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Lean times

Mortgage market set to cool after fervid 2007

By Victor Velek
Staff Writer, The Prague Post
January 9th, 2008 issue

Jan Přerovský/THE PRAGUE POST
Prague real estate prices have risen at the fastest pace in the country, but analysts say there is little room for more rapid growth.
The skyrocketing mortgage market is history.
With the advent of the new year and the incremental increases it is expected to bring in living expenses and interest rates, the appetite for mortgages and housing is expected to lessen significantly after a rapacious 2007, economic analysts and real estate brokers say.
Despite this cooling, however, the real estate and mortgage markets are still predicted to grow moderately and will continue to be immune to the negative impacts of the U.S. subprime mortgage crisis.
“Last year’s growth of the [mortgage] market — around 50 percent — was extreme,” said Pavla Hávová, spokeswoman for Hypoteční banka. “This year, we expect lower growth dynamics, somewhere around 10 percent.”
In 2007, the mortgage market overheated due to fears of the value-added tax (VAT) rising from 5 percent to 9 percent this year, which was expected to push up construction prices, said Pavel Sobíšek, chief economist of UniCredit Bank.
“Last year, people stockpiled mortgages in an unprecedented manner because they feared they would pay more in 2008,” Sobíšek said. “Those who were considering taking a mortgage and could afford it did it in 2007,” added Vladimír Pikora, chief economist at Next Finance.
Moreover, mortgages themselves are becoming more expensive due to growing interest rates. Last year, the Czech National Bank (ČNB) raised interest rates four times to tamp down accelerating inflation, bringing the benchmark interest rate to 3.50 percent, the highest rate since 2002.
Analysts widely expect interest rates will be raised further this February, with further mortgage hikes expected to follow.
Already this year, ČSOB, Hypoteční banka, GE Money Bank, Česká spořitelna (ČS) and other banks have raised their mortgage rates. For example, ČS increased its short-term fixed-rate mortgages by 0.1 percentage point and five-year fixed-rate loans by 0.2 points, the bank announced Jan. 7.
According to Sobíšek, the sharpest rise will hit one-year fixed-rate mortgages. “I expect the interest rates of those mortgages to sit at 0.5 percentage points higher by the end of this year as compared with the end of 2007,” he said.
Pikora predicts a similar hike in the first half of the year but bets on a decrease later on: “A drop in the second half of the year should at least compensate for the growth that is to come now.”
The mortgage hikes will touch not only new borrowers but also holders whose favorable fixed rates are about to expire.
“Someone who took a three-year, fixed-rate mortgage for 2 million Kč [$112,500]...has to expect that their monthly payments will rise 1,500 Kč or more,” said Petr Stuchlík, a board member of the financial consulting firm Fincentrum.
Beyond the more expensive loans, another primary factor cooling off the market is the steep rise in households’ actual living costs and economic expectations for this year, according to Pikora.
The situation calls for frugality. The growing price of food and energy and the government’s public-finance reforms have upped living expenses and are curbing people’s appetite to spend, Pikora said.
Vacant housing
Like the banks, real estate brokers are preparing for a slowdown this year, as the housing market will grow only moderately, reducing the average housing price hike to about 6 percent in 2008, according Petr Illetško, CEO of the real estate company AAAByty.cz. In 2007, the estimated average growth was around 20 percent.
The Prague real estate market has risen at the fastest pace in the country, but this has started to change. “In Prague, there is little room for the rapid rise of housing prices any more,” Pikora said.
The value of apartments in Prague will increase 7 percent this year, though there are also properties that will drop in value, Illetško said. “We expect prices of apartments in unrenovated prefab houses on the outskirts of the city to decline up to 10 percent in 2008.”
In contrast, real estate prices in Ostrava, north Moravia, and other locations in the Moravian-Silesian region are expected to boom up to 25 percent, according to AAAByty.cz.
Real estate in regions like north Moravia has been undervalued for a long time, and properties are now starting to rise to their real market levels, Pikora added.

Victor Velek can be reached at vvelek@praguepost.com


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