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

4.3 Incomes from the shadow economy

Another factor that theoretically could be the cause of the unusually high value of the P/I ratio in Prague is the shadow economy in Prague compared to the level of unclaimed income in the shadow economy outside Prague. There are a number of definitions of what the shadow economy is. Generally the shadow economy refers to shadow activities, transactions, payments that take place outside the official economy (i.e. hidden from the state apparatus).

Research conducted by a research team at CERGE (The Center for Economic Research and Graduate Education of Charles University) in 2004 revealed that 21% of respondents in that year had income from the grey economy, of which only 2% of respondents often had such income. The estimates of respondents as to how much Czech citizens engage in the shadow economy, like the estimates of how much their friends participate in the shadow economy, are much higher – according to estimates on average 4 out of 10 people in the Czech Republic have income from the shadow economy. The results of this research unfortunately cannot be used for a regional comparison because the sample was not very representative. However, the results suggest that in the Czech Republic the amount of income from the shadow economy is not insignificant, but it is difficult to determine the real amount of these incomes.

Among the things the analyses revealed is that differences in the branch structure of the economy cannot alone be the cause of the significantly larger volume of disposable financial resources from the shadow economy that could enter the housing market and thus put pressure on increasing the value of the P/I ratio. However, given that there is not available information on whether and to what extent there is a difference between the share of income from the shadow economy in Prague and in regions outside Prague within individual branches, based on available data sources we cannot entirely rule out the potential effect of incomes from the shadow economy on the values of the P/I ratio. A specialised survey would be necessary to obtain more detailed information, but that lies outside the scope of our research project.