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

1. Housing shortage in the Czech Republic?

1.1 The market-oriented approach

The issue of "housing shortage" can also be viewed from an economic point of view, from the perspective of an effective housing demand. Irrespective of the fact that housing is a specific good, it is a normal good (and not a public good) sold on a market where demand and supply meet. An alternative view of housing shortage then lies not in comparing the number of households (inhabitants) and dwellings but in estimating the "effective housing demand". To put it differently, before we can calculate housing shortage, we need to analyse housing market efficiency, and answer the question whether a given market is able to produce an optimal result and approach equilibrium. If this is so at least in a short (but not too short) and long run, then in principle there is no housing shortage regardless of the fact that even in this situation there can be households without their own independent home and short-term market imbalances.

From the point of view of economic theory, the question whether there is housing shortage can be therefore reformulated as a question whether the housing market functions efficiently in the long and short run. Measuring efficiency of the housing market is in all respects a very demanding matter in the Czech Republic, complicated by the non-existence of needed data sources and the transformation currently underway. The authors therefore attempted to intuitively assess factors affecting housing market efficiency in the Czech Republic.

With respect to ownership housing the following can be stated:

• The rigidity of urban planning is probably formally comparable to the situation in the "old" EU countries, but due to behaviour patterns surviving from the culture of the former regime which made it possible to circumvent defined norms, it can be expected that the impact of regulation of urban planning or construction proceedings on the efficiency of the housing market is actually less significant than could be judged from an analysis of the formal rules (laws).
• The efficiency of the mortgage market in the Czech Republic has sharply increased over the last five years.
• Transparency of the ownership housing market in the Czech Republic is still very poor. In the Czech Republic there is no reliable price index, no comprehensive assessment of demographic factors in relation to changes on the housing market, no estimates of investment activities of foreign investors, no thorough analysis of the return, cash flow, and profit of investors, no estimates of income and price elasticity on the demand side etc.
• Both in the existing and new housing sectors there is a relatively large number of competing suppliers, and therefore it is impossible to observe any monopoly on the supply side.

Due especially to the still quite under-developed mortgage market, a fatal lack of information and poor transparency of the market, we can expect that the ownership housing market in the Czech Republic is not yet fully efficient and therefore even in the long run minor regional shortages (surpluses) may appear due to the relatively low seriousness of these barriers.

Practically everything that has been said about ownership housing applies equally to rental housing, with the exception of the monopoly: municipalities often create local monopolies on the supply of rental housing or at least represent the dominant player on the local housing market. In view of the fact that the objective of municipalities is not to maximise their own profit, as is the case with private capital, and in view of the fact that in a portion of the rental sector which is not subject to the rent control no monopoly can be proven, this fact should not have a significant impact on the efficiency of the rental housing market. The general rent control in most rental dwellings regardless of whether it is control applied in municipal housing or in dwellings of private landlords, has a far worse impact on the efficiency of the housing market. General economic consequences of the continued rent control on the rental housing market are explained in the publication using standard economic apparatus (Fallis 1985: 203-204).