprising to see 2010 post big percentage increases over 2009.
By the end of 1H 2010, for example, FDI was reportedly 48% higher than 1H 2009.
An indication of this increased investment in Czech Republic is the increased office and industrial space take-up that we have seen over the last months.
Much of this has been reported to be by existing companies which are expanding their operations in the country. This is an indication that the Czech arms of international businesses are money-making parts of the overall picture.
According to a report from Jones Lang LaSalle, the industrial market is leading the upward trend with the take-up levels in Prague for the first half of 2010 being greater than that of all 2009 combined. The vacancy rate is reported down 14.1%.
Recently there was a chart from Jones Lang LaSalle published which indicates at which point in the real estate cycle the office rents are for each city. The chart depicts the situation as of the end of June 2010 and it was indicated that at that time the prices were close to bottoming out. To read the full report and view the chart go to: http://www.joneslanglasalle.eu/
King Sturge predicts a 10% increase in commercial real estate transactions as interest in offices and shopping centers increases according to this Reuters article: http://www.reuters.com/
Of course, the effect on the residential market will be delayed as the effects of more jobs and a growing economy takes time to flow through to the bulk of the residential property consumers.
Economic Recovery in the EU and particularly Germany (+)
Although the EU's growth has been lacklustre, Germany has been a gem with Q3 having 3.9% y-o-y GDP growth. This is a very positive indicator for Czech Republic since nearly one third of all goods produced in Czech Republic are sent over the border to Germany.
Although Germany's 2011's growth is currently predicted to be more tempered than 2010, it will certainly be a top performer in the EU.
Developers With Large Unsold Inventories (-)
At the end of the property 'gold rush' there were many new apartment projects built on speculation. Construction costs and land costs for the developer were all at a premium.
For the unfortunate developers whose projects completed in 2009 or early 2010 this means they paid top dollar for the construction but the market was no longer there to resell the flats at the same premium.
The result of this is that many developers are sitting on large stocks of unsold new property, currently unwilling to go down in price. The number of these flats in Prague alone is estimated to be around 3500.
Although the number of flats being held is not huge, we feel that developers will need to lower prices in order to move there flats and this will have a negative effect on property prices in 2011.
Foreclosures by Banks and Unloading Inventory (-)
There was an increase in foreclosures in 2010 estimated at about 10% more than in 2009. However, this is much less than was originally estimated and overall the economic hardiness of Czech households has been very good.
Our conversations with the banks we cooperate with indicate that the number of foreclosures will continue to increase in 2011.
Again, the same as with the newly built stock that developers are holding, the amount of flats are not large enough to make a big impact on prices but will for sure be a dampening effect in 2011.
Wages & Unemployment (+)
In 2009 it was predicted that unemployment would surpass 10% in 2010. However, it stayed just under with the peak measurement being 9.9% in February 2010. Since then it has improved to around 8.5% as of the writing of this report. Estimates see it decreasing to 7.5% in 2011.
The employment situation has remained resilient and this, we feel, will be a strengthening factor for the housing market in 2011.
Wages themselves grew in 2010 which was better than the stagnation of 2009. However, it is estimated to end the year at growth of about 1.5% after being adjusted for inflation.
Although this is not very much, it does show that the purchasing power of households is increasing. This also increases family's abilities to take on mortgages and save for down payments.
The wage increase will be a slightly positive factor for the housing prices in 2011.
Overall Economic Health (+)
At the end of 2009 it was predicted that Czech GDP for 2010 would fall around 0.8%. The current forecast is for the year to end at around 2.2%, so much, much better than forecast.
If this trend of excessive pessimism (it is not socially acceptable to err on the side of optimism these days) is correct that means the current predictions of 2% will also fall short of the actual.
Good numbers like these do much to bolster citizen's confidence that the crisis has been averted and they can be sure to have a job and growing income.
This confidence translates into upward pressure for the housing market.
In 2010 we saw rental demand stagnate in most areas with a small increase in demand in optimal locations.
At the start of 2011 rent controls for about 450 000 flats in Czech Republic will be finished, allowing the owners to demand market prices for them. What do we expect this to do to market prices overall?
We expect that this will bring a stronger demand on smaller and cheaper rental apartments while larger apartments may fall in rental prices. This is due to the fact that many tenants will look for apartments which matched what they were paying under rent control, even though this means reducing the size of their apartment.
We feel that any movement (if there is any) in rents during 2011 will be muted and have little effect on property sale prices.
Currency Trends (+-)
The CZK has strengthened considerably to the EUR through 2010 and we don't feel it will have any further effect on the Czech property market in 2011.
Government Budget Deficit (-)
In our 2010 Czech Property Forecast we had felt that there was a strong likelihood we would see an increase in corporate tax, property tax and/or a capital gains tax on property because of the budget deficits the government was running.
So far there have been small increases in property taxes but not in a way that would affect home owners or have any impact on prices.
However, with budget cuts for 2011 being very timid, there will still be need to make more drastic steps in the future to make ends meet, something that even President Klaus has recently admitted.
We feel there is a very strong possibility that new tax measures could be introduced in 2011 which would negatively affect property prices. For sure we wouldn't see tax changes which would have any positive effect on housing.
Conclusion - Short-term (2011)
When looking at 2011 we feel that the positive factors on the market slightly outweigh the negative and we will see a net growth in property prices over 2011.
How much would we expect to see?
We would expect to see a maximum of 3% year-over-year with much of the growth coming in the spring.
Conclusion - Longer-term (2012 to 2013)
Many of the negative factors which will affect growth in 2011 should be more stabilized the end of the year such as the government budget deficit, developers unsold inventories and bank's foreclosures.
With these negative factors out of the way and the economy continuing to grow we would expect property price growth to increase to the range of 5% per year in 2012 and 2013.
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