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

4.2 Prague’s dominant economic performance

The main factor behind the high prices of housing in Prague noted by respondents in the Housing Construction 2007 survey and the Real Estate Agency 2007 survey was the dominant economic performance of Prague. Therefore, this connection was examined in an international comparison using the GDP indicator and wage statistics.

Prague’s GDP is substantially higher the GDP of other regions in the CR. Prague’s GDP was almost 2.5 times that of the average for regions outside Prague. Prague compares quite well to other regions in the expanded EU. Its GDP is clearly above the average for the EU-25, while the GDP of other Czech regions during the period under observation ranged between 50% and 67% of the EU-25 average. Prague’s per capita GDP is around 200% of the per capita GDP of the Czech Republic. This is a ratio that can also be found in Slovakia, Belgium and Hungary. These three countries, together with the Czech Republic, rank among the countries where there is an above-average difference between the economic performance of the capital city and the economic performance of the country. Appreciably bigger differences between the performance of a country and its capital city can only be found in the case of Poland (Warsaw’s per capita GDP is almost three times that of Poland as a whole), France and Great Britain. In the latter two cases this is only true if we work with just a narrow definition of the capital city (in France this means the per capita GDP of just the City of Paris, which is the wealthy core of the entire Paris agglomeration, and in Great Britain the per capita GDP of just inner London). Among all the other selected countries (and in the case of France and Great Britain, if we define Paris and London more broadly as the entire metropolitan area) the difference between the per capita GDP of the capital city and the per capita GDP of the entire country is smaller – the capital has around 30 to 50% higher per capita GDP. Generally it can be said that the economic dominance of the capital city over the rest of the country is greater in post-communist countries than in countries in Western Europe.

When considering the potential effect that the different economic performance of Prague and the other regions in the Czech Republic has on the values of the P/I ratio it is also necessary to examine wages differences. The level of wages correlates with the level of GDP – in regions with higher GDP wages can be expected to be higher than wages elsewhere and housing prices can also be expected to be higher (thus the value of the numerator in the P/I ratio); higher wages of course are also reflected in the amount of disposable income among the local population (thus also in the value of the denominator in the P/I ratio). The total effective demand, which has a key influence on housing prices in Prague, is not however determined just by the wage levels of the local population; it is also fed by the non-wage incomes of the local population (incomes from leasing, capital gains from participation in the privatisation of municipal flats, capital gains from the rise in residential real estate prices, incomes from inheritance, gifts, and so on). In addition, effective demand is also formed out of the resources of people who are not local inhabitants but are nonetheless looking for housing in Prague, either for themselves or as an investment. On the other hand, the figures on average wages in Prague mainly tell us about the wages of people who work in Prague and not about the wages of the inhabitants of Prague, because some people who work in Prague do not live in Prague, and with the continuing process of suburbanisation the number of such people continues to increase.

From available data sources it was found that the average wages in Prague are appreciably higher than the average wages in other Czech regions. The theoretical explanation for this fact is based on three factors or combinations thereof: in Prague there is an accumulation of branches that pay higher wages than other branches, or the workers that perform certain types of employment that are generally better paid than other types are ‘over-represented’ in Prague, or it is possible that in Prague the wages are higher for comparable professions even in the same branches.

The analyses revealed that the much higher average wages in Prague can mainly be ascribed to the higher wages in individual sectors of the economy and only to a small extent to differences in the branch structure between Prague and other regions. With some exaggeration it could be said that the high wages in Prague are mainly the result of the much higher wages received by people in qualified and highly qualified professions, especially those working in the business sector. This could be one of the factors behind the unusually high values of the P/I ratio in Prague. It can be assumed that people employed in the highest occupational categories are strongly over-represented among people buying their own housing and thus through their demand contributing to the price of real estate in Prague. Of course, the most qualified workers only contribute to the value of the denominator in the P/I ratio in proportion to their number in the population. In other words, Prague residential real estate prices are ‘driven up’ by the relatively strong purchasing power of people in the highest-earning occupational groups while the average Prague wages are ‘driven down’ by the relatively low wages of less qualified Prague residents. Prague acts as a magnet for qualified workers from all over the country, who, thanks to their relatively decent incomes, can afford to buy even relatively expensive housing.