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

1. Financial affordability of housing in the Czech Republic

1.3 Affordability of new ownership housing

The affordability of ownership housing is often studied using specific indicators which measure the costs of the acquisition of new ownership housing (usually they take the form of credit repayments for the acquisition of ownership housing) and the income level of households. Thus, they do not address the actual ratio for households living in the ownership sector, instead measuring the affordability of ownership housing for households entering the ownership housing market. The following indicators have been used to measure the affordability of new ownership housing and its development during the 1990s in the Czech Republic:

• the value of the ratio between the average price of new housing and the total net annual income of a household (price-to-income ratio). The indicator is often used for comparative purposes and states how many annual incomes a household needs to acquire average new housing.
• lending multiplier (LM). We obtain the LM value as a ratio of the total sum a household will pay in credit repayments to the total net annual income of a household. In British literature, the LM limit value equals three (if the LM value is greater than three, housing credit repayments are unbearably high for a household).
• credit repayment-to-income ratio. It is defined as the total monthly credit repayment granted for the acquisition of new ownership housing as percentage of the total net monthly income of a household. Based on a normatively defined maximum "acceptable" burden, studies concentrate on the examination of the percentage of households for whom the acquisition of ownership housing is still affordable and for those whom it is unaffordable.

Table 6 summarises the average acquisition costs of 1 m² of habitable floor space in an block of flats completed in the relevant year.

Table 7 shows a factor of the total net annual income that an average household with at least one economically active person would have to expend in a given year for the acquisition of a new flat of the same habitable floor space as that in which it currently lives (price-to-income ratio). If in 1991 and 1993 slightly less than a triple of the total net annual income of an average household sufficed, in 2001 a seven-fold amount of the average net annual income was necessary to acquire ownership housing. The most dramatic hike came between 1993 and 1995 when the average acquisition price of a square meter of habitable floor space of a flat completed that year increased more than two-and-a-half fold. During the same time period, the income of an average household with at least one economically active household member increased only 1.34 times. Between 1999 and 2001, the gap between the average annual household income and the acquisition price of a new flat did not widen. Compared to 1999, for some households (employees, farmers, households with a head of household between 35 and 44 years of age) the price-to-income ratio even decreased slightly in 2001. During the 1990s the gaps between households with the lowest and highest income and between households of singles and more-member households has noticeably widened.

When calculating the lending multiplier coefficient, particular credit and fiscal conditions valid in the given year were considered. Between 1991 and 1993, households could not have taken advantage of a mortgage credit or construction savings plans to acquire new housing but had to rely on common bank credits (the maturity of these credits was 20 years, with an average interest rate of long-term credits; we have assumed that the credit will cover the full price of the acquired real estate). In 1995, households had the opportunity to apply for a construction savings credit for the acquisition of their own flat (according to the expectation that the amount saved and the amount of the construction savings credit proper would amounted to 30% of the price of the flat, the remaining 70% to be covered with a regular long-term credit with a maturity of 20 years). Between 1997 and 2001, households could have used construction savings plans and mortgage credits to finance their housing needs. For the purposes of the following calculations we have assumed that households have taken advantage of both in the following ratio: households have applied for a mortgage credit amounting to 70% of the acquisition price of a new flat, up to the amount of CZK 800,000 (the maximum credit amount to apply for a state interest subsidy), with a maturity of 20 years; the remaining amount was acquired through the construction savings plan.

Credit repayment-to-income ratio has been calculated based on the actual amount of the monthly repayments of both credits in the first year. The fact that the maturity of the construction savings credit is shorter than the maturity of the mortgage credit and that the burden measure will decrease after the repayment of the construction savings credit, has been disregarded.

Income and age criteria have been introduced to calculate eligibility for mortgage financing (bonity criteria). Households met the income criterion for receiving a mortgage credit if the households' total net monthly income in a given year was higher than hypothetical monthly expenditures. These expenditures were calculated as being the total of: 1.5 factor of the living minimum of the household, the monthly annuity repayment of mortgage loan, the monthly construction savings credit repayment, and one quarter of the monthly annuity repayment (this represented a reserve for the credit repayment of other loans and credits that a household may have to pay during the repayment of the mortgage credit). The household met the age criterion if the age of the head of household did not exceed 45 years of age (with the assumption that with a 20-year term for repayment of the mortgage credit, the household would repay the credit before the head of the household retired).

Table 8 makes it clear that the percentage of households eligible for mortgage credit oscillated greatly between 1991 and 2001 according to how the interest rates and the prices of completed flats changed. If we disregard the situation in 1991, we can say that between 1993 and 1997 the availability of bank credits for the acquisition of ownership housing decreased for the average household, with this development not turning around until as late as 1999. If we take into account the impact of the state subsidies which increased the affordability of ownership housing, the percentage of households that would have theoretically qualified for a mortgage credit had already started increasing in 1997. For the purposes of our analysis it has been assumed that the state interest subsidy was the only instrument that directly influenced the affordability of a mortgage credit for households. The ability to deduct from the tax assessment base the interest paid on the credit for housing needs does reduce the ratio during credit repayment, but it does not influence the decision on granting a credit.

The average number of households (from the total number of households with at least one economically active member that would qualify for a mortgage credit in a given year without taking into account the state subsidies) with an LM value over '3' increased between 1991 and 1999 (from 82.0% to 97.6%), and dropped slightly between 1999 and 2001 (see Table 9). When controlling for state interest subsidies, we can say that the percentage of households with an LM value over '3' grew until 1997 (it increased only slightly between 1995 and 1997); in 1999 the number of households for whom a mortgage credit would be unaffordable decreased significantly, and between 1999 and 2001 we have not seen any significant changes.

Table 10 shows how the repayment-to-income ratio has changed. It is clear from the values indicated that, on average, between 1991 and 2001 the credit repayment ratio increased from 20.3% to 29.9% (when not taking into account the interest subsidies), and to 26.7% (when taking interest subsidies into account).

It is clear from Table 11 that the percentage of households whose credit repayment-to-income ratio exceeded 33% increased significantly over the monitored period (from 4.1% of households who would be entitled to a credit in 1991, to 21.3% of entitled households in 1999 if we take interest subsidies into account). The percentage of households with a ratio over 33% increased until 1997 when not taking into account the effect of subsidies, and until 1995 when subsidies are taken into account. In 1999, and especially in 2001, we can see a reduction in the percentage of households with a burden measure over 33%. This is due to the relatively stable growth rate in the prices of new housing (see Table 6) and household incomes.