Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

3. Market-Based Financing of Owner-Occupied Housing in the Transition Countries

3.4 The Supply of Market-Based Financing of Owner-Occupied Housing

The supply of market-based home financing is primarily focused on the provision of typical mortgage loans; the supply level, however, depends on the volume of risks connected with providing mortgage loans. In this connection a useful solution for transition countries at the given time proved to be the introduction of building savings: first there emerged the opportunity to obtain a loan with a "gradual" interest rate (lower than the market rate) fixed for the entire payment term (elimination of the interest risk), which moreover could be paid off early without the early redemption penalty being charged (eliminating the risk of early mortgage redemption); the successful completion of the savings cycle was able to serve for banks as an additional guarantee of the solvency of the future mortgagee (and thus reduce the interest risk), thanks to which, in the case of a lower value of loan, the need to present the bank with a form of collateral for the security of the loan fell by the wayside. Loans could be used even for the reconstruction or purchase of flats that were not altogether a form of owner-occupied housing (cooperative and communal flats).

By 2000 special home savings programmes had emerged in the Czech Republic, Hungary, Latvia, Poland, Croatia and Slovenia. The individual systems adopted however varied: in the Czech Republic, Slovakia, Hungary, Croatia, and Latvia they resembled the German "closed" system of building savings, while the programmes in Poland and Slovenia were similar to the French "open" system run by general banks. The state assists in all these savings programmes through state bonuses.

Commercial/general banks up to the new millennium and even today were and are the principal providers of typical mortgage loans in the post-communist countries. The conditions for granting loans are however in many countries still in a very primitive stage. The "lower standard" (high interest rates, short payment term, low LTV, limited product variability, a conservative approach to solvency assessments) and a negligible proportion of outstanding home loans to GDP are typical for Romania, Russia, Moldova, Albania, Bulgaria, Serbia, Bosnia and Herzegovina, Ukraine and Belarus. There was surprisingly a relatively low share of outstanding home loans to population at the end of the 1990s in Slovakia, Lithuania and Slovenia. In many of the above-mentioned countries former state savings banks essentially had a monopoly on financing loans, and they applied very conservative criteria and variable interest rates in assessing and granting loans.

Croatia, Estonia, Latvia, and somewhat later also Hungary, and then at a far slower pace eventually the Czech Republic, Poland, Slovenia, and Slovakia were at the end of the 1990s among the countries in the process of "changing course" and moving towards attaining steeper progress in the proportion and quality of market-based home financing. While in some of these countries a sufficiently competitive environment had not yet emerged by the end of the 1990s and the former state savings banks maintained their dominant position (Hungary, Croatia, Poland), the number and aggregate total of mortgage loans provided began to grow with the start of the new millennium.