There are many factors to consider regarding where the property market will go in Czech Republic in 2009. The ones that we feel are most relevant and are discussed in this report are the US housing market, the global credit crisis, Czech wages versus housing prices, the overall health of the Czech economy, rents versus housing prices and accession to the EURO.Short of time and only want to read the final analysis? The final subheading has our conclusions on how we feel the Czech housing market will be affected.Let’s get started.US Housing MarketWith the US housing market in a tailspin will Europe’s follow course as it has in history?Over the past 10 years housing markets in both the eight major European countries and the US have largely moved in sync. Europe’s housing market largely followed the US one with a lag of about 2 years.Starting in 2007 and continuing through 2008 to date this does seem to be the case as we have seen a similar downturn on the property markets in the UK, Spain and Ireland.In these countries the news just seems to get bleaker and bleaker. For example, Former MPC member Charles Goodhart warned July 11th, 2008 that with the economy looking ‘dire’, Britain is now facing a recession.Professor Goodhart, now at the London School of Economics, said: ‘Output is going to fall, unemployment is going to rise, possibly quite sharply. It’s a horrible situation. The British economy is getting into quite a recession. I remember when the Queen had an “annus horribilis,” and this is the annus horribilis for the MPC. The third quarter will show no growth, maybe even a marginal reduction in output,’ he said in an interview with Bloomberg Television. ‘I think it will last rather longer than is going to be comfortable. The situation looks dire.’The same day the Telegraph also printed the quote from Michael Saunders of Citigroup who said: “The housing market is probably not even close to the bottom, and sizeable further declines in house prices are likely, not necessarily every month, in the rest of this year and in 2009. In turn, plenty more weakness lies ahead for the overall economy as well.”However, to judge Europe as a whole would be an erroneous thing to do because within Europe lies multiple market situations including availability and cost of credit, currency strengths/weaknesses, migration among EU member nations, investment and consumer mentality of residents, etc. Already we have seen how housing markets in Spain, the UK and Ireland have performed very differently than markets of central Europe.Global Credit CrisisWhen the American banks started major write-downs in 2007, no one expected that the event would balloon into what we see today. The economic system is purging itself from the era of easy credit and in the end things will return to a more balanced credit attitude. In the US a report in 2004 put the average household debt at $79 000 USD. More than ¾ of all households had some sort of debt and 40% had more than $50 000 USD. In the second ½ of 2007, debt servicing in the US hit an all-time high as households were putting 14% of their disposable income to service debt.”We are going to have to cut back,” said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. think-tank. “We’ve really been living beyond our means.”In Czech Republic, the level of household credit is nothing compared to the figures in the US or those from Western Europe, who are also at much better levels than the US. The ratio of Czech household debt to gross domestic product increased by seven percentage points to 29 percent in 2007, according to the Czech National Bank (CNB). However, this is well below the ratio in the euro zone, which is 61 percent. By the end of March, household debt totalled 756.14 billion Kc ($47.4 billion), an amount that could well top 900 billion Kc by 2008’s end, according to GE Money Bank.So the delay in Czech consumers adopting the Western credit mentality may just be their saving factor as the credit crisis hits Europe.At present, only some banks have changed lending procedures in response to the credit crisis. Other banks such as Raiffeisen have not tightened their requirements, resulting in a 20% increase in lending year-on-year to the end of August 2008. Hypotecní banka, reported an 11% year-on-year increase in the volume of mortgages in July and August 2008. This is very surprising considering that 2007 was a boom real estate year because of the increase in VAT rates which took effect in January 1, 2008.Zdenek Tuma from the Czech central bank said in an interview October 12, 2008 regarding why he feels the Czech banks are in such good condition in spite of the global credit crisis: “The main reason is that Czech banks were quite recently cleansed (of bad assets) so they started with sound balance sheets a few years ago,””They had very good profit opportunities at home and were not looking for profits elsewhere. That is why we are convinced that Czech banks are all right,” said Tuma.Czech Wages/Housing PricesOne indicator whether housing is in for more growth or a correction is the difference in earning power versus price appreciation as this affects affordability.While the average wages of Europeans grew by 8 percent, the wages of Czechs increased by 41 percent in the past seven years.The average wage in Q2, 2008 was CZK 23,182, which is CZK 1,718 higher (8.0%) when compared with the same period of 2007. As indicated by wage increase, unemployment was reported to be 5.3 in September 2008, much better than neighbours and other European countries. For example, Spain reported the highest rate in Europe of 11.2 percent. Unemployment in Slovakia was at 10 percent in August, according to Eurostat data.With healthy statistics in both wage growth and unemployment levels, it is a good indicator for continued strength in the housing sector at the present.Will this change in the near future?Certainly Czech Republic is an economy based largely on exports. As the world economy slows, so will exports. Already companies in Czech Republic are reporting cuts in production, in particular in the automotive industry but also glass makers and some textile companies. This will definitely have an impact on unemployment in 2009 but should not get out of hand.Overall Economic HealthThe Czech economy grew by a record 6.6 percent in 2007.Second-quarter growth figures in 2008 for the Czech Republic were revised up to 4.6%, year on year, from a previous estimate of 4.5%, which is below the 6.8% growth in the previous quarter. Expectations for the final two quarters are also for contraction in GDP. Expectations for 2008 as a whole are for around 5% GDP.This may be better than their Western neighbours–the euro zone’s economy most recently contracted by 0.2%, quarter on quarter–but is still a sign that the east is not invulnerable to the problems plaguing Western economies, which have been hit by a storm of financial market losses, and soaring food and fuel billsThe forecast for 2009 will most likely be reduced in November 2008 from the current 3.6% said Tuma from the Czech central bank (CNB), as reported on Oct. 12th, 2008. Projections range between 3.1 and 3.3%.”Our great advantage, however, is that last year (2007) we were at the peak of the economic cycle and reckoned with slowdown this year and what will happen will be a greater slowdown (than expected),” said Tuma.Although we can see a declining trend through the last three years, it certainly is a lot healthier than the recessions that are either in full bloom in Western countries or are just on the horizon.On a side note, few people know that before WWII and the subsequent events until 1990, Czech Republic was one of the top 6 industrial powers of the world, surpassing economically countries such as Japan, Italy and Spain. The country was once on par with France and this shows, perhaps, where it aspires.Rents/Housing PricesIf we look at the relationship between property prices and rent, it continues to appear favourable in most parts of the country while Prague, Brno and now Ostrava have declined overall. Although basing property prices on earning potential is not always a reliable indicator as the credit market, transaction costs and risk premiums all would justify housing price fluctuating differently from rents.Looking at different areas, we can see Prague having only a small increase in rents while property prices have risen again. This has pushed the gross rental yields to between 3 and 5%. In Brno the situation is similar with property price increases through 2005 to 2007 not being matched by rental rates increases. Current gross rental yields are also in the range of 4 to 6% with the highest being in small studio flats. Outlying cities such as Zlin and Olomouc have slightly higher yields of 5 to 7% because of having more moderated property price growths.Our expectations for 2009 are that rents will start to rise. This due to less active home-buying as well as a reverse migration trend as Central Europeans who have been living and making better money in Western economies return closer to home as these economies slow.In view of the above we expect gross rental yields to increase in 2009 in the major centers such as Prague, Brno and Ostrava at least 1 to 2%.Accession into the EUROThere is much anticipation as to what will happen to the property prices once Czech Republic joins the EURO currency. This date had originally been targeted as 2010 but recent statements show that the state proposed budget contains conditions that might delay Czech Republic meeting the Maastricht criteria until 2012 or 2013.In other countries this move to the EURO has resulted in an immediate price gain, however, much of the price gain is considered to be already priced into the Czech market.Regarding any exchange gains, the current exchange rate stands at around 24.5 CZK for 1 EURO. The gain of the CZK has exceeded even the most optimistic predictions including previous Prime Minister Jiri Paroubek who, in 2007, predicted a rate of 25 CZK/1 EURO when Czech Republic joined the EURO around 2012.Will the trend continue or can we expect the exchange to remain stable?GDP growth and inflation internally vs European neighbours indicates a continued overall upward trend in the value of the CZK although not to the extent that we have seen in 2007/2008.There is now considerable pressure from the export driven economy to halt the appreciation of the CZK against the currencies of importing companies. It is our prediction that the global slowdown and resultant contraction of the Czech economy will prevent the CZK from making further big gains.Other FactorsA major factor which helped create real estate bubbles in Western countries was speculation by investors. Outside of Prague, investment from foreigners is very, very limited, making up only a fraction of the overall market.Czechs typically have not invested in real estate besides their own living residence. Although 2007 saw a growing trend of Czech professionals and companies buying investment property overall it was very limited and is not a contributor to the rise in housing prices. Had the days of easy credit continued for a couple more years, we most certainly would have seen a much further acceptance of this type of investment and more potential for a collapse on the market.ConclusionBecause of all the above factors, our professional opinion is that 2009 will be a year of property depreciation that basically matches GDP growth overall so somewhere in the range of -0 to -5%. Prague and Brno in general we expect to see stagnant or with depreciation in the range above. Smaller centers which have not seen explosive growth such as Olomouc and Zlin we expect to see growth rate in the range of 1 to 3%. Ostrava growth should fall somewhere in the middle.On a very positive side, in terms of rent we expect 2009 to break the trend of stagnation in recent years. Less buyers overall with a still healthy job market as well as reverse migration should see an increase in rental yields in all centers but particularly the major centers with a less export-centric and more diversified economy such as Prague and Brno. Expect rents to increase by 5% overall in Czech Republic and up to 10% in the above mentioned areas.Property Market Update January 1, 2009.Property across the major centers seems to be in a state of limbo right now as sellers have expectations from prices achieved in late 2007/early 2008 and buyers anticipate prices lowering and seek discounts. Inventories have not increased substantially but the amount of sales has been greatly reduced.Developers have begun to offer discounts to move some properties with the highest being seen as 5%. Other incentives offered include free parking places or kitchens.In Brno, rental demand is much higher than the same period last year and especially in the lowest price range. This hasn’t been reflected in an increase in pricing yet in Brno but we expect it to be seen shortly.Property Market Update May 20, 2009In all areas values of smaller flats seem to have held their value better with the price of larger flats being affected the most.All banks have restricted offers including only one now offering 85% LTV for foreigners who are purchasing. Qualifying standards are stricter across every bank for every applicant. If this continues it could cause price falls more than anticipated in this report.Brno: A comparison of developer’s prices from early 2008 to the current month in 2009 shows that prices are down from 3 to 5% on new projects. Other reports indicate that the price fall has been higher in ‘panelak’ or Communist era concrete construction. Rental market is still very strong for flats for rent under 8000 CZK/month from young professional singles. Larger flats are renting slower.Prague: Reports have indicated discounts of up to 10% by developers on new construction although others seem to indicate overall property value decreases of 1 to 3% outside of ‘panelaks’. Rental prices seem stagnant although flats are filling faster.Ostrava: Developers prices have not come down although prices for ‘panelaks’ have fallen. It is currently a period of ‘pause’ for the market as movement of property has really slowed but prices not decreased. Rental offers have increased on the market over the last six months making the rental market softer than before.Zlin: Bank valuations processed this month for new construction in Zlin have shown an increase in prices of about 5% since the beginning of 2008.Nathan Brown is the owner of Czech Point 101.Since 2003, Czech Point 101 has assisted individuals, companies and investor groups to invest in the Czech Republic property market. We have helped hundreds assess real estate opportunities, safely purchase property, manage lettings, register a local company (S.R.O.), comply with regulations, and establish Czech residency (for EU citizens).