MONETARY POLICY REPORT | AUTUMN 2024 (appendix)
(authors: Jan Brůha, Ivana Kubicová, Renata Pašaličová, Zdeněk Pikhart)
Following a decline in 2022, activity on the housing market is on the rise again and is being accompanied by surging house price growth. Property plays a major role in the Czech economy. House price disequilibrium can greatly reduce resource allocation efficiency, exacerbate the imbalances in society and, with a lag, affect consumer price inflation beyond the narrow imputed rent price index itself. This appendix examines house prices in the broader context, supply and demand on the housing market and the effect of monetary policy on house prices.
House prices rose sharply in the period of 2015–2022 (see Chart 1). They peaked during the Covid-19 pandemic and then fell slightly. However, they started to go up again this year. Residential property prices (as measured by the House Price Index, HPI) increased by 4.1% year on year in 2024 Q2 and are 120% higher than in 2015 and 50% higher than in the pre-Covid year 2019. Growth in asking prices of apartments surged to almost 7% in 2024 Q3, with prices exceeding their previous highs. In real terms (adjusted for the CPI), house prices have risen by 44% since 2015.
House prices enter the CPI via imputed rent based on the concept of the prices of the services that dwellings provide to owner-occupiers (the net acquisition approach, NAA). These prices – also referred to as imputed rent – are expressed by the Owner Occupied Housing Price Index (OOHPI). Newly purchased property makes up 15.4% of imputed rent, the remainder being material and other costs associated with individual construction and reconstruction, insurance costs and so on. Given the weight of imputed rent in the CPI (10.3% this year), prices of newly purchased property account for around 1.6% of the CPI. The aforementioned other costs associated with owning property have a greater weight. For this reason, the contribution of house price growth to inflation has long been very low. As Chart 1 shows, the OOHPI (imputed rent) has been rising much more moderately than either the HPI or the asking price index. A pick-up in the OOHPI can be seen in 2021 and early 2022, mainly due to rising prices of building work and materials. The experimental inclusion of existing property transactions (CPIH[1]) would lead to an increase in inflation relative to the CPI of around 1 pp on average between 2015 and 2020 and 2 pp in 2021 (see Chart 2).
Chart 1 – House prices started to go up again this year
2010 index = 100; source: CZSO
Chart 2 – The weight of house prices in inflation is low; given a hypothetical increase in the weight, inflation would have been higher in the past
y-o-y change in %; difference in pp; source: CZSO
House prices (the HPI) rose faster than consumer prices in the past (see Chart 3). The housing market is to some extent determined by domestic factors, and house prices are correlated with the position of the economy in the business cycle with no lag. Their correlation with the output gap stands at 0.5. In the case of the CPI, the peak correlation with the output gap is lagged by three quarters, with a lower correlation coefficient of 0.3. Taking into account monetary conditions in addition to the output gap, house prices recorded rapid growth in the pre-Covid period amid accommodative monetary conditions and a positive output gap.
Chart 3 – House prices recorded rapid growth in the pre-Covid period amid accommodative monetary conditions and a positive output gap
y-o-y change in %; output gap in % of potential output; real monetary conditions index (rhs); source: CZSO; CNB calculation
Chart 4 – The ratio of house prices to households’ gross disposable income is on an upward trend
y-o-y change in %; contributions in pp; 2020 index = 100 and trend (rhs); source: CZSO; CNB calculation
In 2024 Q2, the affordability of owner-occupied housing (OOH) as measured by the ratio of house prices to households’ disposable income was just below the 2008 level and at the same level as in 2020, before house prices rose sharply (see Chart 4). The ratio is on a long-term upward trend (indicating a long-term decline in income affordability) due to the Czech Republic’s economic convergence towards developed countries. This is because there is a positive relationship between a country’s economic level and the OOH costs of its population (see Chart 5). Moreover, due to strong growth in house prices in 2015–2022, which led to the third-largest decrease in housing affordability in the EU (see Chart 6), the Czech Republic is above the line reflecting the estimated relationship (see Chart 5).[2] The ratio of house prices to disposable income in the Czech Republic is thus higher than that implied by its relative economic level.
Chart 5 – The ratio of housing costs to income increases as the economic level rises
x-axis: GDP per capita at purchasing power parity; EU27 = 100; y-axis: ratio of housing costs to households’ disposable income in % in 2023; R2 = 0.36; selected European countries; source: Eurostat
Chart 6 – The reduction of housing affordability in the Czech Republic is one of the most significant in Europe
ratio of house prices (HPI) to income in %; 2015 index = 100; minimum and maximum values in 2010 Q1–2024 Q2; actual value in 2024 Q2; selected European countries; source: OECD
One of the reasons for the low affordability of housing in the Czech Republic is an inflexible supply side, as the building permit process is slow and zoning and land use planning do not take sufficient account of housing needs.[3] The Czech Republic meanwhile has a high share of owner-occupied housing. The supply of new apartments has thus been fluctuating close to the 2010 level in recent years (see Chart 7). The numbers of apartment completions and starts even fell by 2% and 5% year on year respectively in the first half of 2024. These year-on-year declines intensified during Q3, even though the numbers of starts and completions increased modestly as developers implemented previously deferred projects. This year, however, the number of building permits issued is at its lowest level since 2010. A particularly large decline in building permits is apparent in Prague.
In contrast to the inflexible supply, demand for housing has been rising for five quarters in a row (see Chart 8). The number of apartments sold in the first half of 2024 was up 13% year and year and was close to the level of 2021 (a successful year in terms of sales). According to the Bank Lending Survey, this is being accompanied by growth in households’ demand for housing loans, driven, among other things, by expectations of a continued housing market recovery and related expectations of house price growth. Demand is also being supported by a stabilisation of consumer sentiment in the first half of this year and a modest decrease in mortgage interest rates, with the prospect of a continued decline due to expected further monetary policy rate cuts by the CNB. The deactivation of the DSTI and DTI limits in 2023 and 2024 respectively has also boosted demand for housing.
Chart 7 – The supply of housing has decreased recently
numbers of apartments in thousands; annual moving averages; source: CZSO
Chart 8 – Activity on the housing market is rising and is being accompanied by increased demand for loans
number of apartments sold: y-o-y changes in %; demand for loans: annual moving average of banks’ net market shares in % (rhs); source: Dataligence, Bank Lending Survey
New mortgage loans are also now reacting to the economic recovery and the gradual decrease in interest rates (see Chart 9). Their net volume (excluding refinancing)[4] has more than doubled year on year this year in both nominal terms and real terms (adjusted for consumer inflation). Inflation-adjusted housing loan volumes are close to the level of the pre-Covid period, which was characterised by an overheating property market. According to the 2023 Household Finance and Consumption Survey, the percentage of households with a mortgage has increased most of all in the highest (fifth) income quintile.
The household saving rate has meanwhile increased significantly relative to the pre-Covid level, primarily in the form of financial assets (see Chart 10).[5] At the same time, however, almost half of savings are invested in mostly housing-related non-financial assets. According to the 2023 Household Finance and Consumption Survey, financial assets are being accumulated above all by households in the highest income quintile (see Chart 11). Moreover, deposit holdings have fallen least of all in this group of households compared to the others over the past year, so the still large financial buffer in this group of the population may be creating the potential for growth in demand for housing given the assumed decline in interest rates. The interest rate on time deposits at banks reacts quite quickly to CNB monetary policy rate cuts. This will reduce the preference for such deposits.[6] Lower returns on deposits will not only foster growth in consumption, but also motivate people to seek higher returns by investing in riskier financial assets and buying property, which is a popular asset among Czech households.
Chart 9 – Mortgage loan volumes have increased markedly in recent quarters
genuinely new loans in CZK billions; CPI-adjusted (2015 = 100); CNB calculation
Chart 10 – A large part of the new savings created by households since 2020 have been invested in financial assets
ratio of flows to gross disposable income in %; source: CZSO; CNB calculation
Note: Liquid financial assets comprise cash and deposits. Non-financial assets consist of gross capital formation. Other financial assets are calculated as the difference between savings and the aforesaid items.
Chart 11 – Higher-income households have relatively large deposit holdings, which could boost growth in demand for property as interest rates fall
ratio of deposits to net annual income in %; median; source: Household Finance and Consumption Survey; CNB calculation
According to Šustek and Zapletalová (2023),[7] the growth in house prices in the Czech Republic in the period of 2013–2021 was due primarily to growth – and expected further growth – in real household income. The interest rate was also an important, though less significant, factor alongside income. According to the authors’ computations, growth of real household income was responsible for 32 pp of the 78% growth in nominal house prices. A further 15 pp was due to consumer inflation and 20 pp to increasing affordability of mortgage financing, due not only to the interest rate, but also to expected further growth in real household incomes.
A regression analysis-based method that decomposes house price growth (the HPI) in the period of 2008–2024 offers a similar picture (see Chart 12). The main factor in the long term is nominal disposable income growth, which, for example, accounted for more than half of the growth in house prices in the period of high house price growth (2021). Households’ sentiment, or more specifically their willingness to spend on large tangible assets over the next 12 months, contributes in the same direction, but much less so. This follows from the CZSO business cycle indicator as regards the outlook for purchases of furniture and electrical and electronic equipment, which are often connected with house purchases. Low interest rates also contributed to the growth in house prices between 2015 and 2021. Since 2022, by contrast, growth in the average mortgage rate (expressed in terms of the deviation from the neutral level) has been cooling the housing market. Owing to inflexible supply, demand factors have therefore been the prevailing drivers of price changes on the housing market.
The effect of monetary policy on house prices was simulated in more detail using a vector autoregressive model with exogenous variables[8] (VARX) and using the g3+ forecasting model modified to include a housing block (DSGE).[9] Easing the real monetary conditions index by 1 pp causes house prices to increase in both approaches, though with different time distributions (see Chart 13). In the DSGE model, a shock to the monetary conditions will fade away quite quickly due to the monetary policy response consistent with achieving the inflation target. This explains the short-term upward effect on house prices in the first year in particular. By contrast, the econometric VARX model gets going more slowly, with house prices not rising until the middle of the second year. The final effect of the monetary expansion on house prices is close to 3% in both models.
Chart 12 – On the demand side, income, sentiment and the interest rate affect property prices in the long term
y-o-y change in HPI in %; contributions in pp; R2 = 0.70; CNB calculation
Chart 13 – Monetary expansion has a significant effect on house prices
x-axis: quarters; cumulative effect of monetary expansion on house prices in %
The Czech housing market looks to be on the threshold of a new upward phase this year. The latest data are signalling fairly robust quarter-on-quarter price growth, supported by recovering household incomes, rising market rents, gradually falling mortgage rates, a buffer of accumulated capital for buying property among wealthier households, and further expected house price growth. Despite its decreasing affordability, property is a very popular asset in the Czech Republic. Prices of purchased property are included in the consumer price index as part of imputed rent. However, they have a low weight and only a limited effect on the index as a whole. Monetary policy has the potential to influence house prices. The central bank takes the housing market into account when setting monetary conditions affecting the entire economy, and applies targeted macroprudential tools where appropriate.
[1] The motivation for, and construction of, this index was described in the box An experimental price index including prices of older properties in Inflation Report III/2017.
[2] It now takes around 16 net annual disposable incomes per capita to purchase an average 60 m2 apartment, as against just 13 in 2016.
[3] See Housing Affordability in Cities in the Czech Republic, OECD (2021).
[4] Czech households account for around 93% of new mortgage loans provided.
[5] The box Household savings, net wealth and consumption in the Autumn 2023 MPR covered this topic in more detail.
[6] The correlation coefficient between the volume of time deposits and the deposit interest rate is high (0.83).
[7] See Šustek, R., Zapletalová, L. (2023): Snížila by větší bytová výstavba cenový růst nemovitostí v letech 2013–2021? Pravděpodobně ne (Would real house prices have risen more slowly if more new housing had been built in 2013–2021? Probably not), IDEA, Economics Institute of the Czech Academy of Sciences.
[8] This is a reworked version of the model in Pfeifer, L., Pikhart, Z. (2015): Vliv měnových podmínek na jednotlivé kategorie cen v České republice v kontextu měnové a makroobezřetnostní politiky (The effect of monetary conditions on individual categories of prices in the Czech Republic), Politická ekonomie 8/2015.
[9] Brůha, J., Tonner, J., Tvrz, S., Vašíček, O. (2024): Implications of real estate price development for monetary policy from the perspective of a DSGE model, CNB draft. This is an extension of the model in Tonner, J., Brůha, J. (2014): The Czech housing market through the lens of a DSGE model containing collateral-constrained households, CNB WP 9/2014.