Housing Standards 2007/2008:
The Factors behind the High Prices of Owner-Occupied Housing in Prague

6. Conclusions and recommendations

It is very difficult to answer the question of whether and to what extent it is possible to reverse the above-mentioned negative effects in the field of new housing construction and to this end what adopted measures would have the biggest effect without displacing private investment or resulting in the ineffective use of public funds. It is clear that only once the high economic subsidies provided in the form of rent regulation and the advantageous privatisation of flats – sold to existing tenants ‘for a song’ – come to an end will the social consequences of the high price of housing in Prague become apparent. Once the era of untargeted, hidden subsidies is over, then the profound differences in how affordable housing is for various groups of households in Prague will become fully obvious, and a large number of households will certainly be unable to afford housing at its current or future market price – this fact could lead to a process of social or spatial segregation, the formation of ghettos, asocial behaviours, and tense interpersonal relations.

It is likely that many effective (in the sense of long term effective) ways of responding to the current situation suggested by the findings of the above analyses lie outside the scope of municipal housing policy and housing policy as a whole. The exceedingly strong economic dominance of the capital city in the Czech Republic and the regional disparities in the national economy are often been discussed. However much this may be a spontaneous and in many respects natural phenomenon, the centralism of decision-making processes and inappropriate public policy of supporting foreign investment, activities that probably reinforce disparities in the Czech market, are both areas that can be effectively addressed. But this again lies outside the scope of housing policy.

The strong preference for owner-occupied housing is largely the spontaneous expression of the longing Czechs have to live ‘in a place of their own’, but this preference may also in part be fed by the public support that advantages owner-occupied housing over rental housing and the fact that rental housing is not a functional alternative (even from the perspective of the protections accorded tenants in market rental circumstances) for long-term and stable family housing. The degradation of rental housing is the result not just of the division of the housing sector into two dramatically different segments in terms of price (which is now in the course of being rectified by the ongoing rent deregulation) but also of the absence of any clear conception of how the rules of rental housing work in the aftermath of the temporary period of deregulating low regulated rents – this area can be rectified in some way by government policy. At the very least, it is possible to rectify the most digressive forms of support for buying owner-occupied housing (for example, through tax support), redesign the thus far unsatisfactory housing allowance so that it really provides effective support even to people living in market rental housing, create legislation that adequately protects tenants in market rental housing, or begin providing financial (operational or capital) support for those private landlords who are willing to lease their flats to occupants determined by the municipality at a level of rent determined by the municipality.

Investment activity (speculation) in the residential market goes on in every country and city in the advanced world, and if it does not exceed certain boundaries it is good for the state and municipalities and even significantly benefits them (like other forms of investment do). It helps modernise the housing stock, expand it with the construction of new housing, and leads to a better and higher quality supply of rental housing. Naturally the problem is determining where that boundary lies, and beyond which development is unhealthy and speculative investments become ‘bubble builders’, i.e. the main source of the formation of a price bubble. Price bubbles increase price volatility and market instability and turn the often-cited security of residential real-estate investment into a risk. At the current level of household indebtedness from mortgage loans the bursting of this bubble can in many advanced countries have far-reaching consequences for the entire national economy (see the current situation in the USA). There are no guidelines for determining this boundary, just as there are few opportunities to prevent speculation from continuing to go on beyond that boundary. There have been proposals made to raise the taxes on unoccupied flats and speculatively held land, and so on, but all such proposals tend to be doomed, as in reality they would be ineffective (it would be easy to get around them). Generally higher taxes (through real estate tax) for all owners of real estate could be a more effective tool in this regard, but there is also the argument about the currently already high rate of taxation and the widespread though false notion that there is no justification for the taxation of the private property of land and real estate (consequently there is little political will to take this step). There also exists the notion that price trends can be effectively corrected by the market itself, because the gap between prices and rents cannot widen interminably. However well founded and correct this idea is, there is also evidence that residential real-estate investments can grow in strength for a long time owing to nothing else than the existence of high price (‘people continue to buy more and more and the prices continue to go up and up’), regardless of the level of income from rent. It is this kind of ‘blind’ speculative behaviour that is glimpsed behind price bubbles. The careful, neutral, and statistically solid monitoring of prices and rent could at least help make the entire market more transparent.

In the area of housing supply it is also necessary to look for ways of strengthening the efficiency of the market rather than distorting or replacing it. The question of course is whether it is possible, based on the findings presented in this study, to achieve a more efficient market and get the housing supply to respond more efficiently to increased demand. Manpower capacity could be increased by creating more appropriate conditions (rules) for the immigration of workers from abroad, but immigration also has its negative effects. Another possibility would be to more effectively monitor the actions of oligopolies in the global market (at least by the European Commission), and let’s say that at least to some extent it could be possible to prevent non-transparent sales of municipal land, corruption and clientelism in awarding public infrastructure contracts in the Czech Republic and ‘financial’ lobbying at the local level in the process of making zoning decisions and awarding building licenses. All this could make the market more efficient, but if these steps are at all possible, in our opinion, then always only incompletely and over a very long time. In the meantime, other inefficiencies and ways of effectively thwarting the above-mentioned ‘defensive’ steps are already surfacing, so it will be impossible to reach the ideal under any circumstances. In this respect it must be admitted that inefficiency in the residential real estate market cannot, either now or in the future, simply be done away with, and that in consequence legitimise the kind of intervention from the state and municipality that leads to hampering of the market and/or crowding-out of private investment. Here we mainly have in mind the creation of a certain stock of flats – created out of both existing municipal flats and newly constructed flats (and not just newly built municipal flats but also flats newly built by private developers) – leased at lower than market rents to specific income and social groups. The sale of public land should increasingly be tied to the obligation of developers to offer a certain portion of newly built flats to the municipality, which in the future will be able to do with them what it wishes.

In addition to these forms of intervention, there are additional municipal housing policy tools that can be used, such as advisory assistance on moving arrangements and mediating information on housing offers through municipal advisory centres – forms of assistance that according to a survey conducted by Factum Invenio in 2007 enjoy strong support among the Czech public. Their impact on the market is likely to be limited, but they can help make it more flexible and increase the speed at which it adapts to changes in the situation in the market.

Given that many of the processes that influence the price of owner-occupied housing in Prague are more or less spontaneous (the strong economic dominance of Prague and the consequent migration of qualified workers to Prague) and often it would not be possible or even desirable to try somehow to restrain them, it is better instead to count on them in the future and accordingly prepare not just the above-mentioned housing policy activities at the central level but also sustainable and targeted instruments of municipal housing policy. What of course prevents this from happening is that municipal housing policy in Prague is fragmented and lacking in concept, because to a decisive extent it is set by each individual borough separately. The first housing policy concept designed by the City of Prague’s municipal council consequently remained largely unfulfilled.

It is most likely that over time the differences in housing affordability between different groups of Prague households will gradually deepen and there will be a more acute risk of the emergence of spatial and social segregation. It can equally be expected that fewer and fewer workers will come to Prague who are willing to work for lower wages, thus in lower-ranking occupational categories, because they will not be able to afford housing in the city. Both of these processes have already begun, but it may be many years or even several decades before their consequences become more significantly apparent. Housing policy concepts at the municipal level should not however overlook these processes and on the contrary should now begin preparing for them: in the allocation of the remaining municipal flats, in the privatisation of the remaining municipal flats, in the construction of new municipal flats, and especially in the matter of formulating a joint and this time functional housing policy applicable at the level of the city as a whole.