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

2. General assessment of selected housing policy instruments

2.2 Privatisation of municipal dwellings - an efficient alternative to dealing with first-generation rent control?

In principle, privatisation of municipal rental dwellings is one of the ways to deal with an inefficient system of first-generation rent control. Another alternative is a shift from first-generation rent control to one of the second-generation rent control systems. The authors claim that in the region of Eastern and Central Europe privatisation was given priority. In many countries, with the exception of Poland, Lithuania and the Czech Republic (in Slovakia the right to buy was to some extent conditional) tenants got "the right-to-buy" their dwelling under price and other conditions defined by central government. "In Central-Eastern Europe 31 per cent of the stock has been privatised within 5 years! According to rough calculations this wealth transfer equals to 25 per cent of GDP for all of these countries!" (Tosics & Hegedüs 1998: 659)

A number of countries in the region of Central and Eastern Europe took full advantage of the first alternative, namely the privatisation of the municipal rental housing stock, but thus far there is not a single one that would completely carry out the second alternative, namely a shift from first-generation rent control to one of the second-generation rent control systems.

Fast privatisation of dwellings was primarily motivated by the fact that it is the fastest and an easy and voter favoured alternative how to deal with the legacy of rental housing of the former regime, how to create a sufficient supply of owner-occupied housing, and to a certain extent, to meet the wish of many people to own a home. It has also made it possible to establish and develop deregulated private rental housing, especially by small landlords who have often obtained dwellings in privatisation. There was also an expectation that new owners would take better care of the housing stock than municipalities.

Fast privatisation of the rental housing stock in many countries of Central and Eastern Europe has, however, brought many negative experiences of which the most frequently cited ones are the following (Kährik 2002, Hegedüs et. al. 1993, Pascariu 2002):

• degradation of ownership rights, which in many cases can be seen in an irresponsible approach to easily acquired property among new owners;
• actual continuation of cheap housing policy from the period of the communist regime and thus also the prolongation of the false expectation that the state or municipality will continue to hold responsibility for financially affordable housing for everyone;
• problems with condominium management (joint owners);
• problems of "poor owners" who are not capable of sufficiently contributing to the repair fund necessary to ensure the reconstruction and modernisation of residential houses. In some countries this has resulted in a reverse trend where municipalities repurchase dwellings from poor owners;
• disappearance of financially affordable rental housing serving as a safety net for those who cannot afford to buy a dwelling at the current market price or pay a market rent;
• residualisation of municipal rental housing;
• limited space for any rent deregulation in existing municipal dwellings occupied by the poorest households (that did not have enough money to buy a dwelling at the advantageous privatisation conditions);
• social inequality and injustice - some households had the possibility to acquire a dwelling under advantageous privatisation conditions while others had to acquire their dwelling at market prices;
• social inequality and injustice among tenants of privatised municipal dwellings and tenants living in dwellings of restituents;
• reinforcement of social inequalities created during the communist regime (better dwellings in more attractive locations were allocated to people loyal to the regime and these people were able to profit more from the privatisation).

The authors believe that from a long-term perspective the advantages of the reform approach entailing a shift from first-generation rent control to one of the second-generation rent control systems are greater compared to the privatisation alternative. This is due to the fact that the privatisation alternative does not, in principle, at all address the issue of housing affordability among needy groups of population, and in addition, has the above-mentioned negative practical consequences.

The authors believe that if the purpose of second-generation rent control in the Czech Republic is to limit the return on investments for individual landlords and at the same time guarantee to a certain extent - regardless of market relations - a certain return to all landlords, then the Swiss system would probably be the best (such a system is perceived as the least risky for institutional investors). However, if the goal is for the rent in existing lease agreements to reflect more accurately market supply and demand for given type of home in a given location, and thus provide clearer market signals about potential deficits (while the return for landlords is not in any way limited or guaranteed), then the German model should be chosen. Both the systems are described in detail in the publication.