Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

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

3.6 The Development of Market-Based Financing of Owner-Occupied Housing in Transition Countries after 2000

In some CEE countries, namely, Hungary, Croatia, Latvia and Estonia, and to somewhat less of a degree also Slovakia, Poland, the Czech Republic and Slovenia, at the turn of the millennium, or between 2000 and 2003, a boom occurred in the mortgage loan industry. The cause was mainly the attainment of macroeconomic stability, the reduction in inflation, and the related reduction in payment of interest; of clear fundamental importance also was the adoption of the necessary legislation, the reform of the banking sector, and the establishment of functional real estate registers. Although the massive privatisation of communal (state) flats was in many countries at the recommendation of some international organisations also as a necessary precondition for the development of market-based home financing, it turned out that while this factor is significant, macroeconomic stability and economic maturity are truly essential preconditions.

Table 3 attempts to capture the possible relationship between economic maturity (GDP per head by purchasing power parity expressed in percentages of the average for the EU-25 in 2004), inflation between the years 2000 and 2003, the size of the mortgage loan market (measured by the proportion of outstanding home loans to GDP in 2003) and how significant a part of the market is represented by owner-occupied housing (measured by the share of owner-occupied housing in the total housing stock in the particular country) for selected CEE countries. According to the European Mortgage Federation (EMF 2004) Latvia and Hungary (and also Croatia and Estonia, which were not monitored by the EMF) are among the fasting developing mortgage loan markets in the CEE region - in these countries outstanding home loans already constituted 8-16 % of GDP in 2003, with the highest values for this indicator throughout the CEE region in 2003 clearly found in Estonia. For example, in Hungary in the year 2003 alone the aggregate debt burden from mortgage loans increased by 74%, in Latvia by even 85%, and similar growth values can also be expected in Estonia and Croatia!

Table 3: Factors in the development of the mortgage industry

Conversely, in the most advanced countries in the region - the Czech Republic and Slovenia - the proportion of unpaid mortgage loans to GDP in 2003 was only between 3.5% - 4.5%; according to the EMF the aggregate debt in the Czech Republic grew between 2002 and 2003 by "only" 43%. As the data for Romania, Slovakia and Slovenia show, and as we know that the majority of the other countries in the CEE region (for example, Albania or Armenia), which are less advanced than the countries in Table 3, and which usually also have a high proportion of owner-occupied housing in the housing stock, countries with not altogether advanced market market-based home financing, it seems very unlikely that there is a direct relationship between the share of owner-occupied housing and the advancement of the mortgage market. On the other hand, with the attainment of a certain level of macroeconomic stability, low inflation, and economic maturity (wherein it is enough if the national GDP is only roughly 40% of the EU-25 average) the proportion of owner-occupied housing in the national housing stock clearly becomes a significant catalyst for the development of a mortgage market.

Slovenia, however, strays from this theoretical link; in many aspects (a large part of the banking sector owned by the state, the far more active role of the state in the housing market, the broad range of public subsidies) Slovenia is a very specific country.

Comparing the values in Table 3 with the values for advanced European countries the very probably conclusion emerges that unless there is a weakening of economic growth in the CEE countries the mortgage "industry" is likely to continue to grow relatively quickly. Interestingly, the degree to which mortgage industry is concentrated (a measure of market competitiveness), which in the transition countries is generally relatively high, does not have any fundamental influence on the rate of increase in household indebtedness. Although in countries like Hungary, Poland and probably also Croatia, the market share of the principal mortgage provider is as yet still greater than 40%, which means that the market is still very concentrated, this dominant position can have a certain influence on the range of products and margins offered, though demonstrably it does not, at least as yet, have any decisive influence on the volume of mortgages provided or the growth in the level of indebtedness to GDP in a given country.

It is very difficult to evaluate and to compare in detail the efficiency of systems of market-based home financing for transition countries, as there is less available comparative reliable information than in advanced countries. In the place of such a comparison the study instead presents a description of several basic features of the mortgage market in four selected countries - Hungary (a country with dynamic growth in the volume of extended mortgage loans), Poland (a country with a more gradually dynamic increase in this area), Russia (a country where the mortgage industry has thus far made barely discernible development) and Slovenia (a country with a very specific institutional arrangement and a high degree of state interference in home financing).

In conclusion it can be said that as much as the Czech Republic does not rank among the countries with the fastest developing mortgage industry in the region, in terms of the degree of Czech household indebtedness from mortgage loans puts it, in a comparison of the margins of loan providers, the degree of market competition, the supply of products, the possibilities to make use of loans with a high LTV, various types of payment terms or long fixed interest rates, among the top transition countries in this regard. (See next chapter.)