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

3. Residential real-estate prices in the Czech Republic: evaluating the trend

Introduction

The third chapter of the book focuses on evaluating the trend in the prices of residential real estate in the Czech Republic. Figure 1 captures the quarterly indexed trend in nominal and real flat and family house prices in the Czech Republic between 1998 and the first half-year/second quarter of 2007, according to the Czech Statistical Office (CZSO). The CZSO index is constructed out of a non-random and incomplete sample of tax returns on residential real estate transfers and the number of declared transfers is not appropriately weighted (the number of transactions declared by the tax administrator need not correspond at all to the real number of transactions in the given region). The data bias (it is possible that the purchasing prices are deliberately undervalued in order to avoid taxes), the incomplete and non-random sample of transactions, and the inappropriate weighting must all be borne in mind when using this index. However, since 2008 CZSO slightly changed the methodology (especially weighting) of the residential price index computation in order to avoid some possible drawbacks. However, these changes were not available before the release of the publication, thus the values of indeces presented here are calculated according to "old" methodology. New methodology (and refined data for 2007) caused much more sharp increase in flat prices in 2007, which subsequently altered also P/I value for 2007 (the value presented below based on 2007 estimates of the CZSO is lower than it would be according to new methodology and full dataset for 2007).

As Figure 1 shows (CZSO data), the rise in housing prices after 2000 up until the turnaround, that is, until the second half of 2003, was much sharper than the rise in the price of family homes. According to CZSO data at the end of 2003 there was a substantial decrease in the price of flats, and the year 2004 and the first half of 2005 were also marked by a decrease in prices and by price stagnation.

Not until the middle of 2007 in many regions (and in the CR generally) did the nominal prices of flats and family homes return to their mid-2003 level, that is, the price bubble that had arisen at that time, probably as a result of exaggerated expectations prior to the CR’s accession to the EU, subsided. However, according to the ČSÚ, in real values the prices of flats in the CR in the middle of 2007 were still below the level of prices in the middle of 2003 and the effects of the price bubble will probably only fully peter out in 2008.