The construction industry in the Czech Republic collapsed. Papers, mortgages and concrete play a role

The Czech construction industry has been struggling with problems for a long time. Still, March was the worst in three years. “Construction output fell by 8.3% year-on-year in March, and a significant month-on-month decrease was also recorded. While the year-on-year decline was entirely due to building construction, engineering constructions contributed more to the month-on-month decline,” says Petra Cuřínová, head of construction and housing construction statistics for the CZSO.

Specifically, engineering construction, the industry involved in the design and construction of technical structures, fell by 0.9%. However, the land construction industry, i.e. the construction of apartments, took a major blow. Here the decline was much more marked. Specifically, by 11.1% year-on-year.

According to BH Securities Chief Economist Štěpán Křeček, one of the reasons why construction is decreasing year-on-year is the long deadlines for permitting processes. “The Czech construction industry has long been troubled by some of the most complicated building regulations of all countries in the developed world. We have very long permitting processes, which makes construction unnecessarily expensive. Unfortunately, this leads to unaffordable owner-occupied housing, which even the middle class has trouble reaching,” he says, adding that the indicative value of building permits increased by almost half in March.

This also affects the number of construction starts, of which 2,706 were launched in March. This is 17.6% less than in the same period last year. The number of completed projects rose slightly, which in the third calendar month was 2,559, i.e. two tenths of a percent less than in March last year.

Another of the reasons why companies no longer engage in the construction of residential premises to such an extent is the situation surrounding interest on mortgages, which were around two percent just two years ago. In 2024, the mortgage may be as low as six percent, which will make the path to own housing significantly more expensive. However, the CNB’s plan to gradually reduce interest rates is welcomed by everyone who is considering buying real estate with the help of a mortgage.

“In connection with the continued solid investment activity, the further reduction of interest rates, and thus the cheaper financing, and the overall improvement of the economic situation, we assume that this picture will be reflected in construction activity during the year. For the whole of this year, we expect that the construction industry, after last year’s decline of 2.6 percent, will finally show a moderate growth in the amount of low percentage units,” Komerční banka economist Jan Vejmělek told ČTK.

“The price of construction works and materials also has a major influence on the increase in project prices,” comments engineer Ondřej Šťastný from the largest building construction company in the country, Central Group. According to him, materials and labor have become more expensive by 40 percent since the covid pandemic. “A mix of mainly these two reasons affects the number of projects started, and the situation will not improve until the price of material and labor drops,” he says of interest rates and concrete prices.