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Lux M., P. Sunega, T. Kostelecký, D. Čermák, J. Montag 2005

Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

Prague: Institute of Sociology, Academy of Sciences of the Czech Republic.

Housing Standards 2004/2005: Financing Housing and Refurbishing Housing Estates is the third and final publication in the series of annual publications of the same title, issued each year for the past three years with a different subtitle and published as part of the project "Housing Standards of Czech Households and Their Potential Growth with a View to the Experiences of Advanced Countries in the European Union", which was supported by the Grant Agency of the Czech Republic. Although these publications have generally received positive feedback, as the end of the project approaches, along with the end of support for its research, and with the limited capacity of the Socio-economics of Housing research team, it is not possible to continue publication of this title.

This year's publication focuses mainly on the market tools of home financing for owner-occupied housing, that is, particularly mortgage loans and building saving. The second main topic in the analytical section of this study is the refurbishment of prefabricated housing settlements in the countries of the EU and in the Czech Republic. The study's module section is similar in structure to that of the publications in previous years; it provides a basic statistical overview of macroeconomic developments in the Czech Republic in connection with housing and housing construction, a summary of the current housing support programmes run by the Ministry of Local Development and the State Housing Development Fund, basic information on demographic changes in the country, housing allowances and subsidies, the relative consumption expenditures of Czech households, and the market in building savings and mortgage loans in the Czech Republic.

The first chapter in the analytical section of the study is devoted to monitoring and analysing the cost of owner-occupied housing. In this section readers will find basic information on the importance of a reliable price index for housing and the influence of housing price developments on the country's macro-economic development. A basic overview of the types of price indices used in the advanced countries of the EU is also presented, along with a description of their individual features, advantages and disadvantages. This chapter also contains information on the housing price indices that currently exist in the Czech Republic, and in relation to the issue of price indices a detailed analysis is provided of the approaches used to analyse prices of owner-occupied housing - the static and the dynamic approaches. Given that the majority of foreign studies today focus particularly on housing price developments over time (i.e. the dynamic approach), the study looks especially at the results of foreign models and analyses tracing the effects of the main factors on housing price developments over time. As the majority of these models are unable to provide adequately reliable predictions of price developments in the housing market, especially in the short term, some short-term price variations are ascribed to the existence of so-called price bubbles. Explanations for the causes of short-term price fluctuations in the housing market especially refer to the speculative behaviour of investors in the market and to their expectations, to excessive state or local intervention and regulation in the field of housing construction, and, by no means least importantly, to the substantial transaction costs involved in acquiring housing. The study also mentions some models that already take into account short-term price movements in the housing market - so-called error correction models. The first chapter closes with an analysis of price developments in the residential housing market in the Czech Republic using data from the Czech Statistical Office (ČSÚ) and the Institute of Regional Information (IRI).

In the second chapter of the analytical section the authors focus on describing and comparing the systems that have been set up for financing owner-occupied housing in selected advanced countries - namely, Germany, France, the United Kingdom, and the United States. A brief introductory summary in which the basic concepts in the field of the market-based tools of home financing (such as, for example, securitisation, the loan-to-value ratio (LTV) indicator, etc.) and comparing between countries how developed the markets in mortgage loans are using basic indicators (e.g. the share of outstanding home loans to GDP, the extent and types of state intervention, typical and the maximum values of the LTV, etc.). This is followed by a more detailed description of the systems of home financing and how they evolved in the four countries mentioned above, and in this connection an evaluation is presented of the efficiency of these systems of financing owner-occupied housing. This evaluation also contains descriptions of the methodology used in the comparative study by Diamond and Lea (1992) and the methodology of the United Nations Economic Commission for Europe (UN/ECE), along with the findings that the authors of these studies made. The chapter concludes with a description of expected trends in the development of home financing systems in the advanced countries in relation to the process of European unification, the continuing liberalisation of financial markets, and the rapidly growing demand on the part of households for home financing loans in recent years.

Chapter three describes how the market tools for financing owner-occupied housing developed over time in selected transition countries, looking first at the first decade of transformation (1990-2000), followed by the period since 2000, which in the majority of countries has seen a rapid growth in the demand for housing, a related increase in the volume of home financing loans granted, and rising levels of household indebtedness. The study provides evidence showing that the development and spread of market tools for financing owner-occupied housing depended especially on the establishment of macro-economic stability, while the state housing policy also played a role (reducing the "crowding out" effect of state subsidies, with increased state support for market tools of financing owner-occupied housing), along with the privatisation of the public housing stock. An essential precondition was the introduction of banking reforms and amendments to legislation, and in some countries also the introduction of a reliable system of property registration. Particularly in the first decade, between 1990 and 2000, the demand for home financing loans in the majority of countries was low and mainly restricted to the wealthiest part of the population. Even after macroeconomic stability was established in the second half of the 1990s, the growth in demand remained relatively gradual and slow. There are some specifics and some features in common to the kinds of market tools used to finance owner-occupied housing in the individual transition countries, and these are also mentioned in the study. The advantages of building savings are assessed, for example, revealing that in a number of transition countries a typical feature of home financing was the monopolistic or at least dominant position of state savings banks in the home financing market during the first half of the 1990s. An evaluation how market-based financing of owner-occupied housing progressed after 2000 in selected transition countries shows first of all the relationship between the share of existing owner-occupied housing on the one hand and the degree of macro-economic stability on the other from the perspective of how they affect the share of the amount of existing home loans to GDP. This is followed by a relatively detailed description of the systems of market-based home financing and the forms of state support within these systems in Hungary, Poland, Russia and Slovenia.

In the introduction to the fourth chapter the authors use data from the survey Housing Attitudes in the Czech Republic 2001 to address the question of whether the relatively low level of Czech household debt from home financing loans could, in addition to being a result of the inauspicious economic situation in the 1990s, be owing to causes that not economic in nature, that is, whether they could be a result of socio-cultural factors. The authors conclude that in Czech society socio-cultural factors are definitely not marginally influential in the decision to take advantage of mortgage loans. They also compared the level of Czech household debt from home financing loans with the situation in other selected European countries (according to data from European Central Bank) and cite some of the conclusions from a study conducted by the Czech National Bank (ČNB), which examined the impact of monetary policy on the consumer decisions of households. The principal finding in this study was that general disposable income is a decisive factor influencing the consumer decisions of Czech households. The influence of real interest rates and loan supply (measured by means of the interest margin) on household consumption expenditures was very weak. The core part of this chapter, however, sets out to examine the efficiency of the system of home financing for owner-occupied housing in the Czech Republic, specifically its 'procurement efficiency'. The aim of the surveys that were conducted was to answer the question of what institutional factors, the management of interest, credit, liquid and other risks, government subsidies and legislative conditions, may contribute to higher costs of procuring housing loans (i.e. to a decrease in procurement efficiency). The purpose of the survey among the banks providing mortgage loans and buildings savings banks in the Czech Republic was to get an idea about how efficient the market in the financial instruments of home financing for owner-occupied housing in the Czech Republic is as a whole, and, using the knowledge of how the markets in home financing loans work in the countries of the EU and of the efficiency methods used in advanced EU countries, point out its potential weaknesses and shortcomings. The survey was based on a combination of quantitative and qualitative methods, including an analysis of secondary data. The quantitative survey took the form of a questionnaire survey, and representatives from all regular banks and savings banks were approached with a request to complete the questionnaire, which contained mainly (but not exclusively) statistical types of questions about completed loan deals (home financing loans to physical persons). The qualitative survey was roughly a one-hour semi-standardized interview with representatives from individual banks and savings banks using a pre-prepared list of questions. On top of this quantitative and qualitative survey, an analysis was made of secondary data, mainly involving the study of the annual reports of individual institutions, specialised domestic and foreign studies and articles on Web servers specialising in financial issues. The conclusions of this analysis indicate that in general there is a relatively high level of procurement efficiency in the field of financing owner-occupied housing in the Czech Republic, but some smaller problems were detected, solving which could contribute to increasing efficiency.

Chapter five presents the history of European prefabricated housing estates, which, as mentioned in the introduction, "were not a communist invention, despite the fact that many people believe otherwise". Among the points mentioned is the key role that the Swiss architect Charles-Edouard Jeanneret, otherwise known as Le Corbusier, played in their development. He and many other architects and urban planners, advocates of so-called architectural modernism, believed in their day that architecture played a deeper social role and had the capacity to change society itself by means of architectural form and urban planning. Their ideas were realized after the Second World War, when countries on both sides of the Iron Curtain invested massively into the construction of housing in multi-dwelling buildings (the majority of which later began to be built using the technology of prefabricated sections). Some time after the initiation of mass housing construction using "industrial methods", however, a number of unexpected problems began to surface. One problem was the actual quality of the construction complex itself, which could not satisfy the requirements of its inhabitants, and especially it became evident that some of the cautionary predictions made by critics of architectural modernism were coming true. In the interwar period, critics had already begun pointing out that high-rise buildings with numerous dwellings form create physical barriers between people, and the physical distance between the dwelling units and the outdoor environment set aside for children's play complicates communication between mothers and children. Ensuing developments in Eastern and Western Europe then diverged. In Western European housing estates a process of social marginalisation set in, which involved the concentration of the unemployed and families with social problems in this housing, a rise in criminality and drug dependency, and increases in all the associated negative effects. Conversely, in the countries of Eastern Europe, the spirit of functionalism survived up until the fall of the communist regimes at the end of the 1980s, and housing estates became a standard form of housing for the "middle classes" of the population, maintaining its social heterogeneity and, but for some exceptions, escaping the process of social marginalisation.

This historical excursion is followed by descriptions of different programmes for the refurbishment of prefabricated housing estates in Western European countries - France, Denmark, Sweden, and the Netherlands - and in selected Eastern European countries - Slovakia and Estonia. This chapter then proceeds to look at the general criteria of efficiency and effectiveness in the refurbishment process of prefabricated housing estates. As demonstrated on specific examples from selected Western European countries, efficiency (social targeting) usually involves the "concentration of financial resources in a limited number of refurbishment projects aimed at effectuating complex and deep changes to certain areas within a limited scope of space". In this sense targeting usually means also concentrating on the refurbishment of the worst affected housing estates. An important feature of the refurbishment processes in advanced countries, which is intended to contribute to their efficiency, is the participation of the inhabitants themselves in the refurbishment of their housing estates. Their participation in the refurbishment process can take an entire range of different forms and is usually arranged by means various methods, and it fulfils a number of functions, and these are mentioned in the text. In connection with the efficiency of refurbishment projects in the economic sense of the word (Pareto's concept of efficiency) mention is made of the multiple sources of financing refurbishment projects in advanced countries, the presence of control mechanisms for the use of public resources, and the ex-post evaluation of the efficient use of the invested resources by independent institutions directly at the request of the subsidy provider. The chapter concludes by presenting examples of two complex refurbishment projects for prefabricated housing estates - the Bijlmeer housing estate in Amsterdam and the Ballymun housing estate in Dublin.

The final chapter in the analytical section of the study deals with the refurbishment of prefabricated housing estates in the Czech Republic. The introduction notes the considerably large proportion that dwelling units in housing states make up out of the total number of dwelling units with long-term inhabitants in the Czech Republic. It discusses the question of whether it would not be more efficient in the Czech environment to let the prefabricated buildings "die out" and in place of large investments into their refurbishment invest into the construction of new, quality dwelling units and family homes. The approximate costs of the reconstruction of a single dwelling unit in a prefabricated building are presented, along with a breakdown of dwelling unit ownership types in prefabricated buildings according to the results of the census in 2001. The type of ownership of dwelling units in prefabricated buildings is significant in several regards - from the perspective of the potential demand for state support/allowance(s) relating to the refurbishment of housing estates, from the perspective of the way in which consensus between individual building inhabitants is achieved, and from the perspective of the potential to obtain resources for the refurbishment from "commercial" sources (i.e. from banks, or potentially from building savings banks). The individual programmes of state support aimed at the refurbishment of prefabricated housing estates are analysed in the study (the Prefabricated Housing Estate Refurbishment Programme, the Support for Prefabricated Construction Repair Programme, and the Prefabricated Housing Programme) with a view to the volume of resources distributed and the number of applications submitted for support according to ownership type. Despite the evident lack of information on the recipients of support from any of the above-mentioned programmes the authors tried to at least to very roughly analyse the efficiency and effectiveness of the refurbishment programmes in the Czech Republic, while also taking into account the above-mentioned criteria that are applied in the advanced countries of the EU: the targeting of invested resources (or the social efficiency), the participation of the inhabitants in the refurbishment process, the multiple sources of financing refurbishment projects, and the control mechanisms for using public resources. In conclusion, several points are presented to sum up the information about the course to date of the process of the refurbishment of prefabricated housing estates in the Czech Republic, including recommendations that could contribute to making the entire process faster and more efficient. In addition, case studies of three refurbishment projects in the Czech Republic are presented: the Chmelnice housing estate in Prague 3, the Louny - West housing estate, and the housing estate in the Bartošova quarter of Zlín.

Excerpt from the publication