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

4. The factors behind the high value of the P/I ratio in Prague

Introduction

The fourth chapter in the publication summarises the results of analyses that were carried out in order to reveal what factors may lie behind the relatively high prices of owner-occupied housing in Prague (high P/I ratio values) compared to the rest of the Czech Republic. We believe that this chapter is the biggest asset of the entire publication and the findings it reached may be of interest to researchers on housing in other countries. Therefore, it will be devoted the most space in this summary.

In order to identify the individual factors behind the dominant position of Prague’s P/I ratio, the authors drew on their own analyses, but also drew on the opinions of representatives of important developers, investors, building companies, and real estate agencies operating in the Prague real estate market. Their opinions were surveyed in special sociological surveys carried out for the purpose of this project. I.e. for the purpose of the analysis were used both qualitative (based on available data sources) and quantitative (based on sociological surveys and focus groups) methods.

A survey titled Housing Construction 2007 was carried out in the second half of 2007 among representatives of major development, investment and building firms operating in the residential real-estate market in Prague. The survey involved semi-structured questionnaire interviews by phone and supplementary in-depth interviews and two focus groups. The objective of the survey was not just to quantify the problem of housing affordability and the reaction of housing construction to the rising prices of older housing thus far, but especially to map the processes that lie behind housing construction and discuss with the actors involved the individual obstacles (of housing supply adjustments) and their consequences. For these reasons a quantitative and qualitative research design was chosen. The interview, conducted while the questionnaire was being filled in, was carried out with high-ranking and also well-informed representatives from the firms approached to participate in the ranks of managing directors, directors of development, executive directors, and other managerial positions.

The survey Real Estate Agency 2007 was conducted as a questionnaire survey among representatives of real estate agencies operating in Prague. The survey was conducted as a telephone interview on a sample of 29 respondents. Only representatives of important (according to turnover) real estate agencies operating in Prague were selected. Given the size of the sample and the survey methods used it is impossible to guarantee that the responses in any of the surveys mentioned above are representative for the entire target population. The results should be understood just as a kind of probe, despite the fact that even the most important representatives of the target groups participated in both surveys.

The questionnaire survey conducted as part of the Housing Construction 2007 survey showed that 65% of respondents believed that housing prices in Prague in 2007 are long-term equilibrium prices and thus not the result of a short-term fluctuation that should be followed by a more dramatic correction of prices; similarly, 62% of representatives of the approached real estate agencies in the Real Estate Agency 2007 survey somewhat or definitely agreed that housing prices in Prague are long-term equilibrium prices. Only a minority of respondents believed that the current prices of owner-occupied housing are too high (a short-term fluctuation). Respondents in both surveys considered the reason for the high value of the P/I ratio in Prague to be the specific nature of Prague as a (capital) city that has a high economic performance and a wide selection of job opportunities, and that fact leads many citizens from throughout the country to move there. Many respondents also referred to the high demand for owner-occupied housing, the centralism of decision-making and the economic processes that exist in the capital city. Many respondents disagreed with the claim that the P/I ratio is much higher in Prague than in other regions and pointed to an error resulting from the averaging of unevenly distributed incomes and prices; or they pointed out the fact that a similar situation exists in other countries between the capital city and other regions. Respondents often noted the unique job opportunities offered in the capital, especially the wide selection of managerial opportunities and thus well-paid jobs. Some also noted the fact that new housing construction is expensive (the high acquisition costs of new housing) and that ‘drives up’ the price of older flats (so, up to a certain point in time, supply does not respond to the price increase in older housing), or referred to the media pressure created by real estate agencies and developers pushing people to purchase housing, the large demographic cohorts recently entering the market, the ever increasing amount of housing speculation, and the influence of housing being purchased by foreigners with higher incomes.

Respondents were also offered the possibility to choose from a limited number of predefined potential factors behind the high price of residential housing in Prague. According to the respondents’ answers, some of the most important factors were the high economic performance of Prague, the insecurity surrounding rental housing, and the related effort by tenants to own their housing as soon as possible, the fact that people do not want to sell vacated flats but rather lease them out, and the media pressure of real estate agencies and banks recommending that people buy housing of their own.

A problem pointed out, for example, in the Netherlands or Great Britain, namely, of rigid urban planning, was not considered by respondents in the Czech Republic to be a significant obstacle preventing the supply-side of housing from reacting adequately to a rise in the price of older housing (only 24% of respondents). Conversely, what respondents did regard as important was speculative purchases of land and generally the short supply of land for construction in Prague.