Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

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

3.3 The Demand for Market-Based Financing of Owner-Occupied Housing

Considering the problems discussed above the demand for mortgage loans in the post-communist countries remained low for a relatively long time. In many countries the number and aggregate sum of unsubsidised loans per capita in 2000 was negligible and is so even now. Up to the start of the new millennium the main clients of the mortgage industry, even in the more advanced transition countries, were people with very high incomes, while in many cases they were purchasing real estate more in the form of cash payments.

It is interesting that even after the banking sector became stable and the basic macroeconomic situation the subsequent growth in the volume of mortgage loans in the CEE countries tended to be gradual and slow. For a significant period of time the demand for long-term home loans was low, even in those countries where real interest rates from mortgage loans were, thanks to macroeconomic stability, reduced inflation, and additional interest subsidies, close to zero or even negative! There must have been other factors contributing to the fact that people hesitated and today in many transition countries continue to hesitate to borrow money from the open market:

• The falling prices of real estate in some post-communist countries (in Hungary up to the second half of the 1990s).
• In some countries (Bosnia and Herzegovina, Albania, Croatia, and others) there was a mass amount of illegal and uncoordinated housing construction, and for understandable reasons mortgage loans could not be used for these.
• The significance of inheritance and intergenerational solidarity (social expectations). The population decline in many countries made it possible to rely on the help of relatives, inheritance, and intergenerational assistance, which functioned well even under the previous regime.
• The lack of an affordable supply of market-based home financing owing to the lack of competition or high risk.
• The quasi-ownership nature of lease relations. The majority of tenants remained even after the change in regime de facto the owners of the flats they occupied thanks to continuing rent regulation and the broad protection of tenant rights. For these reasons there was no motivation for them to try and improve the legal security of their housing.
• Owing to extensive privatisation of communal and state flats people acquired a relatively large amount of capital that could then easily be used in a change of housing (toward the purchase of another flat). For many transactions there was therefore no need for additional loans.
• The unwillingness of the absolute majority of the population to sacrifice a significant part of their income to payment of a mortgage loan, which to a large degree was also predetermined by the reality of "cheap housing" under the previous regime. When the supply of other consumer goods opened up, specific consumer consumption patterns emerged, in which the most expensive goods - a flat or house - was not considered an immediate and current priority.
• The very limited degree of spatial mobility also often caused the high level of tenant protection and rent regulation.