Czech mortgages and rents set for dizzying increases due to inflation

Inflation spiked to almost 10 percent in the Czech Republic in January. The month-on-month increase in consumer prices compared to December was the largest in the history of the independent Czech Republic.

It’s clear, then, that the economy is entering unchartered territory, and that consumers are being hit hardest by price rises. An area where it's feared the effects of inflation will be felt worst is real estate, with prices for mortgages and rents already rising at an alarming rate.

New data from mortgage analysts at Fincentrum Hypoindex shows that the average interest rate for mortgages has risen above three percent after an increase of almost half a percent in January alone.

Like the sharp rise in overall inflation seen at the start of the year, the increase in mortgage interest rates is the largest in the Czech Republic’s history.

Higher mortgage interest rates are the result of moves by the Czech National Bank to keep a lid on inflation. The bank had hoped that by raising its base interest rate for loans, it would discourage spending while encouraging saving, thereby reducing the flow of money through the economy.

The base rate has been rapidly raised to 4.5 percent; but so far, the steps don’t seem to be working. Inflation continues to exceed analysts’ predictions, and yesterday ČNB governor Jiří Rusnok said further base rate increases can’t be ruled out.

This raises the likelihood of mortgage interest rates also becoming subject to further increases over the coming months.

“The effects of the increase in mortgage rates has now hit us in full force,” said Jiří Sýkora, a mortgage analyst at Fincentrum & Swiss Life Select. “Overall, the average interest rate significantly exceeds three percent, stabilizing at 3.43 percent in January 2022. This was an increase of 0.44 percent, exceeding the record increase set last month. However, it’s clear that we can expect a similar increase over the coming months.”

Whether the significant increase in interest rates will have a major impact on demand for mortgages remains to be seen. But it’s not just those looking to buy a home who are suffering as a result of inflation.

Rental prices are also expected to go up this year. Landlords will be hit by higher overall costs for maintaining buildings, including necessary administrative expenditures such as sewage collection, energy and water costs.

The ability of landlords to increase rent rates depends on the contract governing the tenancy. Increases are usually allowed by a so-called inflation clause, which allows for growth in rents based on the rate of inflation.

But even those without an inflation clause can raise their prices. Landlords can propose rent increases of up to 20 percent to ensure their prices are in line with comparable rents in the same area; a metric which has to be determined by expert opinion.

Economists predict that most rents will increase in line with last year's overall inflation rate of 3.8 percent. This would mean rate increases by hundreds or even thousands of crowns. On top of this, renters and mortgage payers alike can expect more expensive bills for utilities including electricity and gas as a result of spiking energy prices throughout Europe.

In the words of Hendrik Meyer, CEO of online rental portal bezrealitky, speaking to Seznam Zpravy, “everyone who lives in rented accommodation will feel an impact on their budget this year.”