“In order for prices not to rise, a factor would have to come that would cool the demand for mortgages. That is, either an economic recession or inflation, which would force the central bank to raise interest rates,” Petr Dufek, Creditas Bank’s chief economist, told Novinky.
The gloomy outlook for those planning to buy their own home is confirmed by recently published data from the Czech Statistical Office. From January to August, the construction of 21,680 apartments began in the Czech Republic. The last time there were fewer was in 2017.
For example, in Prague, a market with traditionally the strongest demand and the highest prices, this year it was possible to start the construction of less than five thousand apartments. According to the strategy adopted by the city in 2021, it would take around nine thousand per year to increase the financially available offer. In recent months, however, the pace has been declining. In July and August, the construction of only 352 new apartments began.
Economists and developers agree that the main culprit is the considerable bureaucracy that hinders the approval of new buildings. In addition, the rules allow construction opponents to delay projects. And the situation is still complicated by the unsuccessful digitization of construction management. Instead of making the job easier for the officials, it creates problems for them.
“Permitting new housing construction absolutely does not work. It is now much worse than before,” stated Ondřej Šťastný, an analyst at the largest Czech development company, Central Group.
Builders are therefore calling for changes that will solve the problems as soon as possible. “Without acceleration and simplification of permitting processes and support for sustainable urban development, it will not be possible to satisfy the growing demand of households for their own housing in the long term,” declared Michal Vacek, director of the CEEC Research consulting firm focused on the construction industry.
The market is driven by mortgages and investments
Table of Contents
- 1. The market is driven by mortgages and investments
- 2. How did teh focus on luxury apartments contribute to the continued rise in rental rates despite increased construction?
- 3. Rise in Apartment Prices Linked to Construction Surge Starting in 2017
- 4. the 2017-Present Construction Boom: A Key Driver of Rental Costs
- 5. Understanding the Supply & demand Imbalance
- 6. The Impact of Material Costs & labor Shortages
- 7. Geographic Variations in Price Increases
- 8. The Role of Investment & Speculation
- 9. Amenities & the “Amenity Creep”
- 10. Future Outlook: What to Expect in the Rental Market
The problem is all the greater as the demand continues to grow this year. Banks and building societies provided 6,795 new mortgages for almost 30 billion crowns in September alone. Year-on-year, their number was higher by roughly a third.
In addition to people financing purchases with a mortgage, the demand is driven by the increasingly strong interest of institutional investors, such as real estate funds or large financial groups. They are mainly attracted to the segment of rental housing, in which more and more people are ending up due to high real estate prices.
Analysts therefore assume that price growth will continue into the next year. Although it could ease slightly from the current double-digit values, even so, the average three-room apartment could become more expensive by hundreds of thousands of crowns. For example, in Prague, an apartment in a new building now costs more than 10 million as a standard, more often it ranges between 12 and 14 million.
It is cheaper in some regions, such as the Ústí Region or the Karlovy Vary Region. However, buyers often do not want to go there because of living conditions, lack of work or poor transport accessibility.
How did teh focus on luxury apartments contribute to the continued rise in rental rates despite increased construction?
Rise in Apartment Prices Linked to Construction Surge Starting in 2017
the 2017-Present Construction Boom: A Key Driver of Rental Costs
Beginning in 2017, many major metropolitan areas across the United states experienced a important surge in apartment construction. While increased supply should theoretically lower prices, the reality has been quite different. Apartment prices, adn rental rates, have continued to climb, frequently enough outpacing wage growth. This article for archyde.com delves into the complex relationship between this construction boom and the escalating cost of apartment living, exploring the contributing factors and potential future trends in the housing market, rental market, and apartment investments.
Understanding the Supply & demand Imbalance
the initial expectation was simple: more apartments equal lower prices. Though, several factors disrupted this equation.
* Demand Outpacing Supply: Population growth, particularly in sunbelt cities and tech hubs, consistently exceeded the rate of new apartment completions. this created a persistent demand that absorbed the new supply quickly. Cities like Austin, Phoenix, and Raleigh saw massive influxes of residents, driving up competition for available units.
* Luxury Focus: A significant portion of the new construction focused on luxury apartments – those with high-end finishes, extensive amenities, and premium locations. While these catered to a specific demographic, they did little to address the critical shortage of affordable housing options for the majority of renters. This created a two-tiered rental market, with luxury units commanding high prices and leaving a gap in mid-range and affordable options.
* Construction Costs: The cost of building materials (lumber, steel, concrete) experienced significant increases starting in 2017, further exacerbated by supply chain disruptions during the COVID-19 pandemic. These rising costs were inevitably passed on to renters in the form of higher rents. construction inflation played a significant role.
* Land Costs: in desirable urban areas, the cost of land acquisition remained exceptionally high, limiting the feasibility of building affordable housing. Developers often prioritized projects with higher potential returns,focusing on luxury developments.
The Impact of Material Costs & labor Shortages
The period between 2017 and 2024 witnessed unprecedented volatility in construction material prices.
* Lumber Prices: Lumber prices, a key component in framing, experienced dramatic swings, peaking in 2021.These fluctuations directly impacted the cost of building new apartments.
* Steel & Concrete: Global demand for steel and concrete increased, leading to price increases and supply chain bottlenecks.
* Labor Shortages: A shortage of skilled construction workers further drove up labor costs, adding to the overall expense of building new apartments. The skilled trades shortage impacted project timelines and budgets.
These factors combined to make new construction more expensive, ultimately contributing to higher rental rates. Apartment development costs became a major concern for developers and renters alike.
Geographic Variations in Price Increases
The impact of the construction surge and rising prices varied significantly across different regions.
* Sun Belt Cities: Cities like Atlanta, Charlotte, and Tampa experienced rapid population growth and a surge in apartment construction. However, rental rates still increased substantially due to high demand and limited affordable options.
* Tech Hubs: San Francisco, Seattle, and Boston continued to see high rental rates despite new construction, driven by the concentration of high-paying tech jobs.
* Midwestern Cities: While some Midwestern cities experienced moderate apartment construction, rental rates remained relatively stable compared to coastal and sunbelt areas.
* Case Study: Austin,Texas: Austin saw a massive construction boom,adding tens of thousands of apartment units. despite this, the median rent increased by over 50% between 2017 and 2023, demonstrating the power of demand in a rapidly growing market.
The Role of Investment & Speculation
Increased investment in the multifamily housing sector also played a role in rising prices.
* Institutional Investors: Large institutional investors entered the apartment market, viewing it as a stable and profitable investment. This increased demand for apartment buildings, driving up prices.
* Real Estate Investment Trusts (REITs): REITs specializing in multifamily properties contributed to the increased investment activity.
* Speculation: In some markets, speculation – the practise of buying properties with the expectation of future price increases – further inflated prices.
Amenities & the “Amenity Creep”
The competition for renters led to an “amenity creep,” where developers added increasingly lavish amenities to attract tenants. These amenities, while appealing, added to the cost of construction and ultimately contributed to higher rents. examples include:
* Rooftop pools and lounges
* Fitness centers with state-of-the-art equipment
* Co-working spaces
* Pet spas and dog parks
* Concierge services
While these amenities enhance the living experience, they also represent a significant cost that is passed on to renters. Luxury apartment amenities became a key differentiator in a competitive market.
Future Outlook: What to Expect in the Rental Market
Looking ahead, several factors will continue to shape the rental market.
* Interest Rate Impact: Rising interest rates may slow down new construction, potentially easing the supply shortage.
* Economic Conditions: A potential economic slowdown could dampen demand, leading to more stable or even declining rental rates.
* Affordable Housing Initiatives: Government initiatives aimed at increasing the supply of affordable housing could help address the affordability crisis.
* Shifting Demographics: Changes in demographic trends,
