Housing Standards 2003/2004:
Housing Policy in the Czech Republic - More Efficiently and More Effective

4. How quickly should rent be deregulated in the Czech Republic (with respect to the efficiency of public housing expenditures)?

Introduction

In this chapter of the study the authors set out to describe and estimate the relationship between the costs of public budgets and the rent level in the regulated rental housing sector in the Czech Republic. In other words, they set out to describe and estimate the amount of total public costs related to social and economic consequences of rent deregulation. The goal was to propose a methodology for defining annual limits for potential rent increases in the regulated rental housing sector and test this method using the situation in 2002.

With rent deregulation, subsidies for regulated rental housing providers following from operating losses decrease (this decrease is taken into account although it is a fictitious subsidy in the Czech context because in reality neither municipalities nor private owners receive any such operating subsidy) and so does the subsidy for the construction of new subsidised dwellings due to a reduced demand for these dwellings; on the other hand, the costs of the housing allowance and losses from vacant dwellings increase. The costs of public budgets also include the adjustment of social benefits and pensions because rent is reflected in the consumer basket used to calculate inflation (consumer price index), and a sharp rent increase may lead to an adjustment.

The percentage (relative) increase/decrease of public costs (of state and municipal budgets) VN_t+1 caused by a change in the rent amount in a situation t+1 as relative public costs RVN_t+1 can be defined as:

The following public costs VN_t were included in the simulation model: fictitious operating subsidies for municipalities covering the difference between cost and actually paid regulated rent (NPD_t), public costs for the construction of new rental dwellings with regulated rent (NVYS_t), expenditures for the housing allowance (NAPB_t), expenditures for the adjustment of social benefits and pensions (NVALOR_t) and the loss from non-leased (vacant) municipal dwellings (NPRAZ_t). The relatively low degree of regression in the existing Czech housing allowance makes it possible to leave aside the costs following from the impact of the housing allowance on the labour market (the poverty trap). The total public costs did not include a loss due to failure to pay rent because a full compensation for a rent increase through an allowance usually has no bearing on the likelihood of paying rent (More et al 2003: 88; Housing Corporation 1997: 12; similarly for the Czech Republic, also Lux, Sunega 2003). The equation for the calculation of VN_t is therefore as follows (the sign refers to the sign of correlation of a given cost item and the rent level):

The tested hypothesis was formulated as follows: there is a turning point in rent growth when the total public costs (even after including fictitious costs) start growing with further rent growth. The rent level at which the total lowest public costs are achieved may be considered to be a sort of an economic quasi-normative for the rent setting in regulated rental housing in terms of public expenditure efficiency in a given year.