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

3. Critical analysis of state expenditures for housing

Conclusion

It is quite clear that rent regulation is not targeted at the actually needy portions of the Czech population. In addition, there are socially needy groups of households who - due to the continued dysfunctions on the housing market - are practically excluded from the possibility of obtaining subsidised rental housing because of the shortage of vacated rental flats with a rent lower than the market value.

There is no legislative provision that would allow owners of regulated rental flats to increase rent if the household income increases; the rules of "social" rent are not defined even at a conceptual level in the state housing policy (with the exception of the concept of the adjusted rent, the application of which is not, however, contingent upon the income of the needy household). On the contrary, rent regulation in a significant portion of rental flats results in a relatively steep hike in the market rent. In many locations the actual equilibrium rent price could be much lower than it currently is. The cumulated loss following from rent regulation reaches, according to our gross estimates, CZK 5.3 billion.

Rent regulation results in excessive housing overconsumption, especially among households of pensioners. Regulated rent reflects housing quality only marginally (by dividing flats into categories) and insufficiently; it generally does not take into account the location of the flat, the quality of the construction material used (brick versus prefabricated sections) or the quality of the surrounding environment.

Social/affordable housing (generally rental housing with a rent below the market rent value) is not defined in the law and very few municipalities apply the principles of social housing when allocating vacated municipal flats: the criterion of the household income, limited lease contracts, and regular income reviews. Generally, households that have not had a permanent residence in a given municipality for a defined time period are excluded (or disadvantaged due to how the point-awarding system was set up). At the central level, there is no explicit and legally defined maximum income level of a household entitled to social/affordable housing, nor are there any rules concerning state aid in the construction or operation of social flats or rules for rent calculation. There is no unified system to measure social need even within one municipality (in Brno, Ostrava or Prague municipal boroughs are responsible for the preparation of criteria and thus criteria very often differ), and in some cases the point-awarding systems paradoxically give an advantage to households with a stable income from employment.

We would be hard pressed to call any housing sector in the Czech Republic "social housing" in compliance with the EU standards. Municipal housing, like "regulated" rental housing in general, is largely occupied by households with higher incomes; there has as yet been no proposal aimed at dividing the municipal housing stock into flats intended for social housing and flats intended for commercial lease (or privatisation); moreover, there has been as yet no proposal to define the amount of the cost rent and social housing allocation rules. In addition to municipal housing and other "regulated" private rental housing, there is a relatively large sector of co-operative housing, the nature of which, however, changed significantly as a result of the application of the "Transformation Act" in 1992.

It is clear that with the exception of specific programmes concerning prefabricated construction, there is almost no provision in the state budget to cover any potential loss of operators of regulated rental flats and none of the revenue subsidies customary in the EU countries are employed in the Czech Republic. Furthermore, the existing regulated rent level is not, and cannot be, a sufficient motivation for higher-income households to leave for the ownership housing sector. The introduction of a filtration process remains a dream.

A certain number of "rental" flats were constructed based on a state subsidy programme entitled Support for Rental Flat Construction (so called "320 + 80" programme) introduced in 1995 and consisting of the possibility of receiving a subsidy for housing from a municipality in an amount of CZK 320,000 per housing unit and a subsidy of CZK 80,000 per housing unit intended for the construction of the necessary infrastructure. Unfortunately, as in other cases described above, the conditions concerning the maximum costs per m2 of floor space, the income restriction used for the allocation of thus constructed flats, the size of the flat or the maximum rent amount have not been clearly specified. Even the rental nature of the new housing was restricted to only 20 years; after the elapse of this period, the flats can be transferred into the ownership of their users. In view of the benevolent conditions of the programme, lack of money in municipalities and the time restriction placed on the rental nature of this type of housing, municipalities mostly formed co-operatives with private physical entities where the municipalities ensured only the state subsidy and other costs were paid from the resources of the co-operative members involved. Thanks to a Contract on the Future Transfer into Ownership, these new "tenants" secured a transfer of the existing flat into their own ownership after 20 years (generally after the repayment of the mortgage credit). In some cases, relatively large and luxury flats were constructed based on this state programme; these flats have nothing to do with rental housing but rather are "quasi-ownership" in nature. Often these flats were allocated among households with the highest income (in general, no municipality uses any additional income restrictions for the right to become a co-operative member or a tenant in thus constructed new flats). The main competence to allocate the support within the framework of the programme was gradually assumed by the State Fund for Housing Development, which in 2002 modified some criteria of the programme, and especially excluded the possibility of co-financing by future tenants, thus at least partially limiting the rampant abuse of this state subsidy for the construction of "quasi-ownership" housing.

The establishment of the State Fund for Housing Development in 2000 has not proven to be an efficient step for the state housing policy; this was, however, partially due to the delayed and ambiguous state funding for its launch (unavailability of income from the privatisation of state-owned enterprises). According to the law, the Fund should provide subsidies and qualified credit for the modernisation of the existing housing stock and new housing construction. The Fund's activities are not, however, defined in any greater detail by the law, and the law also fails to define the allocation procedure of the Fund's resources. There are no rules for potential parties interested in using the Fund's resources, and no conditions concerning the rent amounts in flats constructed using the Fund's assistance or the maximum costs of such construction.

In the unsaturated Czech environment, heavily burdened by the legacy of the Communist housing projects, the supply side subsidies will undoubtedly continue to play a role. Housing construction programmes of social care housing, and some programmes aimed at eliminating defects of prefabricated construction and regenerating prefabricated housing projects are encouraging examples, despite the absence of a definition of the goals and shortcomings concerning economic efficiency (greater financial participation of the tenants living in the prefabricated housing projects with respect to repairs of the prefabricated block of flats privately or co-operatively owned by tenants). The dilapidation of the housing stock (and not housing shortage) and insufficient active aid to those who cannot live in dignity without such assistance due to health problems or age are crucial problems which the housing policy should address and which can be justified with well-grounded arguments and evidence.

The supply-side subsidies should take a new form, that adopted in the EU countries. "At the same time there is a near universal retreat from direct state-controlled housing provision (through central and local governments and state enterprises). This retreat reflects both discontent with past outcomes and a growing imperative to have investment outside of the state budget." (Maclennan, More 1997, 538). The state contributes partially, and if possible, indirectly and in a targeted way. Operators/developers of new social rental flats are neither municipalities nor the state (both have demonstrated very low efficiency in construction and administration), but independent - basically private - organisations subject to all market risks (housing associations). A completely clear definition of conditions for the functioning of the social housing sector, especially the conditions for the provision of financial assistance from public budgets concerning both the housing stock (size and quality of a flat) and entitlement to a social flat (income criteria, allocation mechanisms) are the necessary prerequisites for the success of future "enlightened" supply support in the Czech Republic.

The limits and inappropriate targeting of the current housing allowance model are already obvious today when the housing market is still distorted due to the general rent regulation. Although low-income households are the main recipients of the housing allowance, it does not automatically follow that these are households with the highest housing cost-to-income ratio. This fact is probably the main reason for the low take-up rate; the poor targeting of the allowance was proven in a simulation analysis using the FBS 2001 data. In addition, there are quite clearly needy households that are - due to the model being poorly set up - completely barred from receiving any efficient help in the form of the allowance (people living in the market rental housing). The poor targeting of the housing allowance, inefficient help where it is needed and, conversely, superfluous aid where it is not wanted, especially the complete inappropriateness of the model if a more pronounced rent deregulation were to occur (greater regional differentiation of rents), significantly reduce the effectiveness of this form of state intervention.

Analyses of the impact of the housing allowance on housing prices (i.e., the assessment of the intensity with which the existing housing allowance creates inflation pressures which result in increases in rent and thus housing prices) needed to assess the programme efficiency do not exist. In view of the current model of the housing allowance we can expect that unlike the greater availability of mortgage credits, the impact is quite insignificant. Moreover, there is no evidence that the existing housing allowance leads to the "poverty trap" effect, i.e., that it reduces the motivation of people to find cheaper housing or increase their income.

It is clear from the figures that high-income households are the main group of recipients of the indirect fiscal support being able to deduct from taxes the interests paid on construction savings credits and mortgage credits (the same is true of the interest subsidy in the case of mortgage credits), and therefore the effectiveness is very low. Neither the possibility to deduct the interest nor the interest subsidy is restricted or differentiated according to household income, which contributes to their regressiveness. This form of support does theoretically increase relatively significantly the financial affordability of housing for larger groups of people; on the other hand, it influences - thus far empirically unverified - the increase in prices of ownership housing, which may negate the effect of increased affordability. Generally speaking, though, the interconnection of the support and the private capital market and the increased role of market instruments of housing financing (mortgage credits) must be viewed optimistically because in a transition economy with a considerable (mental) tradition of relying on the state to play a role in financing housing construction, this is, indeed, a positive element.

The meagreness of the efficiency and effectiveness of the constructing savings system is due to the provision of the savings bonus by the state is the largest item among direct state expenditures for housing. Preparations for reforming the system started at the beginning of 2003, and this should lead to the elimination of the most "blatant" dysfunctions of the system (state support that is too great, low percentage of credits applied for upon the completion of the savings cycles). The construction savings system is criticised at international forums due to its great costs and lack of demonstrable results.