Property prices have soared in recent years and you must have heard forecasts around you that the property bubble will burst soon and prices must start falling. You may be waiting to buy a home – to invest or to live in.
But home prices continue to rise in almost all locations. Are real estate investments worthwhile today despite high prices? Three experts answered this question for us:
Iztok Toplak – real estate broker from RE/MAX G8 Reality, Ivana Birtová – investor in real estate and rental apartments and Petr Marek – chairman of the board of directors of the Klíčanka development company.
Development of real estate prices
Real estate prices were rising before the end of 2018 and are stagnating at the beginning of 2019. The reason for the increase in prices was a greater interest in buying real estate, as buyers were concerned about the consequences of the restrictions and increase in mortgage rates. According to the Czech Statistical Office, prices of flats in Prague hit their ceiling at the end of 2017, but then started to rise again after a slight slowdown.
Real estate broker Iztok Toplak from RE/MAX G8 Reality presented us with an overview of the development of realised property prices and forecasts for 2019 based on transactions of RE/MAX brokers, which makes about 7% of transactions on the Czech market. According to him and other experts on the real estate market, property prices will continue to rise.
Differences in apartment prices in Prague and the rest of the Czech Republic
The differences in apartment prices are large, and it is sufficient to distinguish between Prague and the rest of the Czech Republic. The location, type of ownership and type of construction play an important role. Iztok Toplak pointed out several interesting features in the comparison of Prague flats and Ústí nad Labem.
Rental prices in Prague are still rising, while in Ústí they have stabilised. Ústí is specific, for example, because 1 m2 in a 1-bedroom apartment can be bought for the same price as in a 4-bedroom apartment. In Prague you currently need two monthly salaries to buy 1m2.
Co-operative flats are 20-30% cheaper, unless they are really lucrative locations. Prices of prefab flats have stabilized, brick is still going up. Over the last 3 years prices have gone up 10-15% year on year. The forecast for apartment price growth in 2019 is around 7%. You can compare the development of real estate prices with idnes statistics from 1/2019.
What are good real estate investments for?
The most important consideration to make when buying an investment property is not so much the current price, but the comparison of the purchase price with the rent. The key is how many years you need to pay for the apartment, or what return the apartment brings you.
Ivana Birtová – a member of the club, an investor and trainer in real estate investment explained to us that even today in Prague it is worth buying an investment apartment and getting a 5% rental yield. And even higher returns can be achieved outside Prague.
Real estate prices are rising
Property prices have risen by 50% in the last 7 years.There are many reasons for this:
- GDP and the average wage have been rising steadily.
- Unemployment is low and people are not afraid of losing their jobs and therefore not afraid of going into debt.
- Mortgage interest rates are very favourable.
- Social and demographic changes in society are also playing a large part in the situation.
- The number of independent households has increased significantly.
- Life expectancy has increased, many people are living alone and the divorce rate is still high.
- The younger generation no longer live with their parents as often, nor do they wait for their grandparents to live to old age.
- Prague and other Czech cities are also interesting for foreigners.
- Everybody needs somewhere to live and there are still not as many new flats being built as before the crisis.
These are all factors that speak in favour of the future of rental housing, especially when combined with the restrictions imposed by the CNB, which make it difficult for many people to get a mortgage for their own home.
According to Ivana Birtová, it is currently not worth buying a property because of speculation on a steady rise in its price. However, real estate still represents a good source of passive income and security for old age. Housing is one of the basic human needs and does not lose value like other commodities.
The risks associated with investment property can be treated
However, investment property also has its risks. Defaulters or unoccupied apartments can be a problem, but these risks can be treated. In principle, it is still a very easy business segment where you do not pay health or social security on the income and you do not need a trade licence to operate it.
Since 1990, the interests of property owners have been represented by the Civic Association of Homeowners in the Czech Republic, which, among other things, strongly opposes the current proposal of the Ministry of Industry, according to which the rental of more than three flats in a house should become a trade with all its consequences.
Mortgages, legislation and taxes
The mortgage restriction in October 2018 provoked increased interest in buying property as many expected it to be more difficult to obtain a mortgage, which has now been clearly confirmed after six months of the measure being in force. A big influence on your ability to get a mortgage is your debt in the form of other types of credit, so Ms Birt recommends not taking out unnecessary consumer loans, credit cards or opening overdrafts.
When buying an investment property, banks will now offer you a maximum 60% loan, but it is usually no problem to finance the first 4 or so flats with 80%. There is no longer any need to worry about fixing mortgage interest rates for long periods, as the current conditions for extraordinary repayments and early repayment are regulated and very favourable.
The rental income is also well adjusted tax-wise compared to other types of income. Many investors apply a 30% flat-rate expense when taxing it, whereas it would often be more advantageous for them to apply actual expenses.
Compared to rental income, you can claim depreciation on the property – both accelerated and straight-line, as well as mortgage interest on investment property acquisitions. It just needs to be clearly distinguished from the very differently constructed deduction of interest on a mortgage for your own home. You certainly need to be well versed in the tax and legislative rules around real estate. If you want to learn more about real estate investing, attend one of Ivana Birt’s seminars.
Are you considering buying an investment property?
If you want to buy an investment property or a residential property, be sure to consider the new development project Klíčanka, in which many Venture Club members have already invested. Petr Marek – Chairman of the Board of Directors and member of the Venture Club Committee – gave us an update on the current status of the project.
The Klíčanka flats project is a modern housing project 15 minutes from the centre of Prague with completion in June 2019. You can follow the progress of the construction and its entry into the final stage in the Photo Gallery on the Klíčanka website.
The club is currently open to invest in the Klíčanka CD rental housing project. The Venture Club has decided to buy two houses – houses C and D, occupy these houses with tenants and then sell them. All information and the opportunity to make a pledge to invest is available to club members by logging into the internal section of the website.
“In my opinion, investing in rental properties is one of the safest investments ever. A rental property provides you with a regular income that means you don’t have to worry about fluctuations in its price in the long term, rental income is continually increasing with inflation. At the same time, your investment is a valuable physical asset that does not lose value in the long term, but rather gains. And last but not least, providing housing is a meaningful and useful service that people really need in the long term.” Ivana Birtová