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

The price-to-income ratio analysis in the Czech Republic and in Prague

The household incomes used to calculate the P/I ratio for the Czech Republic were obtained from the Family Budget Survey data of the CZSO (the average total net annual income of households). Household incomes were then compared to average housing prices using the P/I ratio based on housing price data from the CZSO. The values of the resulting P/I ratio for the CR were then calculated through a simple comparison of average household incomes and average housing prices in the CR as a whole (the unweighted average). Calculated in this way the P/I values could be compared with values for other countries.

Figure 2 shows the values of the P/I ratio in the years between 1998 and 2006. The figure also shows the ‘trend’ curve, which, as expected, is a rising curve, like in many advanced countries. Figure 3 shows the deviation of the values of the P/I ratio from the geometric mean for the entire period under observation, thus, a kind of ‘equilibrium value’; in this case, however, the time series is too short for the values to be considered genuinely comparable to the values for the advanced countries analysed above. The value of the P/I ratio in the CR rose from 2 in 1998 to 3 in 2006, thus by 50% for the entire period under observation and by 28% since 2000. From the perspective of the international comparison in this study, this is an average increase (or just slightly above average), especially owing to the decrease in the value of the P/I ratio in the CR in 2004 – 2006. However, it is necessary to bear in mind that the short period after 2000 leaves out the sharp rise in residential housing prices before 2000, reflects a brief price stagnation in 2004 and 2005, which was kind of an anomaly in the trend in residential real-estate prices in the transition period (in these years, the value of the P/I ratio also decreased). From the perspective of the absolute values of the P/I ratio in 2006 (3.04) the Czech Republic ranks among the ‘cheapest’ countries in an international comparison (like Austria or Finland), however much owing to the poor availability of data this international comparison must be viewed only with caution. In 2006 the value of the P/I ratio was higher than its ‘equilibrium’ level, but the deviation of the values of the P/I ratio from the geometric mean (‘equilibrium’) was ‘only’ around 12%, which from the perspective of the international comparison is a very low value; it is of course necessary to take into account that the geometric mean in this case was calculated on a much shorter time series of data (in comparison to other advanced countries). From the perspective of the international comparison, the Czech Republic thus has one of the lowest absolute values of the P/I ratio and one of the smallest deviations of the actual P/I ratio (in 2006) from ‘long-term equilibrium’.

The value of the deviation, which, like in the advanced countries, is measured by comparing the value of the P/I ratio for the capital city and the average value of the ratio for the entire country, reached a level of 207% in 2006, which puts the Czech Republic among the countries with the largest deviations compared to the other advanced countries above (only Sweden has a greater deviation). The Czech Republic is therefore one of the countries with the biggest difference between the value of the P/I ratio for the capital city and the average P/I ratio for the entire country, even despite the reduction in regional differences (in residential prices) in recent years.