“American Rent Prices” in Prague? Increasing Number of Households Cannot Afford Housing Costs

Worse access to homeownership, a shortage of apartments for rent. But also, an economic cooldown, frozen growth of salaries, and inflation.

Czech people who don’t live in a home they own will have to prepare for a significant increase in housing costs. This might reach such a degree that Prague could follow the “American rent” scenario – rent which is so high that a family spends most of its income on it. The turning point might arrive mainly at the moment when citizens of Prague stop considering renting as a temporary solution.

Even though in recent weeks it might have seemed that prices of rental apartments could be going down, the opposite is more likely. That’s because the current decrease is related to a specific type of real estate and represents a local, and most likely temporary, anomaly. And it won’t depend only on the speed with which mass tourism returns to Prague.

This is because the highest number of people to date is looking for rental apartments and the demand is higher than the number of newly vacated apartments; logically, this leads to an increase in price, especially in big cities. Bezrealitky, a portal through which a vast majority of rental contracts are realized over the long-term, announced that in the first quarter of 2020, the highest number of rental contracts in its history have been concluded on it – which is one-tenth more than last year.

“No matter the situation, tens of thousands of households will continue to look for a place to live in Prague. The short-term decrease in prices of certain types of rent might even turn around the stream of Prague citizens which is heading into the Central Bohemian Region in the quest for lower prices, and increase the already high demand,” Hendrik Meyer, the CEO of Bezrealitky, says. “It’s not quite possible to expect a step decrease in the costs of housing, especially a permanent one.”

As a matter of fact, three years ago, one-fifth of people in the Czech Republic lived in rented apartments, but in another five years, it could well be every fourth person. In Prague, where this trend will happen the fastest, 60 % of people live in a place they own, but in several years the ratio could easily be 50:50. It will be very difficult for the new generation to afford to own a home in the capital, and they aren’t always willing to go outside the bounds of Prague.

“American Rent” in Prague

Prague’s market could, therefore – at least partially – follow the path of “American rent”, perhaps in direct proportion with the activities of new developers who wish to invest in rental properties. Tens of thousands of households could thus, as a new norm, start paying more than half of its income on rent. In exchange, they would receive not only more attractive localities but also better-quality service from the owners of the building administrators over time.

“It’s not just about the rent level as determined by the owner – rent will increase mostly due to inflation. A lot of rental contracts include a so-called inflation clause. This makes it possible to increase rent by the percentage of inflation from the previous year. The inflation will, concurrently, increase prices of services,” Meyer explains.

“At the same time, you can’t expect that the rate at which average salaries have been increasing in Prague will continue to grow as in the previous years. We will be just as ‘rich’ as we used to be, but prices will increase. In fact, each metropolitan area that has gone through the same development as Prague in recent years is in a similar situation.”

A similar trend can be observed in other large cities nearby – for example, in Munich, Hamburg, or Düsseldorf, rent prices have commonly reached about one-half of household incomes. In Poland’s Krakow and Warsaw, they’re starting to experience the same problem.

Once households accept that they don’t want to live in a home they own yet and that one half of their income goes towards paying rent, they start to behave differently. To a certain extent, this leads to the creation of a new segment on the rental housing market, and the role of property administrators strengthens. A lot of new properties will enter the rental supply and these properties will begin to serve the local population,” Meyer believes.