Czechia: You can buy a flat this cheaply either now or 10 years from now
The situation on the real estate market has not been as complicated as it is now for a long time. In many regions, property prices are rising, in others they are falling. Trends are developing differently across segments, and scissors between properties are opening up even where the differences were minimal - even between two seemingly similar apartments. Financing has moved away from the ordinary household, and while people wait for more suitable conditions, the market for quality residential property is being rolled by investors with cash who still have plenty of money and have no problem buying up entire projects before they come to market.
But households may not see the ideal moment when apartments and financing will be available. Prices of good apartments are starting to rise again and by the time interest rates fall, which most people are waiting for, good housing will be unaffordable again. Although it is not obvious at first glance, we are at the very end of the "investment window". This has presented a unique opportunity that is not easily repeated. And the next one may not open for another decade.
An inconvenient truth: Expensive housing is a tax on high living standards. If it rises, prices will rise rapidly
Why am I talking about early, and especially long-term, price increases? The annual Deloitte Property Index was released at the end of August. It states that the average price of a property sold in Prague is only a third more expensive than the national average. In contrast, in Paris and Lisbon we are already talking about more than three times as much. Copenhagen, Athens, Munich, Madrid and London are also more than twice as expensive.
Yet Prague is a great place to live that is second to none in other European capitals. In this light, it is more than likely that today's prices will seem low in two years' time - just like those of 2018 or 2019. Moreover, if there is a discussion about adopting the euro in the next few years, the Czech Republic will attract even more foreign investors in leaps and bounds. We have seen this in a number of markets, for example in the Baltic countries.
We have less than two years to go before property prices move up again and interest rates fall. In layman's terms, it is therefore worth waiting. In the eyes of an expert, it is not. After all, it is a golden rule that prices will soar at the first sign of cheaper financing and owners will wait for the mass demand that more affordable money will bring. More bidders always equals better negotiating terms and the ability to push the price up.
The best time to buy has already arrived. The investment window is closing, we're talking weeks in Prague
The right moment to buy is here and in fact we are already slowly passing it. In Prague, we are a few months away from the investment window closing on the knob, in other regions it will probably be open for a while but could close in a matter of weeks. So it is good to keep a close eye on the market and react before conditions change. Experts expect that around the turn of 2024 the CNB could start to lower the base rate, which has been at 7% for more than a year. This is indirectly confirmed by the CNB's forecast for the summer of 2023, which predicts a fall in interest rates as early as the first quarter of next year. The first swallow in September was the Bank of Poland, which surprised the market by cutting its rate by a record 0.75% to the current 6% to support the domestic economy.
So what makes the most sense for me? Waiting for the next, and likely gradual, drop in rates, or buying a property now with an eye on three years of a frugal lifestyle before refinancing the mortgage? I think the answer is clear - the mortgage is the way to go. If you choose to wait for better interest rates, you will eventually be cherry-picking deals where in the meantime other buyers are buying up all the quality properties. At an affordable price, you will either be left with properties that are far from ideal, or you will have to dig deeper into your pockets - only no one can say exactly how much. And that is what weighs most heavily on ordinary households.
The average homebuyer is now playing with the weakest hand in years.
So what's stopping people taking out mortgages now? Simple - down payments. Even with higher household operating costs and more cautious relatives and friends, saving 10 to 20% of the price of a home is not an amount that is easy to put together. And the stories are multiplying - I've met a buyer who, although the bank approved a mortgage, was unable to secure the portion of the funds that had been pledged in the family.
So he couldn't put down 20 per cent of the property price and not only lost three per cent of the apartment price as a reservation deposit, but is now fighting a five per cent mortgage cancellation fee. The total amount he will lose is in the higher hundreds of thousands and has significantly reduced the savings he wanted to use to finance his own home - so he will probably miss the investment window.
And there's another problem that's not being talked about. And for me, perhaps the most crucial. The average buyer with a mortgage (especially on a first home) has a hard time today. There are a number of blind alleys and risks waiting for them in the market that, by definition, they can't fully understand and where they have no choice but to close their eyes, jump in and trust that it will work out. Yet this is the biggest investment of a lifetime and a mistake or ignorance can mean putting your life savings at risk.
The real estate market has long and logically favored sellers who generously pay an experienced real estate agent, and the buyer is up against a force based on data, negotiation, and legal and financial wiggles that they simply don't have a chance to compete with. And I'm not saying that there are illegal things going on - just that they simply have to agree to terms dictated by others.
Add to that the fact that they are almost always up against people on viewings of flats, buying immediately and willing to drop money "on the wood", and the only chance they have is to overpay, then it is clear that they need an experienced partner. One that puts at least the same tools in their hands that experienced real estate professionals have - data, experience, a legal team and the power of cash offers.
The way to hack a mortgage.
We've attempted to fill the gap and bring more than just a way to "hack" mortgages to anyone looking to take advantage of the current investment window. Because - and I will keep saying this - a mortgage is and will be the best way to finance a property purchase. You just need to look at it with a fresh set of eyes and respect how the market has changed.
So at Ownest, we are currently on a path that addresses the current issues. Through an investor, we will pay for the apartment the prospective buyer chooses and give them the option to arrange a mortgage 12 to 24 months later. Basically, it is a one-time, transparent hedge. At that point, the client buys the apartment at a pre-agreed price. While this will be higher than the purchase price, it will increase more slowly than the expected increase in property values in the market.
At the same time, the client receives support throughout the entire process: selection and approval of the apartment by an experienced investor (the investor protects his investment first and foremost and will not approve an apartment that he would not be able to sell himself without difficulty and profit) and then negotiation and financing. Yes - thanks to us, our clients are the ones who pay for cash and have the opportunity to "get ahead". We make payment within a few days of signing the purchase agreement - that's a strong enough argument to still be in a position where we can even negotiate the price. And when the client is ready for a mortgage, Ownest will prepare a list of the best offers from across the market and arrange all the paperwork around it, free of charge and digitally.
Czech Republic at a crossroads.
It is very clear to me that many people are frustrated with the current events in the real estate market. It's understandable - we simply haven't had to deal with housing prices for a long time. Those who wanted to buy their own usually had the opportunity. Now the whole system is suddenly turning around and not offering many answers on how to behave within it. That's why we are trying to be one of those who will make the situation easier, not just profit from it.
But I would like to end on a positive note, so if we should take anything away from all of this, it is that the current situation is nothing more than a tax on the Czech Republic's success in pursuing its dream path to the West. We saw it coming and were surprised that it came so quickly. However, sooner or later the market will somehow cope again and, after all, Ownest is a good example of this. So choose wisely and decisively - you will always find good opportunities.
Author: Martin Machala - Ownest