Rent control Europe: Czech Republic

Population: 10,553,443
GDP: $189,982,000,000
Avg. Weekly Earnings: €198.25
Avg. Apartment Price (Per. Sq. M.): €3,384.00
For 120-sq. m. apartment in city centre
Avg. Monthly Rent: €475.73

Any analysis of rent control in Europe must take careful note of the example that is the Czech Republic, where an estimated 90% of households lived in rent-controlled housing as of 2006. Since then, the country has begun the slow transition to a market-based system, although this has not been without pitfalls; there is a general consensus in favour of readdressing housing regulation legislation, but this has been met with considerable resistance by the citizens.

The prospect of citizens being responsible for their own housing is a new, and alien idea for Czechs, many of whom believe that the provision and maintenance of housing is the responsibility of the government. What has resulted is a split system: older Czechs live in rent controlled housing governed by the Price Regulation of the Ministry of Finance, whereas new renters, foreigners, and any property built after 1993 exists in the free market, with freely negotiated rental rates.

The differences between the two types of rental agreements also manifests in the duration of the contracts: free market negotiated tenancies are typically fixed term, negotiated between tenant and landlord, whereas the rent controlled tenancies are traditionally unlimited contracts. At the expiration of the tenancy period, the tenant must vacate immediately, with no requirement of notice.

Protection of the tenant is also more guaranteed among the rent-controlled housing; a landlord may repudiate the lease and evict their tenant if rent remains unpaid for a three month period in free market tenancies, but the process is significantly more convoluted in rent-controlled flats. In these cases, the landlord must provide evidence of negligence, and may be forced to provide adequate accommodation even in the instance of failure to pay rent.

Unlike some of the other countries we will analyse, the Czech Republic does not operate at an overall shortage of housing. There is a noticeable shortage in localities with significant job opportunities, and overall economic growth, such as Prague and the surrounding areas, but this is offset by more rural areas, where there is a surplus of available housing, with no demand.

Leading up to the financial crisis in 2008, there was a systematic increase in housing construction in the more desirable localities of the Czech Republic, especially in areas surrounding Prague. In 2007, the number of dwellings completed rose by 38% from the previous year, which coincided with increased access to mortgages, supported by the State Fund for Housing Development (SFRB).

Following the bursting of the real estate bubble in 2008, prices of residential property dropped by 12%, and continued to decline, albeit at slower rates. Decreased purchasing power across demographics, as well as the economic downturn, caused prices to decline until Q2 2013, when nationwide apartment prices rose by 0.5%, after four full years of decreases[1]. This was spearheaded by a 3% increase in prices in Prague, but the importance of Prague as the economic and tourism capital of the Czech Republic means that any sign of recovery would likely occur there first, before trickling down to the rest of the nation.

Construction has similarly slowed as a result of the economic situation; the year-on-year measure of construction output shows a 13.7% decrease in April of 2016. This has contributed to the increasing shortage of housing in the most desirable of locations, Prague in particular[2].

One of the primary issues with the shortage, in the rental market specifically, is the disparity in population between the larger municipalities, and the smaller. According to the Czech Statistical Office in 2003, there is only one municipality with more than 1 million inhabitants (Prague), but almost 5,000 with one thousand inhabitants or fewer[3].

With this concentration of jobs comes further issues. Rent control practices in the Czech Republic are heavily ingrained in Czech cultural expectations; as a result, there is limited mobility of households within the nation, and it is highly unusual for a family to leave their flats or homes, even in the face of dramatically better job opportunities.

This stagnation contributes to the housing shortage, preventing younger, more mobile individuals from finding adequate housing in city centres and in turn having an adverse effect on the economic growth of the country. Even in times of growing regional unemployment, there is no subsequent migration to areas of economic prosperity and job availability, meaning the rent controlled flats that these families typically occupy are not being introduced to the free market sector at any noticeable rate.

Despite efforts to move towards the free market system, there still remains a significant difference between the free sector and the controlled sector. However, the Czech government is making inroads into closing the gap between the two, primarily by raising rents to near-market levels for controlled rent properties, and providing relief to those living in the market sector through compensatory income subsidies.

Time will tell if this, compounded with economic resurgence led by the growth of business in Prague, will be enough to address the current inequality of the housing situation, and ease the transition to a predominately market-based system.

This post was contributed by Brandon Nero, University of Florida

[1] Real Estate Firms Cast Doubt on Property Market Recovery, Radio Praha
http://www.radio.cz/en/section/marketplace/real-estate-firms-cast-doubt-on-property-market-recovery
[2] Czech Statistical Office, Construction, Dwellings
https://www.czso.cz/csu/czso/construction_ekon
[3] Human Settlement Country Profile, 2004
http://www.un.org/esa/agenda21/natlinfo/countr/czech/Czechhsettlement04f.pdf

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