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

4.1 Demand factors

4.1.1 The strong preference for owner-occupied housing amongst the Czech population

One of the key attributes of housing (from a legal, economic and social perspective) is the occupant’s tenure on the flat or home occupied. There are several forms of tenure, and the basic distinction is usually between owner-occupied dwellings (which often include cooperatives) and rental dwellings. Housing ownership is often the preferred form of tenure, though this largely depends on the particular cultural environment. A strong preference for housing ownership may be, assuming the housing supply is inelastic (or not very elastic), one of the factors behind its high price. A strong demand for owner-occupied housing or the non-existence of a functional long-term alternative in the form of rental housing was cited by all the respondents in the above-mentioned surveys as one of the main reasons for the high value of the P/I ratio in Prague.

Figure 4 shows the share owner-occupied housing out of the total housing stock in EU countries around the year 2003; owner-occupied housing here includes only “pure” ownership and not any of the various forms of collective ownership (cooperatives). In this comparison the Czech Republic has one of the smallest shares of owner-occupied housing in its housing stock (behind Germany and Sweden). Were other advanced countries (e.g. USA, Canada, Australia, Norway) or other transition countries (e.g. Romania, Bulgaria, Albania) included in the comparison the ‘deficit of owner-occupied housing’ in the Czech Republic would be even more pronounced. In the Czech Republic cooperative housing is very similar in status to owner-occupied housing (because of the possibility to sell it in the market), and were it included in the owner-occupied housing, the final picture would be different.

In the Czech Republic substantial changes occurred in the tenure during the period of transition. Although compared to other transition countries these changes were not as fast or extensive in scope (Lux (ed.) 2003), the privatisation of the municipal housing stock, the transfer of ownership of cooperative flats to their occupants, the expansion of a system of market financing of housing and of the residential market itself, and the spread of the cultural pattern ‘housing ownership’ led to an increase in the share of owner-occupied housing between 1991 and 2001; according to two censuses, it increased from 43.25% to 46.8% of the housing stock, while the share of rental housing decreased from 36.76% to 28.6%. If cooperative housing were included among owner-occupied housing, in conformity with its status in the CR, then the share of owner-occupied housing would only increase slightly – from 63.08% to 64.2%. The question remains whether this change (the increase in the share of owner-occupier housing) would adequately saturate the preference for owner-occupied housing or whether the strong demand for owner-occupied housing would continue to prevail.

The preference for owner-occupied housing in the Czech Republic can perhaps best be documented in analyses based on data from sociological surveys on attitudes. The main (but not the sole) source of data for the analyses carried out in the publication was Housing Attitudes in the Czech Republic 2001 survey. This was a survey of the Czech population’s attitudes towards housing that was carried out in 2001 on a sample of 3,564 people over the age of 18. In this survey respondents were asked whether they planned over the course of the next three months to move from their current house or flat. The survey inquired into the main reasons the respondent had for moving, information about the location of their future residence, and what means they used to look for and obtain their new housing. The intention to move within the next three years from their current house/flat was indicated by ‘only’ 10.8% of respondents (or 11.4% of respondents, once those who did not answer the question are excluded).

Out of the total number of respondents who were considering moving within the next three years, 53% planned to move into their own house or flat in multidwelling building, their own privately owned flat, or a cooperative flat (the other 7% of respondents planned to be a member of the household in a privately owned or cooperative flat) – a total of 60% of respondents were planning to move into the owner-occupied housing – which here also includes cooperative housing. In addition, 20% of the respondents who were planning to move did not yet know what their new housing tenure would be; if then we only take into account those who know where they are going, then 76% wanted to live in owner-occupied (including cooperative) housing.

Given that at the time of the survey only 20% of the people planning to move within the next three years were owners or members of a cooperative, the ‘deficit of owner-occupied housing’ among the migrating population was considerable – 33 percentage points. But ‘thanks’ to the relatively small share of respondents who wanted to move within the next three years, after weighting, the ‘deficit of owner-occupied housing’ was only 3.6 percentage points among the total population. In reality, however, the deficit could be much higher, given the large portion of respondents who did not yet know what tenure they wanted to move to. If those who did not know where they were going ultimately had the same preferences as those who already knew, then the deficit of owner-occupied housing would be 47 percentage points among the moving population and, after weighting, 5 percentage points among the total population. Owners do not envision themselves moving into rental housing, and the majority of renters would like to move into the owner-occupied housing – in particular in their own family home, which was the most strongly favoured option (conversely, the least favoured option was to move into rental housing and become a tenant of a private landlord).

If we would take into account the statements respondents gave about what their idea of ideal housing is (i.e. not the actual intention to move), the size of the deficit of owner-occupied housing in the Czech Republic would be even higher. A full 64.5% of respondents considered their current housing to be ideal; 35.5% had different visions about ideal housing. Mainly owners and co-owners of family homes (including members of such households) considered their housing to be ideal, while renters (especially tenants in flats with private landlords) and people in other tenure felt least that their current housing is their ideal housing.

From the perspective of ideas about ‘ideal housing’ the preference for owner-occupied housing would be very high, especially the preference to own a family home, but this is not exclusively the case. If in conformity with its current status we considered cooperative housing to be owner-occupied housing, then 90% of those Czech citizens who at the time of the survey were dissatisfied with their current housing would prefer to living in their own (including cooperative) housing. If we compare this preference held by Czech citizens with the actual proportion of people living in owner-occupied and cooperative housing (based on the census from 2001), then there is a clear ‘deficit of owner-occupied housing’ by 20 percentage points; and in particular there is a large deficit of owner-occupied housing in segment of family homes, which owing to the amount of effective demand does not have that much of an effect on the real migration plans of households, but could be a significant factor behind the high demand for owner-occupied housing in the Czech Republic. The determined extent of the ‘deficit of ownership’ in the Czech Republic was compared with the situations in France, England, and Scotland.

The question is what lies behind this relatively large ‘ownership deficit’ in the Czech Republic, or what lies behind the strong preference of Czech citizens for owner-occupied housing? Could the absence of a stable rental sector be a reason? Could rent regulation or very positive expectations relating to the trend in flat prices in the future be a reason? The answers to these questions were examined with the aid of another survey among first-time buyers in Prague, i.e. among people who bought their own housing (usually a flat) for the first time in 2007 in Prague. The survey First-time Buyers 2007 was conducted as a telephone interview on a sample of 150 respondents. The majority of respondents were selected ‘randomly’, based on a contact for them provided in their own classified advertisement seeking a flat to buy in Prague. A small portion of respondents was selected using the method of snowballing: contact information for them was obtained from other respondents. Given the size of the sample and the sample selection method it is impossible to guarantee that their responses are representative for the entire target population. The findings should again just be understood as a form of probe into the views of the specific group of people who enter into the real estate market in Prague.

The majority of respondents were people who were still looking for housing to buy; only some of the respondents had already bought their housing in 2006 or 2007. It is worth mentioning that for a large number of the first-time buyers, previous rental housing had not been just a short-term, transitional arrangement – only one-quarter renters buying a flat had been renting for less than five years. Conversely, one-half of them had been renting their housing for more than 15 years. It is clear from these figures that the current wave of tenants departing the rental sector to buy their own flat/ home is not just part of a natural transition, when the young generation moves out of the rental flats (where they started their housing career) into owner-occupied housing (in the next stage of their housing career), but instead it seems that this exchange of rental housing for owner-occupied housing is more of a mass phenomenon, and it relates to older generations and people who have long lived as tenants. The vast majority of respondents (86%) were already living in Prague before buying a flat, but we do not know if their registered permanent address was also in Prague. Only those respondents who bought their housing under market conditions were included in the research (i.e. not those who obtained housing through the privatisation of municipal flats).

The majority of interviewed first-time buyers indicated that they believe market rents will rise in the next five years. They expect the rise in rents to be slight, not sharp; nonetheless, 47% of respondents expect an increase and 16% of respondents do not expect any substantial change. Only just over 10% of respondents believe that market rents will decrease in the near future (which seems to be quite small proportion in the context of rent deregulation process in the CR). First-time buyers cited various reasons for their assessment of the trend in market rents, but two reason were mentioned most: the rent deregulation, and expected continuation of rise of residential property prices). It should be noted that even rent deregulation was cited as one of the reasons for the belief that market rents will increase; in other words, paradoxically, to some extent there is a notion that the deregulation of regulated rent will also increase “market” rents.

How do first-time buyers see the future trend in flat prices in Prague? The majority of them believe that the prices will rise in the future. If flat prices do rise, most believe that the increase will be slight. Like in the previous case, only few people believe that flat prices will fall. Almost no one believes that there will be a sharp fall in prices. Those who predict a rise in flat prices in the next five years most often make the argument that this will be a continuation of the current trend or base their belief on a rise in demand, without being specific about what would be the cause of this rise in demand.

Relatively straightforward answers were given to the question why people want to own their flat and why they do not prefer to rent instead. Respondents almost always referred to the following advantages of owner-occupied housing: buying a flat is a good investment, and therefore, it is better to take a loan and pay the repayments than to pay rent. Flat ownership was also valued for the security that comes with ownership, which was contrasted with the insecurity of a person living in a rental flat and potentially the negative experiences with private landlords. Some respondents indicated simply and without any further explanation that they wanted to live in their own flat. All these reasons point to a deep-seated belief that owning is the better alternative for obtaining housing than renting a flat. This belief does not appear to be a reaction to the momentary situation in the market; arguments like ‘at the moment favourable mortgages are available’ or ‘at this time I have the money to buy’ were rare.

The survey attempted to determine what might get respondents to reconsider their decision to buy a flat. The respondents were presented with a battery of questions describing possible situations that could occur and they were asked whether in the case of each such situation they would consider renting instead of buying a flat. It is clear from the respondents’ answers that nothing can get respondents to reconsider their belief that buying a flat is the right decision. Respondents perceived that relatively the biggest obstacle to buying a flat to be if they were at risk of losing their job. Given that the majority of them need a mortgage to buy housing, understandably they see the threat of ‘losing their income’ to be a serious problem. Respondents felt a relatively significant obstacle to buying a flat in Prague to be if they were uncertain about whether they wanted to stay in Prague – in that case one-third of respondents would consider renting instead of buying. Finally, more than one-quarter of respondents would be deterred from buying if flat prices were too high and it looked like they were going to fall; this of course is not what they believe about the current situation.

What is significant is that not even fundamental changes in the rental housing sector would have any significant effect towards changing people’s preferences for housing ownership. A fall in market rents by 20% or the introduction of a substantial rent allowance would cause only 17% of the first-time buyers asked to question their decision to buy, only 15% would reconsider if the increase in market rent was limited to the rise in inflation, only 13% would reconsider if it were required that landlords sign leases for an unfixed term, and only 11% would reconsider if landlords valued their tenants more. Rental housing, even if market rents were to fall and financial and legislative protections for tenants introduced, is not – at least not from the perspective of current first-time buyers in Prague who are mostly expecting rents and flat prices to go up – a real alternative to owner-occupied housing. The general belief that investment into housing ownership is a definite advantage – a belief that, at least in the short term of the past, but also in the current outlook of an even more uncertain future, is not based on relevant information obtained from experiences in other countries – may be an important and to a large degree a ‘risk’ factor behind the strong demand for housing ownership in Prague.