Hours after the Czech Central Bank announced its shock rate hike on November 4, ThePrime asked Pavel Velebil (TIDE REALITY) for his reaction to the move and its potential impact on the residential market
Today’s dramatic step by the Czech National Bank has two meanings. First, the bank wants to achieve higher rates for commercial loans and mortgages. But the second meaning is possibly more important: The central bank is sending a clear signal that it intends to fight both inflation and inflation expectations.
In fact, today’s move could be as important as the measures it took in November 2013 in order to dramatically weaken the value of the koruna. At that time, the central bank wanted to halt deflationary tendencies and deflation expectations, which (as I wrote at the time) had a positive impact on the dormant real estate market.
Today, however, the ČNB didn’t just try to send the opposite signal – it succeeded. Just read the papers. All of the articles use phrases like “unexpected step”, “radical raise”, and/or “CNB surprised experts and the public”. This is masterful PR. All the more so because the bank’s governor said quite clearly that the bank was prepared to go even further. Those are all clear signals for the mortgage market. So, while there’s usually a delay before mortgage rates react to such announcements, potential real estate investors are probably already revising their plans. The more circumspect among them will realize that low interest rates can’t last forever and that they could encounter real difficulties when their mortgage rates reset in a few years.
What’s it mean for real estate?
Developers (and the journalists who parrot them) have been repeating their claims that the slow planning process and the lack of supply is causing the rise in prices. This is partially true. But this year’s price rises have been driven above all by the exceptional growth in DEMAND. Just look at the numbers: in Prague it took just the first six months of 2021 in Prague to sell a normal year’s worth of new build units!
It’s precisely this surging demand that the ČNB decided to disrupt. Unfortunately, it was the bank itself that helped stoke the fires of the overheating real estate market in reaction to the Covid pandemic. It did this by raising the acceptable LTV level for mortgage loans to 90% and softening conditions on the income-to-total-loan payments ratio allowed for households. That move sent individual investors storming into the real estate market in the fall of 2020 in an attempt to protect their savings. Using mortgage leveraging, they raced to acquire investment flats. In my opinion, some of these investment buyers will set aside their purchasing plans following today’s rate hike announcement.
The move could actually help the market. Every slowing of demand, each brake on the growth of prices should serve to protect the market from the bursting of the price bubble. The central bank’s moves could assist the real estate market in finding a new balance, even if some isolated locations could still be hit by a price correction of 3-5%. But I’m not worried about a more dramatic decline. The fact is that Czechs traditionally consider real estate as a secure type of investment.
Today’s movement in rates has had one other effect: In making its rate hike announcement, the Central Bank published its expectation that the Czech koruna to as much as CZK 24.20/EUR by the first quarter of 2022. This means that foreign investors now have more reasons to sell than to buy.
Pavel Velebil, managing partner, TIDE REALITY spol. s r.o.
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