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

3. Selected housing policy instruments in the Czech environment

3.3 Housing allowance in the Czech environment

The effects of introducing a housing allowance differ depending on the following key factors: Should the allowance take into account normative or actual household expenditures? If normative housing expenditures are used, how should they be set? If actual housing expenditures of a household are used, up to which amount should they be taken into consideration for the purpose of calculating the allowance? Is it necessary to take into account regional differences in housing costs? How should it be determined which minimum portion of its income a household should expend on housing (in other words, how to define the limit of "bearable" or "desirable" housing cost burden for households)? Should explicit income limits be defined which, if exceeded, would terminate the eligibility to the allowance? Which financial sources should be used to cover the costs of the payment of the housing allowance?

If the allowance is calculated based on tariff costs, Gibb (1995) talks about ex ante allowance, i.e., an allowance the amount of which does not depend on the actual housing costs of a given household related to concrete type of housing it has opted for. Ex post allowance, on the contrary, is calculated based on actual housing costs of a concrete household and thus covers a portion of actual housing costs which from the point of view of the system pose an excessive burden for the household.

In the Czech Republic the inefficient allocation of the housing stock (over-consumption of housing) is quite a serious problem (Lux (ed.) 2002, Sunega 2003). Conversely, social exclusion is still a rather marginal problem. In addition, there is an increasing pressure to cut down public budgets expenditures and ex ante contribution would be relatively very expensive due to the specificity of the housing market. For these reasons, in our opinion, an introduction of a second-generation rent control system should be accompanied with an introduction of a housing allowance based on the actual and not normative housing costs.

During the transfer from the existing system of rent control to a second-generation rent control system, however, it would be feasible to consider a temporary form of ex ante housing allowance with defined limits for housing costs which would simplify the administration of the allowance in conditions of quickly changing rent amounts.

If, after the end of the interim period and after the final introduction of a second-generation rent control system, the housing allowance is to reflect the actual housing costs (hereinafter we shall talk only about rent expenditures; we assume that all the other housing costs will not change significantly upon a transfer to the second-generation rent control, and if so, then they will change identically for all households or, to put it more accurately, adequately to their consumption preferences), it is necessary to define the maximum limit of these expenditures because it is not desirable if the allowance covers housing costs of households living in luxury or oversized dwellings. In other words, it is necessary to define a maximum rent. Such a maximum rent should be defined (as is the case in the German allowance model) as a factor of the normatively defined size of a dwelling (depending on the size of a household) and a maximum normative rent per m² of dwelling floor space.

When defining the maximum rent, the authors believe, regional differentiations in the housing costs should be taken into account because differences in the housing cost burden of households living in areas with a higher rent level and households living in regions with a lower rent level will be better levelled through the housing allowance.

Moreover, normative costs entering the calculation of the housing allowance during the interim period before the final introduction of second-generation rent control should take into account the already existing and not negligible regional differences in the rent amounts arising as a result of the thus far applied form of deregulation (rent in a dwelling of 1^st category in Prague is today in average more than double that in municipalities with a population of 10,000 or less). In addition, it would be appropriate to set normative housing costs in view of the significant differences in the amount of housing costs of tenants and owners.

A method how to limit speculative agreements between landlords and tenants on the rent amount for the purpose of calculating a housing allowance is to define a normative burden rate (NBR is usually defined as a percentage which in the equation for the calculation of an allowance defines which portion of its income a household should contribute to paying their housing costs) depending on the amount of declared housing costs. If the NBR increases with increasing housing costs, tenants will object more to speculative increases of rent by landlords because the level of their contribution to the payment of the growing housing costs will increase. The allowance will indeed increase with increasing housing costs in absolute values (until the costs reach the maximum cost limit, i.e. the maximum rent) but in a falling order (i.e., it will not fully compensate an increase in the costs).

In some countries of Central and Eastern Europe (e.g., in Slovakia, Russia) we can find models of a housing allowance with constant NBR (the NBR does not change with the income level, expenditures or the number of people in a household). Testing the alternatives of the housing allowance in the Czech Republic (Sunega 2001), however, showed that an allowance with an increasing NBR compared to an allowance with a constant NBR:

• more supports those households that are today burdened the most with housing costs anyway (measured as the share of housing expenditures in the total net household income), primarily single-member and two-member households, especially households of pensioners;
• is better suited to level out differences in the housing cost burden level of less numerous and more numerous households;
• less supports households with a higher income and, on the contrary, more supports households with a lower income - differences are clear especially on the extreme margins of the income spectrum;
• is more efficient (cheaper) with respect to demands on funding from which the payment of the allowance should be covered;
• respects the principle of marginal costs, i.e., if a household moves to a more attractive location or better furnished dwelling for which the household will pay a higher rent, the difference between the original amount and the new rent is not fully covered through an increase of the allowance but the household partially covers such an increase from its own income. Thus, it motivates households more to seek housing adequate to their means, and contributes to a more optimal allocation of the housing stock.

However, during the interim period it is also possible to consider the alternative of a constant NBR due to the sharp rent increases and the related necessity of frequent adjustments of the allowance with the NBR growing with the housing expenditures of a household. With respect to efficiency and effectivity of the allowance, it would be appropriate to plan on its amendment beforehand after the termination of the interim period and transfer to the new second-generation rent control system.

Besides the state budget, municipalities (as is the case in Poland) should also contribute to financing the housing allowance in the Czech Republic for which a rent increase would mean a significant increase in the income of the local budget. Municipalities should be allowed to react to local conditions, and influence, for example, the amount of the allowance by softening the criteria defined at the state level but the additional costs following from such a potential modification of the allowance would be fully covered from the municipal budgets (without the possibility to claim co-financing from the state budget).