Key determinants of sales price in the residential developments in Prague

What the paper says

Purpose The real estate residential market plays a crucial role in the economy and personal savings of a significant portion of the population. In recent years, the pricing of new apartments in Prague and other major European cities has experienced rapid growth but also a sharp decline during the global financial crisis of 2008. The purpose of this paper is to describe the relationship between the selling price per square meter of new residential developments in Prague and the macroeconomic determinants, as well as real estate sector variables. Design/methodology/approach The econometric model developed for this study is based on quarterly observations from 2005 to 2021 and utilizes statistical learning (SL) techniques of lasso regularization combined with Bayesian model averaging (BMA). Findings The primary objective is to employ the model to identify the main determinants and provide insights into the price dynamics of new residential units. The outcomes of the model suggest that the set of variables selected in this paper – Net disposable income per household, Prague GDP per capita, Unemployment rate, Mortgage Interest rate and Covid dummy variable – provides a good explanation of the developments in real estate prices in Prague. Practical implications This model can be reproduced also for other European capital cities and can be tested. Our goal is to expand this model also for the data in Warsaw and to update the data and model annually. The model’s high explanatory power (over 90% of variance explained) suggests that it can serve as a strong foundation for future forecasting models, though this was not the primary focus of our current analysis. We believe that this model can be used well for the prediction of residential price developments in Prague or other European capital cities. Social implications In the current situation where the affordability of housing is becoming a more and more important policy topic, we strongly believe that a model like ours, that explains the price development can be helpful in explaining price movements and helping to understand changes in housing prices (thus affordability) in connection to the macroeconomic variables. Originality/value This paper is bringing a very long data series on the residential price of the new developments in Prague that were constructed in the early 2000s. Compared to the other research papers studied where the dependency of residential price is tested on only a few variables, in our model, we tested large scale of explanatory variables using SL techniques of lasso regularization combined with BMA. Our paper focuses on the price of new apartments, whereby most of the literature studied prefers the housing price (family homes) or apartment price including both primary as well as secondary markets.