Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

1. Monitoring and analysis of the prices of owner-occupied housing

1.1 Introduction

The results of studies conducted to date that analyse the housing policy and housing market in the Czech Republic have indicated that although when compared to the advanced states of the EU the Czech Republic is not lagging behind in terms of housing facilities, the housing market nonetheless features a certain degree of inefficiency, which has a direct and especially long-term impact on the affordability of housing (Lux 2002, Lux (ed.) 2002, Sunega 2003). One of the reasons for this, which was presented in a recent study published by the Institute of Sociology AS CR (Lux, Sunega, Kostelecký, Čermák, Košinár 2004), is poor market transparency, both in terms of the level of demand for market-based home financing (mortgage loans) and in terms of investment activity in the residential market. A basic precondition for greater market transparency is the existence of a reliable, long-term and detailed housing price index.

The creation of a reliable price index for residential real estate (flats and houses) is important for all the actors in the housing market (Pollakowski 1995). Mortgage loan providers usually require exact knowledge of the development of price levels for variously defined segments of the market in order to minimize the risk of non-payment and losses from the use of securities owing to unfavourable price developments. No minor advantage is the usefulness of a price index for real estate assessments, especially then for the assessment of the investment aims of both small and institutional investors, which directly affects the volume of investment in the national economy (Pollakowski 1995, Thibodeau 2003).

Central and local administration and housing policy analysts more and more have need of (or in order to make the right decisions "should have need of") reliable information on housing prices and their development to analyse how the housing market functions (an evaluation of the efficiency of the housing market), to estimate the income and price elasticity of the housing demand, to search for the causes behind irregular price developments (price bubbles) or the rigid response of the housing supply to price signals, and especially to evaluate the efficiency of state subsidies by ascertaining their impact on prices. It is well known that the prices of owner-occupied housing can have a considerable influence on population mobility and demographic behaviour; for example, on the marriage or birth rates (Hamplová 2000).

The developments of residential real estates prices also have significant macroeconomic effects. Investments into housing represent a substantial proportion of all investment expenditures; at the end of the 1990s in the G7 countries investments into housing constituted approximately 30% of total annual investments (Rooij 2003). Housing is moreover a very important component of household wealth; the value of residential real estates out of total household property was 40% in France in 1998, 34% in the United Kingdom, and 21% in the United States (Rooij 2003). Real estate price growth thus leads to an increase in household property and the investment and consumption expenditures of businesses and households (owners), and this naturally has a positive effect on overall economic growth. Meen (Sullivan, Gibb 2003) cites the following as the main effects of housing price changes on macroeconomic development:

• effect on household consumption;
• effect on wages, migration, and the labour market;
• effect on the cyclical behaviour of the economy;
• effect on the deepening differences in the economic performance of different regions in the country.

Given the above-mentioned macroeconomic effects of the development of residential real estate prices an exact knowledge of housing price developments should be one of the key pieces of information taken into account in the decision-making process relating to the monetary and fiscal policies of the state - i.e. of the government and the central bank. The need for a reliable price index for housing is highlighted by the International Monetary Fund (Slack 2003). In the European Union it is called for with increasing emphasis by the European Commission. And in recent years in the Czech Republic there has been increasing awareness of a need for such an index on the part of the Czech National Bank, the Ministry of Finance, and the Czech Statistical Office (Trh postrádá data o realitním trhu (The Market Lacks Data on the Real Estate Market)…. 2004).

There are several methods with which it is possible to obtain information about price levels and their development: from the simplest indexes consisting of the average or median price of real estate sold (derived from transaction prices and estimated prices), through Laspeyres method or Paasche's index of real estate prices, to the more complex indices more capable of dealing with the problem of the change in the quality of housing or implicitly in the value of individual attributes of housing over time, such as the repeat-sales price index or the hedonic price index (Clapp, Kim, Gelfand 2002, Shiller 1993, Ferri 1977). The simplest, but for that reason also methodologically more problematic, indices are ones that only involve the monitoring of changes to the average or median price of real estate sold. Their most serious flaw is that they are in no way capable of controlling for the change in housing quality in the changes to prices (both across individual segments of the market and over time).

In the Czech Republic several such indexes have appeared since the 1990s. Leaving aside the attempts by some real estate agencies, which were based on unadjusted averages of current price offers, from the perspective of methodology and data collection there are three indices that can be considered relevant. The first is the price index published by the Czech Statistical Office (ČSÚ), based on prices (real and estimated) derived for the purpose of taxation on the transfer of real estate, recorded by the Ministry of Finance. The second is an index developed by the Institute of Regional Information (IRI), which for Prague is published monthly on the iDnes newspaper website (for the republic as a whole it is updated annually) and which is based on the offering prices of real estate ascertained by monitoring the main advertising pages. The third index, saturated in a similar method (from offering prices in advertisements), is the index of the Czech Technical University (ČVUT), created by a team headed by Doc. V. Dolanským, CSc. And published monthly in the magazine Reality. All three indices attempt to standardise the quality of housing and represent a certain form of Laspeyres index. The hedonic approach has been used in a limited "start-up" form since 2003 only in the ČSÚ index. To date there is no reliable publicly accessible bank index.

All the Czech indexes have to struggle with probable methodological errors to both the methods of indexing and the sample selection (IRI, ČVUT) or to the volume and quality of data (ČSÚ). The available data file for the ČSÚ index is neither a random nor complete sample of completed transactions, the hedonic regression model contains few attributes of housing and its model has been thoroughly worked out. The IRI and ČVUT approach is not entirely open and the data file is based on advertised and not real market prices.