In Kafka’s Birthplace, Bureaucracy Keeps Property Boom Going

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One of Europe’s hottest property markets is lavishing opportunities on those lucky or smart enough to have bought early. But for Richard Gallo and Michaela Tomaskova, it’s a headache with no end in sight.

They’re caught on opposite ends of the same conundrum, an alignment of forces pushing housing prices relentlessly higher in Prague. When Gallo moved from Italy to the Czech Republic, one of the European Union‘s cheaper countries, he found himself priced out of the capital. It’s the job of Tomaskova, a developer, to provide people like him with places to live. But her company is drowning in a sea of red tape.

The problem is a supply squeeze that’s been exacerbated by Prague’s booming tourism industry and its rapidly growing population. Mostly, though, it’s bureaucratic hurdles that have capped the flow of new apartments at a rate that’s changed little in the last decade, even as soaring demand sparked construction booms in cities like Budapest and Warsaw.

It means that, even though prices jumped 22% last year, the surge has no reason to slow any time soon.

“We’re absolutely convinced, and there’s a consensus among developers, that the jump in prices will stop and the market will stabilize only if the permit process speeds up,” said Tomaskova, the head of one of Prague’s biggest developers, Central Group.

Prague often feels full, with throngs of people crowding its compact downtown area. The medieval cobblestone streets, Gothic towers, Romanesque rotundas and Art Nouveau palaces have long attracted millions of tourists. And with the EU’s lowest unemployment rate, the country has also become a magnet for foreigners looking for work. All of them need places to stay -- while local demand is also up, driven by rising wages.

Gallo struggled to find work in his hometown of Corropoli, Italy after the global financial crisis, but made his move and quickly found a job working as a lathe operator in a factory in Prague. That, though, didn’t mean he could afford a place to live.

He’s not alone: compared with wages, the prices are the EU’s highest. Across the nation, potential buyers need 11 gross annual salaries -- the average paycheck is 409,260 koruna ($17,779) -- for an apartment, more than in the U.K., France or Germany, according to a study by Deloitte LLP. Even in an age of cheap mortgages, that’s out of reach for many.

“In the past, perhaps it was doable to buy something in Prague,” said Gallo, 27. “But these days the prices are so high that it’s impossible.”

Part of the problem are the apartments taken off the market as owners jump into the Airbnb-fueled short-term rental craze. According to a 2018 study by the Planning and Development Institute of Prague, as many as a fifth of all apartments in the capital’s Old Town district, and 10% in the surrounding areas, are listed on the site.

But the biggest factor is the absence of new apartments. For years, developers have failed to build the estimated 6,000 a year that the city needs to keep up with its growing population, now at 1.3 million. That’s expected to grow by 160,000 in the next decade.

Last year, builders finished only 5,290 flats, according to the statistics office.

“For many years, Prague hasn’t managed to react to the inflow of people into the city,” said David Jirusek, the spokesman of Finep Holding, one of the largest developers in the capital. “Prague is lacking thousands of apartments.”

Tomaskova, the developer, has 30,000 apartments in the pipeline. But the approval process is kafkaesque. Just a planning permit -- one of three required stages -- needs about 40 stamps from different authorities from the Fire Department to the Cultural Heritage Office. Approvals often take so long that plans need to be amended to reflect technological advancements, she said.

“These three steps take us 10 years,” Tomaskova said. “The documentation for buildings is now so detailed that we have to drive it to the construction office in a van, and it’s also clear that the clerks can’t understand everything.”

As a result, Central Group is well below the lower end of its target of bringing 1,000 to 1,500 apartments to market each year.

Read More: The Real Estate Boom in Portugal

Still, the surging prices are breathing life into some big projects. One site that may help clear the logjam is Bubny-Zatory, an area about the size of 140 soccer fields just two miles from Prague Castle. Not that it has been a smooth run for the former rail freight terminal. Along with other brownfield sites, it’s been locked in bureaucratic battles since the fall of communism three decades ago.

Prague’s new leadership, serving since 2018, wants construction on a mixed office, retail and housing project to start there within the next two to three years, with the goal of providing homes for as many as 25,000 people over two decades.

“Prague has some homework to do to make more apartments available,” Mayor Zdenek Hrib said in an interview. “The first thing that we need to do is to unblock these huge brownfields.”

Gallo, who has started a family, now has a flat in Sadska, a village about 25 kilometers east of the capital. He has to get up at 5:30 a.m. every day to make it to work on time.

“We kind of gave up on the idea of moving to Prague,” he said. “It’s cheaper to live here and commute every day than paying a mortgage there.”

--With assistance from Zoltan Simon and Dorota Bartyzel.

To contact the reporters on this story: Michael Winfrey in Prague at mwinfrey@bloomberg.net;Lenka Ponikelska in Prague at lponikelska1@bloomberg.net;Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, ;Andrea Dudik at adudik@bloomberg.net, Andras Gergely

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