Housing Standards 2002/03: Financial Affordability and Attitudes towards Housing

3. Critical analysis of state expenditures for housing

3.1 State housing expenditures in the Czech Republic

Table 2 shows the total state expenditures for housing in 2001 and 2002, including estimates of the losses of the state budget following from indirect fiscal support for construction savings credits and mortgage credits (tax deduction) and tax exemption of savings plan credits. The table also show an estimate of the total support of households living in flats with a regulated rent, calculated as the simple difference between the existing regulated rent price and the potential equilibrium market rent price of 90% of the rental flats in the last Census (2001). The interval for the estimate is relatively wide; this is especially due to methodological difficulties concerning the Family Budget Survey data, but also to the different settings of various important coefficients serving for the calculation of the potential equilibrium market rent value. We must note here that in principle this is one of the first attempts to calculate all the forms of state support aimed at housing; the methodology of the estimates may be subject to debate; discarding data that has thus far often been neglected, however, leads to far greater distortions.

A brief look gives an indication of the first bewildering fact. Although in principle housing policy falls within the powers of the Ministry for Regional Development (responsible for the concept and implementation of the housing policy), the Ministry plays a marginal role with respect to the allocated state funds. On top of the completely inefficient division of powers among three ministries (the Ministry of Finance, the Ministry of Labour and Social Affairs, and the Ministry for Local Development), the creation of a superfluous body (the State Fund for Housing Development, which still largely functions as an extended arm of state finances and not as a self-financing source of cheap loans) there is an incomprehensible dominance by the "power" ministries in the area of expenditures. Crucial decisions such as those regarding reform of the construction savings plans and future rent regulation/deregulation in the Czech Republic are made by people who, unlike the team at the Ministry for Regional Development, have far less information about and experience in the functioning of the real estate market or measuring the efficiency of housing policy instruments. This does not mean, however, that the efficiency and effectiveness of programmes prepared at the Ministry for Regional Development are that much better.

According to officially published statistics, state expenditures for housing in 2002 reached CZK 25 billion, i.e., 1.12% of the gross domestic product. In fact, state expenditures are far greater: if one were to include the loss from indirect fiscal support (tax deduction, value added tax exemption or reduction) and especially the hidden subsidies for households living in the rental housing sector where the rent is regulated by the state, the state expenditures would be as high as CZK 32.8 billion to CZK 42.8 billion, i.e., 1.44% to 1.88% of the GDP.

Information about all the potential state benefits a household acquiring housing may use further attests to the opulence of the state aid. In 2002, households acquiring a new flat had the right to take advantage of a one per cent state interest subsidy to the mortgage credit, tax exempt of construction savings interest, state premium on construction savings, the deduction of the actual interest paid on construction savings credit or mortgage credit from the tax assessment basis, and a lower value added tax rate. Since households take advantage of the individual benefits at different times, it is necessary to use the concept of the net present value of subsides as at the date of real estate acquisition for our calculation of the total state subsidy.

Let us assume a two-member household reaching a total income before taxation (but after deducting the obligatory insurance and applicable expenses) in an amount of CZK 40,000 per month where the husband makes a monthly salary of CZK 25,000 before taxation and the wife an amount of CZK 15,000 before taxation. Let us also assume that this family makes a decision to purchase a new two-bedroom flat (60 m²) at a price of CZK 2 million. At the moment, both the household members have completed the five-year savings cycle of the construction savings plan at the most advantageous alternative (maximum state premium) with a target amount of CZK 240,000 (i.e., each have saved CZK 120,000 in five years with a monthly deposit of CZK 1,500) and together they have saved (or received as a gift) another CZK 120,000. They will cover the remaining CZK 1,400,000 using a mortgage credit. The average interest rate of mortgage credits in 2002 reached 6.7%; the household was, naturally, entitled to the one per cent state interest subsidy and could deduct the amount of interest paid on all the credits from the tax basis. The new flat was moreover constructed with a lower value added tax rate. The following summary shows the total amount of the net value of all the state subsidies.

The amount of subsidy due to the reduced value added tax rate was ascertained as a simple difference between the price of a flat at the regular tax rate and the price at the reduced tax rate. The subsidy following from the construction savings plan was calculated as a discounted sum of all interest rates on the construction savings plan (including the state premium) for a five-year savings cycle; for the purposes of discounting, the average discount rate in 1997 was used (upon beginning of the saving cycle, source: the Ministry of Finance of the Czech Republic).

The subsidy for the construction savings credit equalled the total tax savings of both the spouses following from being able to deduct the interest paid on credit from the construction savings from the tax basis during the entire period of credit repayment (7 years). In view of the fact that we have assumed that a seven-year construction savings credit would have an interest of 6% p.a., i.e., approximately the same interest rate as the subsidised mortgage credit, we did not include any additional support following from the low-interest construction savings credit (this advantage was very important during the creation of the construction savings schemes when the average credit interest was over 10%; in 2002, however, the mortgage credit interest with a state interest subsidy was even slightly lower than for the construction savings credits).

The subsidy for the mortgage credit was ascertained as the total of all the annual differences (for the total 20-year repayment period) between the amount of interest repayments without any support and the amount of interest repayments with the one-percent state subsidy and the tax savings for the husband following from the ability to deduct the interest from the tax basis. In each year, the amount of the subsidy from the one-percent state interest subsidy (difference between the standard and subsidised credit) was calculated, followed by a calculation of the tax savings of the husband who has a higher salary and therefore higher savings (calculated as a difference between the potential amount of the taxes due in a given year without the deduction and the actual taxes paid in a given year after the deduction of the mortgage credit interest). The total amount of the subsidy was calculated as one-year subsidies; we have assumed that the income of the spouses will not change.