The high price froze the sales of apartments. She set off an avalanche that would cause damage for at least a year

People stopped buying real estate. This is the news that spread throughout the real estate industry last year. Sales of apartments at large developers fell to less than half compared to the previous year, and prices even started to fall for older properties. The freezing of the market was due to a significant deterioration in the availability of mortgage loans caused by the rise in interest rates and the tightening of bank conditions for obtaining a loan.

However, high prices and the difficult availability of bank financing are not the only problems for end buyers of real estate. They also cause problems for larger investors who are planning to build real estate projects. The banks also made it harder for them in terms of obtaining financing.

“There has been a tightening of all construction parameters, higher requirements for pre-leasing and pre-sale,” said Petr Plocek, Unicredit Bank’s spokesperson, for SZ Byznys. He mainly talked about LTV and LTC. LTV compares the amount of the loan to the value of the mortgaged property, while LTC compares the amount of the loan provided to the cost of the financed project.

According to Plock, the tightening was mainly due to the deterioration of the situation on the real estate market, but also due to the increase in interest rates.

If the customer does not have the money to buy an apartment and the developer does not have the money to build it, it is clear that construction companies will be next in line. Some already feel it.

“In the building construction sector, the implementation of a large number of planned development projects, especially those with bank financing, was already postponed last year,” confirmed Edita Novotná, press spokesperson for Strabag.

An example of postponing construction is the largest Czech residential builder Central Group, which at the end of last year postponed the start and sale of the ongoing stages of its two largest projects.

“At a time of slowing sales, it is not efficient to build too many new ‘in stock’ apartments. That’s why we decided to postpone the start of construction and the sale of the ongoing stages of our two largest projects – the Park District in Prague 3 and Tesla Hloubětín in Prague 9 – by a year,” confirms company owner Dušan Kunovský. In total, Central Group is postponing the construction and sale of more than 730 new apartments.

The decrease in demand has already been felt by the company Metrostav, for example.

“In the housing construction segment, we can indeed confirm a decrease in demand. In addition to the worsened availability of mortgage loans, demand is also reduced by the rise in the prices of construction works, which is caused by the rise in the prices of inputs. This manifests itself most often in the way that investors postpone the start date of construction works or stages of already prepared projects,” confirmed Pavlína Metrl, press spokesperson of Metrostav.

According to her, the company began to feel the reduced demand already in the middle of last year, while it expects a recovery at the beginning of 2024 at the earliest.

However, Jiří Nouza, president of the Association of Entrepreneurs in the Construction Industry, is not full of such optimism. According to him, the consequences will be reflected in their worst form only next year, i.e. if the economic uncertainty persists.

“The freezing of the apartment market is evident and we perceive it. Investors live in uncertainty and do not know for what and how they will build or who will buy housing from them, because today everyone has problems with financing. On the other hand, from the point of view of construction companies, it has not yet fully manifested itself. If the current economic situation and restrictions in terms of the mortgage market persist, the decline in demand for construction companies in residential construction projects will be reflected in the following year,” said Jiří Nouza for SZ Byznys.

According to him, the construction industry has a certain inertia, and projects for this year have already been contracted by companies.

“However, projects for next year are already being agreed upon, where we are already watching the decline. So far, we have not been able to achieve as many contracts as we were used to in recent years,” says the president of the union.

Next year, the drop in demand for construction work could pose a problem especially for smaller and medium-sized companies.

“They do not have as large financial reserves as large companies. They are also the third in line to be hired, so they would be the first to be investigated. Savings will be made from below,” adds Jiří Nouza.

However, the cooling demand for construction work could have a positive effect on the projects of smaller investors. “With the outflow of large projects, companies’ hands could be freed for smaller projects, such as the construction of family houses,” said the head of the union.

In some respects, the slump is already showing today, as companies are starting to fight for contracts. Ondřej Wachal, CEO of the construction company of the same name, notices this.

“Companies that work on housing construction have already been affected by the drop in demand and are looking for work elsewhere. We see it in the tenders we participate in. There are significantly more companies competing in them. Even a year ago, the fight was often just between two companies, because they all had a lot of work. Even now, companies, just like us, have quite a few projects in progress, which, however, will be completed in the second half of the year and a tougher fight for work will begin,” the head of the company describes the current situation.

It is the competition that could make some construction works slightly cheaper. “Although energy prices, inflation and pressure on wages stand against the discounting, a slight reduction in prices could come as part of the competitive struggle. But I don’t expect a radical change,” said Jiří Nouza, head of the Association of Construction Entrepreneurs.

Wachal is also skeptical about discounting, pointing out the ever-increasing prices of materials. “They talk about cheapening building materials, but in reality they only cheapen the extremes, which have gone up many times in the past years, such as iron or polystyrene. A number of other commodities, on the other hand, are growing, albeit subtly, by five or ten percent, but the price is still increasing,” adds the businessman.