Demand & Supply Analysis of EU Accession on Residential
Property Prices
This report will attempt to explain the recent trends we
have seen with residential property prices in Prague. With European Union
(EU) accession approaching on May 1, 2004 in the Czech Republic, future
expectations of prices have caused a somewhat volatile price market as the
perception of EU accession has changed price expectations.
Since last
year's spring vote favouring EU accession, domestic and international
investors have formed future higher price expectations and as a result have
driven up today’s prices. The risk analysis,
graph 1 below,
shows that risk has been falling since the vote for EU accession passed.
Risk has been falling at an increasing rate and will approach full certainty
when May 1, 2004 is realised. The expected fall in risk is caused by an
increase in certainty that the Czech Republic will actually enter the EU.
The fall in risk started when the Czech people voted in favour of EU
accession last spring and higher future price expectations became a reality.
Since the vote, higher future price expectations has resulted in an upward
pressure on prices for today’s housing environment and as result has pushed
up the current demand for housing
(see graph’s below).
The
expectations for future higher prices have driven up prices today. Property
in Prague’s research database saw a 20-24% increase in prices last year as a
result of future expectations and increased demand for housing. This
increase in price growth is attributed to the fall in risk as EU entry is
realised along with the optimistic expectations of future higher prices.
Since
January of 2004, Property in Prague has seen a temporary easing of price
growth which appears to be a temporary break in trend as we approach the
realisation date of May 1, 2004. This can be attributed to nervous feelings
on the part of people who believe that previous expectations of EU accession
were overly optimistic of the future price increases from EU entry. We feel
this is a temporary glut in the market. We expect prices to stabilise after
May 1, 2004 and continue on an upward trend as the nervousness will diminish
as expectations of future value will no longer be affected by EU accession.
Meaning EU entry will no longer cause volatility in the market after May 1,
2004. After May 1, 2004 complete certainty of EU entry will come to
realisation and although risk for investing will still exist, it will only
be dependent on the everyday attributes that influence risk but this is the
case in every country around the globe.
The housing
supply curve in graphs 2 and 3 below are vertical because land and housing
are fixed in supply. This means that the supply curve is highly inelastic as
supply is always slow to adjust to market changes. The vertical supply line
represents all housing stock in Prague. As new build developments slowly
come on to the market in the coming years we expect the supply curve to
shift slowly to the right and to slightly push down market prices
(Graph 3 below). However, with strong domestic
migration to Prague, strong domestic mortgage growth, strong domestic demand
for housing, as well as a growing interest in foreign investor interest, we
expect these factors to offset the small fall in prices that would occur
with the entry of new build developments. The net affect of increased
building stock will be future price growth.
In summary,
residential property prices are still growing but there has been a slight
softening of price growth as nervousness has become evident with pre-May 1,
2004 expectations. The nervousness will continue until May 1, 2004 is
realised. We expect that there will be a reversion back to continuous, less
volatile, and stable price growth that we saw before the vote for EU entry
and EU accession May 1, 2004. There appears to be a window of opportunity
for investing at the moment as the softening of the property price growth
has allowed for the existence hot market deals that may be a once in a life
time opportunity.
A final
comment about property in Prague: No matter what the future expectations of
prices are in Prague, I feel that there is such a uniqueness of architecture
in the stock of housing that is impossible to reproduce at a feasible with
today’s developer. The current market price does not reflect the future
value of the housing stock. The ability to purchase a fully reconstructed 14th
century building for a reasonable price demonstrates that property in Prague
will have significant value in the years to come, even when expectations are
overly optimistic. One will always have significant value in the current
stock of property in Prague. No developer in today’s world can possibly
reproduce these historic buildings, in Prague or else where in the world, at
the current cost one can buy them. This demonstrates continuous and
significant value, use value, and investment value. The limited supply of
housing stock in Prague will almost always have some form price growth in
the years to come.
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