Homeownership and Housing Finance Policy in the Former Soviet Bloc Costly Populism
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Struyk, editor This is a very thorough and readable analysis of the housing finance situation in the CEE. More than a policy paper, it provides a combination of historical perspective and current, on-the-ground intelligence that will be useful to both practitioners and researchers in housing finance in the region. Soviet Bloc in the Former Policy Finance and Housing Homeownership DEBRA L. ERB, PRESIDENT Societas: International Institute for Real Estate Finance HOMEOWNERSHIP AND HOUSING This text makes a major contribution to our understanding of housing finance in transition FINANCE POLICY IN economies—providing both detailed data which are THE FORMER not available elsewhere and coherent analysis of how governments frame the environment in which housing SOVIET BLOC finance markets develop. CHRISTINE WHITEHEAD Professor in Housing, Department of Economics COSTLY London School of Economics POPULISM The Urban edited by Institute RAYMOND J. STRUYK 2100 M Street, N.W. Washington, D.C. 20037 Phone: 202.833.7200 Fax: 202.429.0687 E-Mail: [email protected] http://www.urban.org Research Reports HOMEOWNERSHIP AND HOUSING FINANCE POLICY IN THE FORMER SOVIET BLOC COSTLY POPULISM edited by RAYMOND J. STRUYK The Urban Institute Copyright © October 2000. The Urban Institute. All rights reserved. Except for short quotes, no part of this book may be reproduced or uti- lized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without written permission from the Urban Institute. The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Contents Preface v Introduction vii 1 A Regional Policy Report 1 Raymond J. Struyk 2 Home Purchase in the Visegrad Countries: The Case of Poland 75 Sally Merrill 3 Russia: Dramatic Shift to Demand-Side Assistance 151 Nadezhda B. Kosareva, Andrei Tkachenko, and Raymond J. Struyk About the Editors 217 About the Contributors 219 iii Preface he inspiration for this book came from two sets of discussions in T1997 and 1998. One set was with housing finance consultants and policy advisers working in the central European states of Hungary, Poland, and the Czech Republic and in the Russian Federation. The other set of discussions was with officials and knowledgeable observers in the countries in southeastern Europe and nations other than Russia in the Commonwealth of Independent States (CIS). These conversations illuminated a disturbing pattern. First, the types of homeownership policies and related housing finance policies the bellwether reform states of central Europe were pursuing appeared to have serious limitations. Second, the countries of southeastern Europe and the CIS outside of Russia generally seemed to be strongly influenced by what their col- leagues to the north and west were doing. Because these nations had yet to tackle restructuring homeownership policies beyond implementing mass housing privatization schemes, this influence could be decisive. This book is the result of a careful analysis of the actual situation in the more “policy-advanced” transition countries of the former Soviet bloc. The book confirms that my initial foreboding was justified. By and large, the policies adopted, while a definite improvement over those inherited from pre-transition governments, are nevertheless conspicu- ously inefficient and wasteful. One hopes that the other countries in the v vi PREFACE region that will soon address new homeownership and housing finance policies will learn from the mistakes of their neighbors. Among the many persons who contributed thoughtful analysis and insights about developments in central Europe, I particularly want to thank Douglas Diamond, Achim Duebel, Jozsef Hegedus, Michael Lea, and Katie Mark. I thank Harold Katsura for a careful reading of the entire manuscript. Eric Zaretsky provided competent research assis- tance. EEI Communications did an excellent job editing the manuscript. Finally, but certainly not least, I gratefully acknowledge the support of the Urban Institute in writing this book. Raymond J. Struyk July 2000 Introduction young Hungarian family in 1998 wanting to purchase a newly Aconstructed flat or house was eligible for extensive assistance from the state. The family might have participated in a housing-linked con- tract savings scheme in which the government provided generous bonuses to increase the effective interest rate on the savings. The price of the apartment might have been lowered because building materials used in housing construction were exempt from the hefty value-added tax (VAT). And if it purchased a modest unit, the family might have been eli- gible for a downpayment subsidy and for interest rate write-downs on its mortgage loan. After it purchased the apartment, the family could deduct its loan repayments from its taxable income, up to a fairly high limit. While few families qualified for all of this assistance, many did receive benefits from multiple programs. What is it that causes the Hun- garian government to be so generous in promoting home purchase? ✦ ✦ ✦ Three powerful forces have driven some countries in central and eastern Europe to engage in expensive policies to produce more owner-occupied housing: • The perception of a “housing shortage,” associated in part with lower levels of new construction in the 1990s than in the 1980s. vii viii INTRODUCTION • An unwillingness on the part of the population to spend a sub- stantial share of their incomes (equivalent to the share spent by new homeowners in the West, for instance) to achieve their objec- tive of improved housing. • The desire of people for very secure tenure arrangements (through either unit ownership, with a minimum mortgage debt at most, or lifelong rental contracts in state housing). With the privatization of a large share of state housing during the transition and virtually no additions to this housing stock, security in the future will be avail- able almost exclusively through ownership. The accent in the new policies is on housing production and on fos- tering homeownership. With a nascent private rental sector, supporting construction of units for purchase (homeownership) is cheaper for the government than building rental units owned and operated by the state. And it may be cheaper than cooperative housing, which was and is heavily subsidized in some countries of the region––for example, Poland. Nevertheless, modest levels of state or municipal support for construction of rental housing continue in some countries. Naturally long-term housing finance, or mortgage finance, has a crit- ical role to play in fostering homeownership and associated residential construction. Long-term loans multiply the borrower’s purchasing power, making it possible for borrowers to contribute relatively more (and the state less) in attaining their housing goals. Hence, the active role of governments in the region in fostering the development of hous- ing finance systems is understandable. Despite these efforts, however, loan volumes are much lower than before the transition began, in part because of higher, market-determined interest rates. In Hungary, for example, the volume of home purchase finance as a percentage of hous- ing investment fell steadily from 22 percent in 1991 to 3 percent in 1997 (Hegedus and Varhegyi 1999, table 3). Government’s role in promoting housing finance is not always neu- tral in its effect on the structure and efficiency of the financial system. External advisers and business interests have had a fundamental impact on the shape of the emerging system. The German-Austrian Baus- parkassen associations have been particularly active and effective. The Bausparkassen system is a closed system in which mortgage loans from a specialized housing bank are funded exclusively from the savings of future would-be borrowers. Because it is a closed circuit––only the funds saved are lent––it is possible for the interest rates on both savings and deposits to be substantially below market levels, with borrowers subsi- dizing themselves by accepting low interest during the earlier savings period.1 The result in the Visegrad countries––Hungary, Poland, the Czech Republic, and Slovakia––has been a distinct but partial move- ment toward a German housing finance system. Under this system, a borrower takes a package of loans––typically two mortgages and some- times an additional (often unsecured) loan. The first mortgage is usually from a specialized mortgage bank for 40 to 55 percent of the house price. The second is through the borrower’s mortgage-linked contract savings plan, providing a mortgage for another 20 percent of the unit value. The borrower’s equity (downpayment), including the savings accumulated in the Bausparkassen, nearly always exceeds 20 percent and is often substantially more.2 The main step in adopting this model has entailed the creation of new specialty housing finance institutions in the region to operate the mort- gage-linked contract savings schemes (Bausparkassen). More recently, some new mortgage banks have also been created. All of this has hap- pened while the dominant international trend was toward universal banking and consolidation (Diamond and Lea 1992b).3 But nowhere in the region is the “German system” fully implemented. Indeed, commercial banks retain primacy as the originators of mort- gage loans in almost all countries. And borrowers taking multiple loans are the exception rather than the rule. An interesting dynamic has been at work in the region regarding sub- sidies for housing production and home purchase. At the beginning of the transition, government subsidies for housing production were sharply cut in all countries (Struyk 1996b). But around mid-decade, pressure for renewed subsidies for home purchase developed, despite surges in homeownership rates through mass privatization programs. And governments responded, although they sometimes limited assis- tance to those purchasing newly constructed housing. The pattern of direct support for borrowers through the banking sys- tem was very different.