Housing Standards 2007/2008:
The Factors behind the High Prices of Owner-Occupied Housing in Prague

5.3 A shortage in the supply of new flats in Prague

In another part of the book we focused on the issue of new housing construction. The situation in this area is less than optimal in the Czech Republic, despite the fact that the reasons for the inelasticity of supply usually cited abroad (strict and rigid urban planning, e.g., in Great Britain or the Netherlands) do not apply in the Czech Republic. Housing construction was found to be relatively expensive: in relation to the average incomes of Prague households, but also of Czech households in general, it is equally as expensive as it was at the end of the 1990s, which was when private housing construction began to ‘take off’ and, owing to the absence of competition and numerous risks, developers were able to make abnormally high profits. But even many years later, and even during the construction boom going on at the time of the survey, there was still paradoxically no decrease in the price of new housing construction, even though there was a pronounced increase in the amount of competition in residential development and developers’ margins decreased considerably. This raises the hypothetical question of whether the market in new residential construction is perhaps always implicitly and under any circumstances inefficient – as though the rise in demand that evoked competition at one end of the production chain necessarily led to a decrease in competition at the other of the chain, and vice versa. This fact is the result of the limited supply of building plots (and opportunities for speculative holdings), capital concentration in the industry of producing building materials (owing to the formation of oligopolies at the international as well as the national level), and the limited capacities of building production (especially in terms of manpower). The statements respondents gave in the in-depth interviews and focus-group discussions showed that during a construction boom the market in many cases begins to behave irrationally; irrationally in the sense that it behaves in a manner opposite to what standard economic principles say about how efficient markets function – there are no economies of scale, buying more building materials is ‘sanctioned’ by paying a higher price for it, and the fact that even in a boom situation numerous losses are incurred.

The statements made by the interviewed representatives of development, investment and construction firms and manufacturers of building materials and an independent analysis of the market shares of individual major players in the real estate market revealed that the biggest disparity between the applied margin and business risk is evident among manufacturers of building materials, especially in those areas where there is extreme capital concentration (brick production, the production of insulating materials). Also, alongside a policy of ‘starving’ the market, global companies can and usually do apply a global price policy, and as a consequence building materials cost roughly the same in variously developed (and variously wealthy) countries. Many of the respondents regard such behaviour on the part of oligarchies as an abuse of their dominant position, but the representatives of manufacturers of buildings materials argue in their defence that this is a natural process and is the result of demands on technology and capital, the growing emphasis of the end clients on quality, investments into research and development, and the relatively high risks. The publication shows that there is strong capital concentration, for example, in the field of cement, lime, and plaster production (the sales revenue of four companies accounts for 62% of all the sales revenue of all the companies in this field) and in the field of the production of burnt masonry materials and tiles (the sales revenue of three companies account for almost 78% of the total sales of all the companies in this field).

Another serious problem is a shortfall in production capacity, especially construction manpower. As one respondent noted, ‘whoever has manpower rules the market’. Although it may have been just a temporary phenomenon, during the period under observation there was not such a high level of housing construction that all available capacity should have been exhausted. The reasons cited for this shortfall were the demise of apprenticeship training, the low social prestige of the bricklaying profession, and insufficient arrangements for the employment of migrant workers (an inadequate state immigration policy). The average registered number of employees in construction firms rose in recent years only very slightly and the number of manual labourers actually remained at the same level (despite the growing number of construction firms). The activity of foreign subjects in this field is largely limited, as foreign construction firms also usually take on manpower at the location where they are working. The shortfall in capacity (taken up increasingly by more and more public contracts for infrastructure construction) and the growing emphasis placed by clients on the quality of the work performed have resulted, for example, in just a small number of construction firms expressing interest in taking on the responsibility of a major project (including the required quality assurance). An analysis of construction works based on supply contracts also confirmed the existence of a strong trend towards the concentration of production. Developers find themselves increasingly ‘in the grip of a limited number of construction firms’ that are aware of their growing market strength and thus demand an increase in margins that had previously been relatively narrow. The interviews and focus-group discussions showed that large construction firms currently inform each other more about developers’ calls for tender and to some extent, however informally, divide up the market. Many of the respondents stated that this ‘unhealthy’ reaction to the rising demand for housing is largely the result of the lack of transparency in public contracts for the construction of public infrastructure, where illegal practices have resulted in the ability of construction firms to obtain much higher margins than what the market would have set.

A significant factor mentioned that probably contributes to the high value of P/I ratio in Prague is the limited supply of land for construction and the increasing effect of property speculation. The book showed that land ownership in the City of Prague is somewhat fragmented, the exception being the dominant ownership position of the City of Prague (26% of the land). However, even individual owners can have relatively large parcels of land intended for or potentially intended for construction, but given their own wealth and the low costs of holding land there is nothing to encourage them to sell (on the contrary, by holding land they are speculating that its price will rise in the future). In this connection, respondents mentioned the lack of transparency in sales of land owned by the City of Prague, and that also restricts free and open competition. The majority of respondents agreed about the lack of transparency in the sale of municipal lend and a specific example was used to show that the criteria for the sale of land are often very restrictive (and ‘tailor-made’ for interested parties determined in advance). However, a decisive majority of respondents are opposed to the idea of taxing unused land or raising taxes on residential real estate across the board, as they believe that these costs would still be negligible for speculators but could negatively affect small owners.

The costs of ‘financial’ lobbying evident at the local and central levels (especially at the level of the municipality in the process of making zoning decisions and issuing building permits) and the strong concentrated market in providing financing and mortgages to clients (the formation of three large financial groups that control the system of building savings and mortgage loans) may also have a significant effect on the risks and the final cost of housing construction.