In the Czech Republic, affordable housing is at a record low. Although young people manifest a greater interest in renting out of necessity, they still desire ownership just as much as their parents’ generation. In order for the relationship to rental housing to change and become a real alternative, Czechs must go through the tragic experience of falling prices on the housing market, says Martin Lux, a sociologist working at the Academy of Sciences, in an interview with Echo24.
Is the Czech housing market at a crossroads, when will it start to change?
You can say that the housing market is at a crossroads almost every year, or at least every five years. The market has fundamentally changed during the pandemic. At that time, the prevailing expectation was that there would be a price correction, but the exact opposite happened. This was a sign that some major change had occurred, usually apartment prices fall during economic crises, but in 2020 and 2021 they rose very sharply.
We are currently in a phase where the availability of housing has deteriorated to a record. During the entire period of monitoring the market – about 25 years, when we have available a reliable index of the Czech Statistical Office, which monitors the development of apartment prices – in 2022 housing availability, measured by price in relation to household incomes or wages, was definitely the worst. In late 2022, the market began to turn around as the economy cooled and home prices began to correct. But given that the recession seems to be relatively short and mild, it is likely that price growth will resume, and if not growth, then at least their stagnation. So the overvaluation of apartment prices will be with us for some time to come, and that is not exactly positive news.
So even if we call it a crossroads, it doesn’t lead us anywhere. I also ask in connection with rental housing, the current situation leads to a greater interest of young people in rental housing, but as your data also shows, it is rather out of necessity. However, it also attracts developers who announce construction with the intention of offering rental apartments, the Ministry for Regional Development (MMR) allocates hundreds of millions to support affordable housing in municipalities. Does it have a chance to somehow change the market, or is it just a drop in the bucket?
That’s really a drop in the bucket so far. It is clear that more people are staying in rental housing than before. New and new people are always coming to rent, but those who should have left for their own a long time ago are staying there. The demand for rental housing has thus increased significantly, and someone could interpret this as a change in preferences towards lifelong rental housing. But according to our research, and the last one was conducted among young people in 2020, it seems that owner-occupied housing still dominates preferences, but for many it has become just an ideal.
We must always bear in mind that the housing market, including housing prices, develops cyclically. It will definitely go down at some point, and very significantly. And only such an event, which could be called tragic – for example, for households that bought an apartment in recent years, when apartment prices are overvalued – only changes ideas, preferences, social norms. When people experience for themselves that it is not such a great investment, it is possible to expect that the attitude towards own housing will change and people will want to voluntarily live longer or even their whole life in rental housing more than today.
When you look at this description of the condition, do you believe that rental housing has a future here? In the sense of a change in the ratio, when up to 80% of people currently live in “their own”?
Of the total housing stock, owner-occupied housing represents between 70-80%, unfortunately the exact number is not available, because during the census, the legal reason for use of many apartments could not be established and more than 800 thousand apartments were uninhabited. In order for rental housing to become a real alternative to owning, I think two things would have to happen. The first of them is the aforementioned tragic event in the housing market, meaning that the idea of how great an investment it is would be blown away. I am convinced that this will happen at some point, we live in a price bubble, but no economist can answer the question of when such a bubble will burst and prices will correct back to equilibrium. That’s when many people think that there is another option, i.e. to invest their savings, their parents’ savings and their debts in something much more useful, meaningful and profitable than bricks and their own housing. The second condition for such a change is an increase in security in rental housing.
The Institute of Sociology of the Academy of Sciences of the Czech Republic came up with the project LeasePlus, which sets a relatively ambitious goal with regard to security in rental housing. He wants to contribute in the future to the fact that it starts to be perceived more “Western”, i.e. as a real alternative. How do you think this can be achieved in the Czech environment?
I believe that both mentioned conditions must be met. Without more security in rent, the crisis will make us afraid to invest in bricks for a while, but in time it will return back to the absolute preference for ownership. In order to increase security in the rental, we tried to contribute a small part with the project, which consists in the fact that through the new web platform NájemPlus, landlords who undertake to comply with the ten-point code of ethics can advertise their apartments for free.
The points of the code include, for example, that the contract will comply with the law in all its parameters, but also that the landlord will allow registration for permanent residence, which does not always happen, even if it is already stipulated by law today. More importantly, it will make the lease either long-term – for at least five years – or just for a year, but it will put a very strong option for the tenant in the contract. This option means that if the tenant complies with all the terms of the contract in the previous year, the contract is automatically extended under the same conditions for the next year, and thus at least for a period of five years. The lessor also undertakes not to use one reason for termination given by law, namely that he needs the apartment for himself or his relative. We think it is exploitable.
Isn’t it a bit naive when both parties have a problem complying with even what is in the law, that in case of any problems, the code of ethics would restrain the landlord or tenant?
At least the contract should look different than it is common today. Some contracts say you can’t apply for permanent residency, you can’t have pets, just things that are against the law. And it is common to sign contracts for only one year, which does not allow you to create a feeling of home in the rental apartment. Maybe it’s naive to a certain extent, but from here, the public and academic sphere to move things forward, to aim for the future and thus do things that would not be commercially successful today, but can increase the quality of life. We want to offer our project to the MMR as well, whether they would like to follow up on it with public support in the area of affordable housing.
You have also created a code of ethics for the tenant, what are the worst transgressions on his part to deal with?
We tried to make it even and both sides of the lease were committed. In principle, it consists in the fact that the tenant will fulfill the terms of the rental agreement and what he is supposed to fulfill by law. At a minimum, he will not grossly violate the terms of the rental agreement, such as not paying rent. At the same time, if the tenant wants to contact the landlord through our portal, he can – but does not have to – have himself verified that he is not in debt anywhere, has never had any problems with repaying obligations, can prove that he has sufficient income from his job. The project should also offer landlords a significant bonus, i.e. a greater chance of finding a solid long-term tenant.
Non-payment of rent is understandably a big scare for landlords, is there any other way to get rid of a non-payer faster than through a lengthy court?
It’s not possible now. On this platform, we also cooperate quite closely with landlord associations, such as the Rental Housing Association, the Civic Association of Apartment and House Owners, and we also support, for example, the activity of the Rental Housing Association in finding a legal way to speed up enforcement options in the event of a justified termination. In other words, in the case of non-payer of the rent, execution should no longer take longer than a year, as it is today, but similar to the West, everything will take place within a few months after the breach of contract. Thanks to this, private landlords will not perceive renting as risky and will themselves be willing to conclude contracts for a longer period.
In general, what can we draw inspiration from in the West when it comes to rental housing, for example in neighboring Germany?
I don’t want it to look black and white, that everything works in the West and not here. In the Czech Republic, private rental housing works the best of all Eastern European countries, nowhere is there such a large share of legal private housing as here. In our country, more or less all contracts are concluded on paper, and most of them – probably – also comply with the law. This is truly unique, in many post-socialist countries private rent functions more like a part of the gray economy. If we go to the West, there is no unity there either, in the south of Europe, in countries like Portugal, Spain, Greece, the private rental situation is in many ways worse than here. But then there are countries like the mentioned Germany, that should probably be the biggest inspiration for us.
So what does it look like there?
Most of the households there live in private rentals, about 49% live in their own. The legal regulation of tenancy relations is not so far removed from ours. The only fundamental difference is that, except in exceptional cases, only open-ended contracts may be concluded there. Notice periods, reasons for notice, possibilities to increase the rent, these are otherwise very similar to ours.
Isn’t it a bit misleading at the moment that rents are really low compared to mortgages, which may turn around again in the future?
Rent and prices should be closely related. A person decides whether he will live in a rented house or in his own, depending on how much it costs him. Rationally, he should choose the cheaper one, but people often act irrationally in the market. Likewise, it is on the supply side where the landlord decides whether to sell or continue the lease based on the rate of return. If we look at historical data, whether it was more profitable to live in one’s own house or in a rented one, we will see that, for example, in 2008-10 it was similar to today, i.e. renting was more profitable than buying, but then it turned around, it was more profitable to live in one’s own , rent is again cheaper today. That curve oscillates more or less around that equilibrium, although the swings are often long-term and high. From a longer period of time, i.e. from the perspective of the whole life, it should come out more or less the same, but the state contributes to the distortion with its unbalanced tax support for owner-occupied housing.
So people have to decide between whether they will be left with an apartment at the end or, on the other hand, the money they invested in other ways, and those options are equivalent in your opinion.
You might even have more left over than investing in an apartment if you invest in something you really enjoy and are strong at. You will earn significantly more from your own business than if you made millions in bricks. It’s about changing the way of thinking that renters must necessarily be poorer because they don’t have the money to buy their own home. Germans also live in rent, middle class sometimes all their life, it doesn’t mean they are poor, but they have invested elsewhere where it brings them more satisfaction and profit.
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