Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

3. Market-Based Financing of Owner-Occupied Housing in the Transition Countries

3.2 The situation in the transition countries at the end of the first decade of transformation

What kind of situation in terms of economic preconditions for development of housing finance existed in the transition countries at the end of the first decade of transformation?

Economic factors

In almost all post-communist countries achieving macroeconomic and price stability was extremely difficult. Even though at the start of the transformation the high inflation rate fell relatively quickly in several states, for various reasons, however, it began to rise again in subsequent years. Many post-communist countries had not even reached the level of GDP in 1990 by the end of 2001 (Bulgaria, Romania, Russia, Ukraine, Yugoslavia, Bosnia and Herzegovina, Moldova, and others) and several states surprisingly after a period of relatively substantial economic growth experienced a brief period of economic recession (Albania, Czech Republic). Unemployment was a weak point in the transformation process in almost all the countries, including those that at the start of the transition exhibited promising results. In a slight majority of the countries monitored the unemployment rate in 2001 exceeded the 10% limit, and in Macedonia it reached 31% and in Bosnia and Herzegovina even 40%. With the exception of Hungary and Poland, unemployment grew in 1995-2000 in all the monitored states, including those that were usually evaluated as "advanced" (Slovakia, Czech Republic).

The factors of state housing policy

It is necessary to mention that even before 1989 there were significant differences between countries in the former Eastern bloc with regard to housing policy. In the majority of countries the "Soviet" system of construction and feeless allotment of state/enterprise rental flats predominated, although there were also countries where privately owned flats were nothing exceptional even under the previous regime - Hungary, Bulgaria, Poland, and Yugoslavia, especially after 1980. Even in these countries, however, it was the state that facilitated private ownership through state loans and subsidies. The finance systems were set up on the basis of central plans, without any reference to supply or demand, and the state banks were, put simply, just other institutions fulfilling the state plan.

The transition to a market economy had the following principal priorities: the privatisation of state enterprises, reform of the judiciary, the liberalisation of prices, a transformation of the taxation system, and the re-assessment of state policy in many areas, and so on. This fact combined with politicians' fears about the rapid changes in conditions relating to how the market functions meant that reform in the area of housing and housing policy was only partially introduced in a number of countries or was entirely put off until later (along with the privatisation of the banking sector). Owing to rigid factors lingering from the past the housing and housing construction sector at the end of 2000 was often among the least economically effective sectors of the economy.

In some countries even no changes at all occurred in the area of housing policy in the first years of transformation. For example, in Poland the state subsidised the construction of new cooperative tenement buildings through loans with fixed interest rates below the market level up until 1996, whereby the placed a considerable burden on the state budget to cover the losses from so-called "old loans".

Many countries adopted laws allowing for a system of mortgage loans to be set up relatively early on, but only few of them eliminated the traditional requirement that substitute housing be provided in the case of court-ordered eviction of rent defaulters. The Czech Republic, Poland and Hungary eliminated this requirement relatively early on, but in other countries it occurred much later.

Another problem relates to the speed of foreclosure on loans. The judicial attachment of property or court-ordered eviction in the majority of countries took and today still takes up to several years, and this is true even in countries that introduced the requisite legislation relatively early on - judicial proceedings are lengthy and protracted in all the post-communist countries.

For a variety of reasons the privatisation of banks was often deferred, which in the 1990s contributed to an unexpectedly high number of financial and banking crises throughout the region. Owing to concerns about a rise in unemployment some governments "forced" unreformed state banks to extend the risk credit to enterprises with serious economic difficulties. The consequence of this short-sighted policy was massive public subsidies to ward off the threat of bankruptcy and it became customary to refer to this huge state financial injection as the costs of transformation. Financial crises occurred at various stages in the transformation in almost all the post-communist countries, including the economically most advanced four Visegrad countries.

In many countries state housing funds were established, which combined subsidies received from outside the country (World Bank loans) and subsidies from the state budget in support of the acquisition of owner-occupied housing (Slovakia, Slovenia, Estonia, Lithuania), while in other states National Housing Agencies were set up (Romania, Albania, Moldova), which served as an intermediary between the state and the market, banks and developers, aimed at new construction of owner-occupied housing. However, this support was far from targeted, and as such it often helped only groups of households with the highest incomes, which did not need any such assistance at all.

Clearly in many cases market-based home financing was "crowded out" by the new, untargeted government subsidies, although this certainly does not mean that state support was the main cause of the slow development of market-based home financing. Much more likely it was a vicious circle: an unstable macroeconomic situation prevented the emergence of conditions necessary for the development of supply and demand in the area of market-based home financing and therefore the government approved new subsidies, which edged out market financing even more.

It cannot be said that the governments do not make any changes in the area of housing policy. The following steps were taken in almost all the countries in the region: direct state subsidies for the construction of public rental flats were reduced, the prices of construction materials were liberalised, ownership of rental flats was transferred to the municipalities, and the laws necessary for the privatisation of the public housing stock. In the majority of countries current tenants of public flats became entitled to purchase the flats they occupied at a considerable discount or even at no cost. An exclusive focus on privatisation and regressive public support in housing acquisition are not enough of course for the successful development of market-based home financing.