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Mortgage trap: The rules for buying apartments and houses are tightened.

July 2018 /

Rising housing prices in Prague are affected by the long construction process and the active role of the CNB. He wants to tighten the bolts even more.

So far, the Czech National Bank appears to create the bubble on the real estate market. With its restrictions, CNB intended to make the housing market safer, but she caused right the opposite. Prices of flats in Prague and in other large Czech cities are rising. And there is nothing to indicate that growth will stop, perhaps a slowdown may come. In Prague, real estate prices are rising also due to rising land prices, materials and construction work. The lengthy building permit process does not help the situation and is one of the main factors of the tense situation in the market for new apartments.

Prague as a warning
In Prague, a person with average gross salary would save for the apartment for 15 years. Virtually, it means that they couldn’t spend their gross wage of CZK 36,758 for 15 years. Only then after this long time they would accumulate enough cash to buy an apartment. That would cost him 6.5 million Czech crowns. Prague is becoming unaffordable to Praguers. There are also fast-growing prices of apartments in the city neighbourhood, from which you can commute to work. Housing crises can spill out over the year into other larger Czech cities. The Czech National Bank's policy will most likely have a share in this trend. The central bank seeks to actively influence the rules for mortgage lending. Commercial banks that provide mortgage loans must comply with these rules.

The availability of mortgages is going to get worse since autumn
CNB has set two strict restrictions for mortgage lenders. They will begin to apply from October 2018. The first condition concerns the total mortgage volume that can be lent which cannot exceed the sum of the applicant´s net wage over nine years. From this example a person with average national gross wage would represent 27,000 Czech crowns net per month. After applying the above-mentioned condition, he or she would reach a maximum mortgage of 2,9 million Czech crowns. In practice, this means that in the city of Prague he or she wouldn’t be able to buy a flat through a mortgage as even the smallest flats are more expensive.

The second condition represents the maximum amount of the mortgage repayment depending on the applicant's net monthly income. The monthly debts repayments cannot exceed 45 percent of the monthly net income. In case of a net average wage of 27 thousand Czech crowns, the mortgage repayment can be less than 12.5 thousand Czech crowns.

The Czech Banking Association has prepared an analysis according to which a fifth of the applicants would not have had reached for the mortgage last year taking into account upcoming rules. Interest rate rise is also expected. With a one-percent increase in rate from two to three percent, a three-million mortgage maturing in 20 years can cost CZK 1500 more on monthly instalment.