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World Bank Document Public Disclosure Authorized Komarov Vladyslav* Housing Market and Labor Mobility Public Disclosure Authorized Background Paper for World Bank Report No. 68824-ECA “In Search of Opportunities: How a More Mobile Workforce Can Propel Ukraine’s Prosperity” Public Disclosure Authorized * Deputy Director, Analytical Center “BEST” The views expressed in this paper are those of the author and do not necessarily represent the views of neither the World Bank, its Board of Directors, or the countries they represent, nor the institution with which the author is affiliated. September 2011 Public Disclosure Authorized Acknowledgements: This background paper was produced by a research team comprising of: Komarov Vladyslav, head of research team and editor of the report, Deputy Director, Analytical Center “BEST” Bigdai Vitaliy, Economist, Analytical Center “BEST” Boguslavska Kateryna , Political Scientist, Analytical Center “BEST” Dodonov Borys, Ph.D. in Economics, Senior Economist, Analytical Center “BEST” Gladkiy Valeriy, General Director, Analytical Center “BEST” Gladkyy Yuriy, Economist, Analytical Center “BEST” Eromenko Igor, Ph.D. in Economics, Senior Economist, Analytical Center “BEST” Leshchenko Nataliia , Economist, Analytical Center “BEST” Podvysotskaya Tamara, Economist, Analytical Center “BEST” Taran Svitlana, Economist, Analytical Center “BEST” 1 Contents 1. Delineate conceptually what are the different ways in which the housing market can matter for labor mobility ............................................................................................................................ 3 2. Is the rental market underdeveloped? Why is that? .................................................................................................. 6 Box 2.2. Pro-tenant rental policy in Germany .................................................................................... 9 Rent setting ........................................................................................................................................................ 9 Landlord’s and tenant’s rights with respect to duration of contract and eviction ... 9 a. Size of the rental market vis-à-vis ownership ...................................................................................................... 12 b. Vacancy rates of rental housing (by region) ........................................................................................................ 14 c. Number of houses/apartments for sale (by region) ............................................................ 16 d. Real estate investments/number of new units by region ................................................ 18 3. How developed is the real estate sector in Ukraine using comparable international statistics? How competitive is it? 23 4. Housing price/cost differentials across rayons/oblasts in Ukraine – and evolution over time ..................................................................................................................................................................... 26 4.1. Housing price ......................................................................................................................................................... 26 4.2 Housing costs .......................................................................................................................................................... 28 5. What are the different ways in which Ukrainians get a house? From government, from their enterprises, inheritance, from the market (how prevalent are each of these?) .......................................................................................................................................................................... 33 6. How do households finance their real estate (housing and land) purchases? ......... 34 7. Public free housing ....................................................................................................................................... 36 8. Housing subsidies and allowances (for construction; for mortgages; for rent/ heating; regional differences) ........................................................................................................................ 42 9. Mortgage system: how developed is it? ....................................................................................................................... 49 10. What is the role of land issues in functioning (or not) of the housing market in Ukraine? Differences across regions? ........................................................................................................ 52 11. Any relevant reforms in recent years? Planned? ...................................................................................................... 56 12. Overall, what are the key issues in the housing and rental markets and what can be done to address the issues identified? ......................................................................................................................................................................... 59 Annexes ............................................................................................................................................................................. 63 Bibliography ...................................................................................................................................................................... 68 2 1. Delineate conceptually what are the different ways in which the housing market can matter for labor mobility Labour mobility is determined by a whole set of different factors, but housing market is clearly one of the most important ones. Individuals do not make employment decisions without taking into account options of housing market. Economy constantly changes and diverse opportunities arise in different locations at different points of time. Badly functioning housing market can cause low labour mobility and restrain the ability of employers to match vacancies in specific locations. The issue of labour mobility is especially vital for developing countries. According to Paci et al. (2007), labour mobility in the EU tends to be lower in new member states located in Central Europe and Baltic region comparing to advanced European countries. Synovate, a global marketing research company, conducted survey of labour mobility in Russia, Ukraine, Bulgaria and Serbia (Synovate, 2010). Results of the survey showed extremely low desire to relocate in Russia and Ukraine. If offered 1.5 times increase in salary, around 80% of respondents in Russia and Ukraine would still refuse to relocate, though in Bulgaria and Serbia only 50% of respondents would not change their location on this conditions. Answering to the question what would change their mind, more than 50% of respondents in Russia and Ukraine indicated provision of free housing. Moreover, imperfections in housing market were mentioned in this survey as one of the main reasons for low mobility in Russia and Ukraine. Different characteristics of housing market that can influence labour mobility are discussed below. Homeownership generally reduces mobility compared to renting . According to many studies, home owners are less likely to change their location compared to those, who rent their dwellings. The main idea is that home owners face high transaction costs if they wish to relocate. In fact, homeownership has two contrary effects on employment: I. Increases unemployment due to low mobility (see Figure 1). This was confirmed by studies of Green and Hendershott (2001), Nickell (1998). II. Decreases unemployment due to higher incentives to keep current job and stay at present location. Van Leuvensteijn and Koning (2004), Munch et al. (2006) According to Oswald (1999), there are five factors that support argument why homeownership leads to higher unemployment: 1) There is a direct effect from owning a home. Selling home and finding new dwelling is expensive. These expenses can be direct (actual losses if selling price for old house is lower compared to buying price for a new one, transportation cost of moving, buying new furniture, etc.) or indirect (costs of familiarizing with new area, looking for another school for children, problem of social isolation in a new place, etc.). If new opportunities arise in different location, home owners can be reluctant to move since transaction costs might be too high for them. 2) Immobility makes economy inefficient. If labor market is immobile, workers may take jobs that do not correspond to their abilities. Labour productivity drops, production costs rise and real income becomes lower. Comparing to mobile society, in this situation real wages have to be lower and prices higher. Inefficient economy lowers number of new vacancies. 3) Home owners tend to commute over longer distances compared to renters, since the former prefer to stick to homes they own. This leads to transport congestions and makes getting to job more costly for commuters. Thus, it reduces the gain from having a job and increases attractiveness of not working. 4) Housing markets dominated by home owners can impede newcomers (mostly youngsters) from settling in their neighborhoods close to their jobs (this idea was first mentioned by Kain,1968). Even if certain area is attractive from the point of view of employment opportunities, but is dominated by home ownership, young people and people with low income will not be able to come and work there. 5) Home owners are less likely to let entrepreneurs
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