Thanks to low interest rates on mortgages and generous social subsidies from the left-wing government, the development of new housing projects has boomed in the past two years. But a change is likely to come soon. Interest rates have started rising, and the new government will need to cut a big chunk of social subsidies in order to reduce the mounting budget deficit. Petr Illetško, general director of the AAAByty.cz real estate company, talks to The Prague Post about the outlook for the real estate market.

1. The threat of a huge state budget deficit next year is likely to force major cuts in social subsidies, including subsidies for young families — are you afraid those cuts could hamper investment in housing?

The question is whether cuts in housing subsidies will really occur. And even if they occur, my experience and the experience of our experts indicate that the decline in demand would be only minimal. Housing subsidies to young families represent an additional support for them, but they are not crucial.

2. The construction industry is growing thanks to low interest rates on mortgages and the expected value-added tax increase on construction projects in 2007. How do you see future development given that interest rates are slowly rising and the VAT increase could affect only a small fraction of newly built flats?

Actually, I expect that interest rates will rise, and that they will reach higher levels usually found around the European Union. Having observed recent steps taken by the Czech National Bank [ČNB], it seems that its effort to target inflation will lead to a gradual increase of interest rates. Still, it's important to see that interest rates on mortgages are rising ahead of the official rate increases announced by the ČNB.

3. Keeping most flats in the 5 percent VAT bracket will only be possible if the government also includes large flats in the category of subsidized housing. Do you think such a move runs counter to EU regulations?

Well, I'm not qualified to say whether a particular categorization is correct or not. Still, I'm convinced that, even if large flats were removed from the 5 percent VAT bracket, the real estate market would not decline significantly.

4. Planned rent deregulation beginning in 2007 is another key factor in the demand for flats. Do you think this move could work as an incentive to the construction industry to develop low-cost flats?

Again, I need to say that I do not expect this factor to have any major effect on the construction of new flats. The actual rent deregulation will bring more transparency to the market and bring prices of older real estate to current levels. I think rent deregulation will affect prices of flats in regional towns rather than in Prague.

5. What is your personal opinion on the issue of rent deregulation? Do you think it could further increase the gap between the rich and poor?

Regulated rent is a remnant of the past, and it now applies to many families who do not belong to socially weak groups. That's why I'm convinced that the planned deregulation will not increase the gap between the rich and the poor.

6. Are people buying flats as investments? What is the state of speculative purchasing in your industry at the moment?

Today, about 5 percent to 10 percent of new flats are being purchased for as investments. I can hardly estimate any figures of future development of speculative buying. However, I think that it is dependent upon the marketing activities of developers, banks and real estate companies. I believe that flats bought as investments will not be higher than around 10 percent.

7. Business analysts often mention Czechs' lack of flexibility in relocating for work. Are Czechs naturally averse to this, or does a lack of adequate accommodation outside major cities create a roadblock?

I don't see a big problem with the availability of flats, but rather in the rigid mortgage market. If you want to buy a flat somewhere and move for work, you must deal with problems financing your previous mortgage. The market can become more flexible only when banks become more flexible in terms of refinancing mortgages. Our real estate company is well aware of this issue, and therefore we attempt to build up a network of branches throughout the whole country that mediates sales and purchases of flats with mortgage burdens.

8. Your real estate company entered the market only last year, but it is now already the third-biggest firm. How do you explain such fast development?

We have a strong capital base thanks to the financial backing of the SPGroup. Also, we thoroughly analyzed the industry before entering the market, and we now proceed according to preset strategy.

9. Does the example of AAAByty suggest there is room for other companies on the Czech real estate market?

I don't think there's room for another player with the ambition to serve the whole market. I can see new business opportunities in various niches, such as in offering real estate services to foreigners or buying and selling properties abroad.

10. By the way, why are there three 'A's ?

The name of our company is related to our Web site, and it should work in a way that potential sellers or buyers of flats are directed to our site. The reason for the three 'A's is to accentuate the quality of services, and it is an easy way of looking us up on the Internet.