Sep - British Chamber of Commerce in the Czech Republic

Bubble? What Bubble?However the aim of the Phillips InternationalJazz Festival, held on September18th, was also to bring jazz to a wider audienceand so the line-up also includedmore contemporary acts whose work hasbeen influenced by jazz“We want Philips International JazzFestival to become a place where jazz reachesout to many more listeners,” said RuudJona, CEO, Philips Česká republika, whoVan Morrisonadded that he hoped that the Festival willbecome an extraordinary annual event.In addition to the international jazzgreats, the European jazz stage featuredAcker Bilk and his Paramount Jazz Band,marking the 40th anniversary of his firstperformance in Prague. He was joined byBéla Szakcsi Lakatos of Hungary, JiříStivín, Adriena Bartošová of Slovakia andAdam Pieronczyk of Poland.The Philips International Jazz Festivalwas organisationally supported by Agentura10:15. The Festival Partners were: Citibank,Eurotel, Hotel Mövenpick and Volvo CarsČeská republika.Mrázovka Tunnel Openingat andel's hotel PragueOn 26th August the Mrázovka Tunnel celebrationswere held at andel’s hotel Pragueto officially start the tunnel operations forpublic.The event was attended by the CzechMinister of Local Development, Jiří Paroubek,deputy Prague mayor Jan Bürgermeister,the Prague region Parliament representativePetr Bendl and and Subterra generalmanager Petr Kuchař, who representedarchitects and constructors of the tunnel.There is plenty of global talk, and perhaps more speculation these days, about housingbubbles and now that discussion has reached the Czech Republic.People from all walks of life are predicting gloom and doom in various housing marketsthroughout the world as a result of some perceived pricing bubble. A “bubble” ina market generally means the price of an asset has grown so much that it has outstrippedthe asset’s fundamental value, usually on speculation that prices will continue to increase,driving prices higher until they reach an unsustainable level and eventually collapse.But note that bubbles typically do not pop like a balloon; they don’t even crash likestock markets. Rather, the air in housing bubbles tends to just leak out slowly – sometimespainfully slowly – while in commercial real estate markets there is a more noticeablehiss. And traditionally the market adjustment to a collapse in real estate has come fromthe quantity side, not the price side – fewer houses are sold – while price reductionstend to come gradually. This doesn’t mean that housing bubbles can’t exist or that thebust is any less painful, only that it doesn’t make as much noise.Now, with respect to the housing market in Prague, let’s be clear; there is no bubbleand here’s why:• Home prices remain relatively affordable. Even though home prices have grown, theaffordability of housing – the link between incomes and home costs – remains in check,thanks in part to historically low mortgage rates and the fact that for several years,mid-manager/manager incomes grew slightly faster than home prices and people saved.Home prices remain within the reach of many with a little saved and the ambition tobe a home owner.• Housing inventories remain reasonably low. One key sign of a housing “bubble” wouldbe a growing stock of unsold homes on the market as speculative production outpaceddemand and affordability. This has not yet occurred in this market, nor do we anticipateit in the near to mid term. Demand for homes continues in a large part becauseof strong demand fuelled in some ways by growth in new household formations, thesteady growth in disposable income and the strongest engine, the new mortgage productsbeing offered by area lenders. Meanwhile, the supply of homes is held in checkby land use, available developable land, and homebuilder inventory controls, (thephasing of building construction and the sales of new units). These supply-demandfactors – not price speculation – have helped to push home prices up.• Housing bubbles are hard to create. The housing market here has not experienced the“boom-bust” cycle in prices which have been seen in mature housing markets suchas the United States. Indeed, home prices have not really declined as some mightsuggest. While home prices in a few areas of the city have been a little more buoyanton occasion, that is due mostly to some other volatility in that particular locale but notnecessarily because of a price “bubble”. As the US Federal Reserve Chairman AlanGreenspan recently noted, it is difficult to generate bubble conditions in housing.“Certainly the analogy to stock market bubbles is inappropriate,” he said, noting thattransaction costs and the process alone generally prevents the type of speculativehousing demand that leads to bubbles.There continues to be unprecedented interest in the residential real estate markets ofcentral and eastern Europe, but particularly in Prague. But not only among local buyers.Prague is seen as far more western than its Polish or Hungarian counterparts andthe level of English spoken throughout the city helps British and Irish investors feel morecomfortable about where their investments are located. It also helps that there are somany relatively inexpensive flights to and from the City, to say nothing of the stunningarchitecture and the fascination people have always had with Prague.Since May 1st investor interest has steadily increased while prices have remainedrelatively stable. This flies in the face of the many predictions a year ago that EU entrywould bring about a price spike. Note: this author never agreed with that theory but rathersaid that prices would continue unphased along their current growth curve. Today, thevalue of quality properties continue to appreciate at about 6-8% per year and it is anticipatedthat this growth will follow that trend for some time to come.Rental yields have slowly levelled off due in large part to increased investor activities.There is a larger stock of quality rental housing, leaving new expats moving to Praguewith more to choose from and more to say about where they will live. Yields, in today’srental market average 5 to 7%; still averaging a few points above western equivalentinvestment returns.Is now a good time to buy? Categorically yes. Property values will continue to appreciate,mortgage rates will eventually go up, expats and diplomats will always be hereand Prague will continue to develop as a premier capital city.John Breaux, CIPS, LEXXUS a. s.FOCUS SEPTEMBER 2004 33