Protection against inflation? Invest in real estate In the Czech Republic, residential property is one of the most popular and at the same time safest ways to invest spare funds. Why is that, and what are the prospects for the future? The current 2020s will probably one day be recorded in history textbooks as a period full of uncertainty in society and on the financial markets. The impact of events such as a global pandemic or the first war in Europe in more than twenty years is hard to predict in advance, and a mild sense of uncertainty has taken hold of the stock markets. Society at large is struggling with a high rate of inflation, which has reached double digits almost everywhere in developed Europe. How are investors trying to cope with this unfavourable situation? There are plenty of alternatives for parking spare funds, from commodities (the protagonists of the Oscar-winning film The Big Short are currently betting on water) through cryptocurrencies and mutual funds to works of art. For the ordinary citizen, however, one of the most accessible and socially acceptable forms of investment is buying property.
Investing in cryptocurrencies is certainly not for everyone. Research shows that the vast majority of retail investors get burned and lose at least part of the money they put in.
The biggest question mark remains whether buying a flat or a house is worth it right now, or whether it is better to wait. We cannot offer a direct answer to that question (and to be honest, neither can the leadership of the Czech National Bank or other leading economists), but we can offer a few important arguments to consider. The impact of mortgages on the housing market Mortgage rates naturally have a major influence on retail demand for flats. As rates rise, fewer and fewer people can afford to buy a property (that is, to service a mortgage). This means the number of potential buyers falls, which can push property prices down, just as we are seeing now. Conversely, when rates are low, more people can afford to buy, which drives demand up and with it property prices. A pessimist might therefore say that for an investor relying on borrowed money at market interest rates, the situation is always much the same: either they buy cheap but pay more to the bank, or they buy expensive but save on mortgage interest. The current situation therefore clearly favours above all those who do not need to borrow to buy a property (a flat or a house) in the first place, but who want to make their spare funds work for them. It is interesting to watch the pressure from various lobbying groups in both directions: what suits companies with a heavy interest burden is quite different from what suits small investors or development firms. No dramatic change of course can be expected from the CNB, and in the coming months we anticipate rates staying around their current levels (repo 7%, Lombard 8%).
High-quality, architecturally interesting residential projects will always find their clientele. Sustainability is also becoming an important factor in the decision-making process.
5 reasons to invest in property Wondering what the specific pros and cons are? We have put together a clear list of the five main reasons why buying an investment flat may be just right for you.
- Stable returns: Property investments usually offer stable, long-term returns. If you put your property up for rent – for example through Flat Service, a reputable partner offering guaranteed rent for the entire duration of the cooperation – you have the certainty of a regular passive income.
- Protection against inflation: The five percent interest rate most banks currently offer on savings accounts is certainly nothing to sneeze at. But with inflation at almost twenty percent, it will not really protect your money. While the purchasing power of your spare funds declines, the value of your property may rise at the same pace. Throughout modern history, flat and house prices have risen over time, which can mean a further realised profit when you later sell.
- Portfolio diversification: Investing in property can help you significantly diversify your portfolio and reduce investment risk. In the past, many financiers committed to holding all or most of their money in shares, gold or other commodities. The year 2008, for example, showed just how risky that is. Markets are often volatile and can be affected by many factors beyond the control of governments, let alone the individual investor.
- A guarantee of value: Property has a real value that remains stable even during an economic recession. People will always need somewhere to live, whether the country is run by Petr Fiala, Andrej Babiš or someone else entirely. Property investment can therefore be considered a safe and steady investment on which economic cycles and unexpected political changes have an absolutely minimal effect. Extreme scenarios (war, expropriation and so on) are highly unlikely in the Czech Republic and would have an equally devastating effect on the value of other forms of investment.
- The specifics of the Czech Republic and Prague: According to calculations by leading economists, Prague is short of tens of thousands of flats. And because of poor construction legislation, rising material prices and the ever-shrinking supply of available building plots, that shortage will only grow. Yes, the market is currently in a mild slowdown, but that is mainly down to the mortgage rates already mentioned. Looking ahead, demand for housing in the capital and its immediate surroundings will continue to rise.
For most properties in Prague we find promising tenants in a good financial situation within 14 days. We are happy to take care of all the administrative duties for you.
Before buying a property, do not forget to carefully assess your personal plans for the future and your financial situation – as well as the macroeconomic one. The article you have just read is not an investment recommendation – but it is a useful guide setting out the points that should serve as a starting point for your deliberations. If you already have a property and are looking for a reliable and trustworthy rental partner, we at Flat Service will be glad to introduce our Partner and Garant services and prepare a personalised offer for you. Do not hesitate to contact us and in just a few weeks you can be enjoying passive income with no further worries.
