## 1. Measures of Housing Affordability

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---

### Introduction and key concerns
- Housing affordability is described as macro-critical because it affects household consumption, savings behavior, and financial stability.
- Czech Republic recent dynamics:
  - House prices rose at an average annual rate of nearly 9 percent between 2013 and 2021.
  - House prices accelerated to 10 percent year-on-year in 2025Q1 and nominal prices surpassed their 2022 peak by late 2025.
  - The price-to-income ratio surged during 2020–22 and remains well above pre-pandemic levels.
  - Housing costs absorb approximately one-quarter of disposable income on average and close to half for lower-income households.
  - Prague requires 13-15 years of gross annual income to purchase a standardized 70-square-meter dwelling (Deloitte 2025).
- Financial-stability linkage:
  - Housing loans account for close to half of total bank credit to the private non-financial sector.
  - Share of housing lending has been rising steadily since 2014.
  - Current financial stability risks are contained due to prudent credit standards, low default rates, and well-capitalized banks, but concentration warrants continued monitoring.

### Structural drivers of housing market dynamics
- Demand-side drivers:
  - Rising real household incomes and improved labor market conditions strengthened housing demand over 2013–21.
  - Šustek and Zapletalová (2023) estimate rising real household incomes—and expectations of continued growth—accounted for 32 percentage points of the 78 percent increase in nominal house prices during 2013–21.
  - Unemployment has remained below 4 percent over the past decade.
  - Pandemic effects: shifts in preferences for larger spaces and accumulated household savings coincided with historically low mortgage rates, increasing demand.
  - Net migration positive for over a decade; arrival of close to 400,000 Ukrainian refugees under temporary protection after 2022—the highest per-capita share in the EU at 36 per 1,000 people as of November 2025—added pressure to housing demand.
  - Internal migration toward Prague and other urban centers and rising single-person household formation increased rental demand; tourism recovery encouraged conversion of long-term rentals into short-term accommodations.
- Supply-side rigidities:
  - Construction sector contracted sharply after the global financial crisis with new residential construction declining steeply between 2008 and 2013; recovered after 2014 but remains below pre-crisis levels.
  - Construction sector share of gross value added (GVA) has stagnated around 5 percent since 2008.
  - Labor productivity remains below pre-crisis levels while unit labor costs nearly doubled since 2015.
  - Protracted permitting delays can extend standard residential project timelines from months to several years.
  - Rental and social housing shortfall:
    - Rental housing accommodated close to 22 percent of Czech households in 2021.
    - Subsidized social rental units constituted less than 4 percent of the dwelling stock (OECD 2025).
  - Municipal fragmentation:
    - There are 6,258 municipalities with an average of about 1,700 inhabitants per municipality, the smallest in the OECD.
    - Fragmentation limits economies of scale and undermines coordinated policy implementation.

### SVAR decomposition of house price movements
- Model and data:
  - A Structural Vector Autoregression (SVAR) with sign restrictions is estimated using quarterly data from 2005 to 2025 across four variables: real house prices, construction activity (first principal component of real residential investment and dwellings completed), real disposable income, and real mortgage rates.
- Historical decomposition findings by phase:
  - 2010–2015 (Post-GFC Adjustment):
    - Collapse in household purchasing power and reduced credit availability drove house prices down, outweighing modest upward pressure from lower construction activity.
    - Persistent demand weakness illustrated "scarring effects" after financial disruptions.
  - 2015–2020 (Gradual Recovery):
    - Positive demand shocks drove steady price growth; mortgage rates fell below 3 percent by 2014.
    - Construction activity recovered but not enough to offset demand pressures.
  - 2020–2022 (Pandemic Boom):
    - Supply constraints dominated price growth as construction stalled amid labor shortages, supply-chain disruptions, and permitting delays.
    - Accommodative monetary policy (near-zero rates through 2021) amplified pressures alongside pandemic-driven demand shifts.
  - 2022–2023 (Monetary Correction):
    - Stabilization in house prices driven almost entirely by monetary tightening.
    - CNB raised the policy rate from 0.25 to 7 percent, transmitting quickly to mortgage rates and dampening borrowing capacity and housing demand.
    - Correction was predominantly policy-induced rather than reflecting easing in supply constraints.
  - 2024–2025 (Demand-Led Recovery):
    - Price growth resumed as demand recovered with easing financing conditions after CNB shifted toward a rate-cutting cycle.
    - Supply contributions remained minimal, indicating persistent structural constraints.
- General SVAR insights:
  - Demand shocks produce large, persistent price responses (lasting 3-4 quarters); supply shocks generate smaller, shorter-lived effects.
  - Monetary policy transmission to house prices is effective but primarily cyclical.
  - Supply shocks contributed minimally across the sample period, confirming structural unresponsiveness of housing supply to price signals because of permitting bottlenecks, construction inefficiencies, and municipal coordination failures.

### Policy options and recommendations
- Overarching strategy:
  - Sustainable improvements in housing affordability require combining demand-side moderation with ambitious supply-side reforms.
  - Monetary policy can moderate cyclical pressures but cannot address structural supply rigidities.
- Macroprudential measures (recommended lower limits effective April 2026):
  - LTV recommended lower limit: 70 percent for investment mortgages.
  - DTI recommended limit: 7 for investment mortgages.
  - Owner-occupied loans retain more accommodative binding limits: 80 percent LTV, or 90 percent for borrowers under 36.
- Notes on design and enforcement:
  - Czech definition of investment lending is broader than in some peers; most comparator jurisdictions apply tighter limits from the second and subsequent property.
  - As mortgage credit growth accelerates, close monitoring of compliance is necessary, including consideration of tightening the definition to cover second or subsequent residential properties.
  - Regionally differentiated limits for high-demand metropolitan areas (particularly Prague and Brno) could help address localized overheating without unduly constraining other regions.
- Supply-side reforms:
  - 2024 Building Act permitting reform consolidates zoning and construction approvals into a unified ‘one-stop’ system.
  - December 2025 amendments (pending Parliamentary approval) centralize permitting under state authority and fast-track large housing projects.
  - Successful implementation requires resolving technical challenges around digitalization and enforcing processing timelines to ensure predictable and transparent outcomes.
  - Complementary supply-side measures discussed include expanding social and affordable rental housing, reforming fiscal transfers to municipalities, and modernizing property taxation.

---

### 17. Complementing these regulatory reforms, new financing instruments are expanding

### New financing instruments and capacity needs
- Public and multilateral financing commitments:
  - The State Investment Support Fund launched its program in April 2024, allocating CZK 7 billion through 2026 for grants and low-interest loans.
  - In April 2025 the National Development Bank launched a program that provides CZK 2.25 billion to support large-scale projects that leverage private capital (Földi 2025, OECD 2025).
  - The European Investment Bank Group decided to double its EU-wide housing commitment to EUR 6 billion for 2026, broadening financing opportunities for Czech municipalities and housing providers (EIB 2025).
- Implementation requirements:
  - Strengthening municipal, administrative, and technical capacity to develop and implement projects effectively.
  - Strengthening transport infrastructure to improve connectivity between regions facing affordability pressures and neighboring municipalities to expand effective housing supply.

### Municipal incentives, fragmentation, and intergovernmental transfers
- Current transfer framework issues:
  - Under the current revenue allocation framework, population size is the primary determinant of transfer receipts, encouraging municipalities to compete for residents and potentially fostering sprawling housing developments and inefficient land use (OECD 2021).
  - The population-based formula limits smaller municipalities’ resources for housing development.
- Reform opportunity:
  - Restructuring intergovernmental transfers to reward investment in housing construction and improvements in public service provision could:
    - Incentivize more efficient residential development.
    - Reduce competitive pressures that impede intermunicipal cooperation.
- Administrative fragmentation:
  - The Czech Republic has 6,258 municipalities, most of them small in size, which rely heavily on transfers from the central government and have limited autonomous revenue generation.
  - Severe administrative fragmentation leaves many small municipalities lacking the technical capacity to address housing challenges independently.

### Property tax reform: rationale and recent changes
- Current area-based property tax system limitations:
  - Fails to penalize land hoarding.
  - Undertaxes high-value properties.
  - Produces regressive outcomes.
  - Generates just 0.3 percent of GDP in revenue, among the lowest in the EU.
- Recent reform effective January 2024:
  - Increased base rates by about 80 percent.
  - Introduced inflation indexation.
- Assessment and recommendation:
  - Indexation alone is insufficient where house price growth persistently exceeds economy-wide inflation.
  - Transitioning to a value-based property tax system would:
    - Link liabilities to actual property values.
    - Raise the holding costs of vacant properties and land banks.
    - Incentivize owners to bring idle assets to market or pursue development.
    - Provide municipalities with a higher-yielding, more autonomous revenue source that could be dedicated to affordable housing development.

### Complementary tax reforms to mobilize underutilized housing
- Housing vacancy and tax changes:
  - 16 percent of Czech dwellings were vacant as of 2021 (Census 2021).
  - The abolition of the 4 percent tax on real estate transactions in 2020 almost halved housing-related tax revenue.
  - The uptick in property tax revenue in 2024 reflects the increased base rates.
- Possible complementary tax policy measures:
  - Targeted taxation in high-demand urban areas to encourage owners to sell or lease properties rather than keep them idle.
  - Reinstating the real estate transfer tax as market conditions normalize merits consideration.
  - Eliminating distortions favoring ownership over rental tenure, for example:
    - Limiting capital gains exemptions on primary residences.
    - Removing exemptions for secondary homes.
    - Continuing to gradually phase out mortgage interest relief (OECD 2025).
- Expected effects:
  - Align tax incentives with efficient land use.
  - Reduce speculative holding.
  - Support expansion of professionally managed rental housing.

### Sequenced reform strategy and macroeconomic implications
- Proposed sequencing:
  - Short-term measures: operationalizing the 2024 Building Act and implementing differentiated macroprudential limits.
  - Medium-term institutional reforms: expanding affordable housing and restructuring municipal fiscal incentives.
  - Long-term structural changes: transitioning to a value-based property tax system.
- Interactions and reinforcement:
  - Permitting reform unlocks supply capacity.
  - Value-based property taxes mobilize vacant housing and discourage speculative holding.
  - Fiscal restructuring aligns municipal incentives with housing development.
- Broader economic stakes:
  - Analysis suggests domestic structural reforms in CESEE economies could raise productivity by over 6 percent.
  - Without adequate housing in cities and regions where economic activity concentrates, the Czech Republic risks losing skilled workers to countries that address these constraints more effectively (Ayerst and others, 2025).

*Source: HOUSING AFFORDABILITY IN THE CZECH REPUBLIC: DRIVERS, DYNAMICS, AND POLICY OPTIONS (March 4, 2026); sipea2026036 — International Monetary Fund*

### 1. Measures of Housing Affordability ________________________________________________ 3

### 1. Measures of Housing Affordability

### Introduction and key concerns
- Housing affordability is described as macro-critical because it affects household consumption, savings behavior, and financial stability.
- Czech Republic overview of recent dynamics:
  - House prices rose at an average annual rate of nearly 9 percent between 2013 and 2021.
  - House prices accelerated to 10 percent year-on-year in 2025Q1 and nominal prices surpassed their 2022 peak by late 2025.
  - The price-to-income ratio surged during 2020–22 and remains well above pre-pandemic levels.
  - Housing costs absorb approximately one-quarter of disposable income on average and close to half for lower-income households.
  - Prague requires 13-15 years of gross annual income to purchase a standardized 70-square-meter dwelling (Deloitte 2025).
- Financial-stability linkage:
  - Housing loans account for close to half of total bank credit to the private non-financial sector.
  - Share of housing lending has been rising steadily since 2014.
  - Current financial stability risks are contained due to prudent credit standards, low default rates, and well-capitalized banks, but concentration warrants continued monitoring.

### Structural drivers of housing market dynamics
- Demand-side drivers:
  - Rising real household incomes and improved labor market conditions strengthened housing demand over 2013–21.
  - Šustek and Zapletalová (2023) estimate rising real household incomes—and expectations of continued growth—accounted for 32 percentage points of the 78 percent increase in nominal house prices during 2013–21.
  - Unemployment has remained below 4 percent over the past decade.
  - Pandemic effects: shifts in preferences for larger spaces and accumulated household savings coincided with historically low mortgage rates, increasing demand.
  - Net migration positive for over a decade; arrival of close to 400,000 Ukrainian refugees under temporary protection after 2022—the highest per-capita share in the EU at 36 per 1,000 people as of November 2025—added pressure to housing demand.
  - Internal migration toward Prague and other urban centers and rising single-person household formation increased rental demand; tourism recovery encouraged conversion of long-term rentals into short-term accommodations.
- Supply-side rigidities:
  - Construction sector contracted sharply after the global financial crisis with new residential construction declining steeply between 2008 and 2013; recovered after 2014 but remains below pre-crisis levels.
  - Construction sector share of gross value added (GVA) has stagnated around 5 percent since 2008.
  - Labor productivity remains below pre-crisis levels while unit labor costs nearly doubled since 2015.
  - Protracted permitting delays can extend standard residential project timelines from months to several years.
  - Rental and social housing shortfall:
    - Rental housing accommodated close to 22 percent of Czech households in 2021.
    - Subsidized social rental units constituted less than 4 percent of the dwelling stock (OECD 2025).
  - Municipal fragmentation:
    - There are 6,258 municipalities with an average of about 1,700 inhabitants per municipality, the smallest in the OECD.
    - Fragmentation limits economies of scale and undermines coordinated policy implementation.

### SVAR decomposition of house price movements
- Model and data:
  - A Structural Vector Autoregression (SVAR) with sign restrictions is estimated using quarterly data from 2005 to 2025 across four variables: real house prices, construction activity (first principal component of real residential investment and dwellings completed), real disposable income, and real mortgage rates.
- Historical decomposition findings by phase:
  - 2010–2015 (Post-GFC Adjustment):
    - Collapse in household purchasing power and reduced credit availability drove house prices down, outweighing modest upward pressure from lower construction activity.
    - Persistent demand weakness illustrated "scarring effects" after financial disruptions.
  - 2015–2020 (Gradual Recovery):
    - Positive demand shocks drove steady price growth; mortgage rates fell below 3 percent by 2014.
    - Construction activity recovered but not enough to offset demand pressures.
  - 2020–2022 (Pandemic Boom):
    - Supply constraints dominated price growth as construction stalled amid labor shortages, supply-chain disruptions, and permitting delays.
    - Accommodative monetary policy (near-zero rates through 2021) amplified pressures alongside pandemic-driven demand shifts.
  - 2022–2023 (Monetary Correction):
    - Stabilization in house prices driven almost entirely by monetary tightening.
    - CNB raised the policy rate from 0.25 to 7 percent, transmitting quickly to mortgage rates and dampening borrowing capacity and housing demand.
    - Correction was predominantly policy-induced rather than reflecting easing in supply constraints.
  - 2024–2025 (Demand-Led Recovery):
    - Price growth resumed as demand recovered with easing financing conditions after CNB shifted toward a rate-cutting cycle.
    - Supply contributions remained minimal, indicating persistent structural constraints.
- General SVAR insights:
  - Demand shocks produce large, persistent price responses (lasting 3-4 quarters); supply shocks generate smaller, shorter-lived effects.
  - Monetary policy transmission to house prices is effective but primarily cyclical.
  - Supply shocks contributed minimally across the sample period, confirming structural unresponsiveness of housing supply to price signals because of permitting bottlenecks, construction inefficiencies, and municipal coordination failures.

### Policy options and recommendations
- Overarching strategy:
  - Sustainable improvements in housing affordability require combining demand-side moderation with ambitious supply-side reforms.
  - Monetary policy can moderate cyclical pressures but cannot address structural supply rigidities.
- Macroprudential measures:
  - Introduced recommended lower limits for investment mortgages effective April 2026:
    - LTV recommended lower limit: 70 percent for investment mortgages.
    - DTI recommended limit: 7 for investment mortgages.
    - Owner-occupied loans retain more accommodative binding limits: 80 percent LTV, or 90 percent for borrowers under 36.
  - Notes on design and enforcement:
    - Czech definition of investment lending is broader than in some peers; most comparator jurisdictions apply tighter limits from the second and subsequent property.
    - As mortgage credit growth accelerates, close monitoring of compliance is necessary, including consideration of tightening the definition to cover second or subsequent residential properties.
    - Regionally differentiated limits for high-demand metropolitan areas (particularly Prague and Brno) could help address localized overheating without unduly constraining other regions.
- Supply-side reforms:
  - 2024 Building Act permitting reform consolidates zoning and construction approvals into a unified ‘one-stop’ system.
  - December 2025 amendments (pending Parliamentary approval) centralize permitting under state authority and fast-track large housing projects.
  - Successful implementation requires resolving technical challenges around digitalization and enforcing processing timelines to ensure predictable and transparent outcomes.
  - Complementary supply-side measures discussed include expanding social and affordable rental housing, reforming fiscal transfers to municipalities, and modernizing property taxation.

*Source: HOUSING AFFORDABILITY IN THE CZECH REPUBLIC: DRIVERS, DYNAMICS, AND POLICY OPTIONS (March 4, 2026), International Monetary Fund*

### 17. Complementing these regulatory reforms, new financing instruments are expanding

### 17. Complementing these regulatory reforms, new financing instruments are expanding

### New financing instruments and capacity needs
- The State Investment Support Fund launched its program in April 2024, allocating CZK 7 billion through 2026 for grants and low-interest loans.
- In April 2025 the National Development Bank launched a program that provides CZK 2.25 billion to support large-scale projects that leverage private capital (Földi 2025, OECD 2025).
- The European Investment Bank Group decided to double its EU-wide housing commitment to EUR 6 billion for 2026, broadening financing opportunities for Czech municipalities and housing providers (EIB 2025).
- Translating these resources into tangible housing outcomes will require:
  - Strengthening municipal, administrative, and technical capacity to develop and implement projects effectively.
  - Strengthening transport infrastructure to improve connectivity between regions facing affordability pressures and neighboring municipalities to expand effective housing supply.

### Municipal incentives, fragmentation, and intergovernmental transfers
- Under the current revenue allocation framework, population size is the primary determinant of transfer receipts, encouraging municipalities to compete for residents and potentially fostering sprawling housing developments and inefficient land use (OECD 2021).
- The population-based formula limits smaller municipalities’ resources for housing development.
- Restructuring intergovernmental transfers to reward investment in housing construction and improvements in public service provision could:
  - Incentivize more efficient residential development.
  - Reduce competitive pressures that impede intermunicipal cooperation.
- Administrative fragmentation: The Czech Republic has 6,258 municipalities, most of them small in size, which rely heavily on transfers from the central government and have limited autonomous revenue generation. Severe administrative fragmentation leaves many small municipalities lacking the technical capacity to address housing challenges independently.

### Property tax reform: rationale and recent changes
- The current area-based property tax system:
  - Fails to penalize land hoarding.
  - Undertaxes high-value properties.
  - Produces regressive outcomes.
  - Generates just 0.3 percent of GDP in revenue, among the lowest in the EU.
- Recent reform effective January 2024:
  - Increased base rates by about 80 percent.
  - Introduced inflation indexation.
- Assessment of the reform:
  - Indexation alone is insufficient where house price growth persistently exceeds economy-wide inflation.
  - Transitioning to a value-based property tax system would:
    - Link liabilities to actual property values.
    - Raise the holding costs of vacant properties and land banks.
    - Incentivize owners to bring idle assets to market or pursue development.
    - Provide municipalities with a higher-yielding, more autonomous revenue source that could be dedicated to affordable housing development.

### Complementary tax reforms to mobilize underutilized housing
- Housing vacancy and tax changes:
  - 16 percent of Czech dwellings were vacant as of 2021 (Census 2021).
  - The abolition of the 4 percent tax on real estate transactions in 2020 almost halved housing-related tax revenue.
  - The uptick in property tax revenue in 2024 reflects the increased base rates.
- Possible complementary tax policy measures:
  - Targeted taxation in high-demand urban areas to encourage owners to sell or lease properties rather than keep them idle.
  - Reinstating the real estate transfer tax as market conditions normalize merits consideration.
  - Eliminating distortions favoring ownership over rental tenure, for example:
    - Limiting capital gains exemptions on primary residences.
    - Removing exemptions for secondary homes.
    - Continuing to gradually phase out mortgage interest relief (OECD 2025).
- Expected effects:
  - Align tax incentives with efficient land use.
  - Reduce speculative holding.
  - Support expansion of professionally managed rental housing.

### Sequenced reform strategy and macroeconomic implications
- The policy sequencing proposed:
  - Short-term measures: operationalizing the 2024 Building Act and implementing differentiated macroprudential limits.
  - Medium-term institutional reforms: expanding affordable housing and restructuring municipal fiscal incentives.
  - Long-term structural changes: transitioning to a value-based property tax system.
- Interactions and reinforcement:
  - Permitting reform unlocks supply capacity.
  - Value-based property taxes mobilize vacant housing and discourage speculative holding.
  - Fiscal restructuring aligns municipal incentives with housing development.
- Broader economic stakes:
  - Analysis suggests domestic structural reforms in CESEE economies could raise productivity by over 6 percent.
  - Without adequate housing in cities and regions where economic activity concentrates, the Czech Republic risks losing skilled workers to countries that address these constraints more effectively (Ayerst and others, 2025).

*Source: sipea2026036 - 17. Complementing these regulatory reforms, new financing instruments are expanding (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026036.pdf_