Local Government and Public Service Reform Initiative Housing Finance New and Old Models in Central Europe, Russia, and Kazakhstan Edited by József Hegedüs and Raymond J. Struyk Local Government and Public Service Reform Initiative Open Society Institute–Budapest Address Nádor utca 11. H-1051 Budapest, Hungary Mailing address P.O. Box 519 H-1357 Budapest, Hungary Telephone (36-1) 327-3104 Fax (36-1) 327-3105 E-mail [email protected] Web Site http://lgi.osi.hu/ First published in 2005 by Local Government and Public Service Reform Initiative, Open Society Institute–Budapest © OSI/LGI, 2005 TM and Copyright © 2005 Open Society Institute All rights reserved ISBN: 963 9419 90 7 (print) ISBN: 963 9419 91 5 (online) OPEN SOCIETY INSTITUTE The judgments expressed herein do not necessarily reflect the views of the above two sponsors. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Copies of the book can be ordered by e-mail or post from LGI. Copy editor: Brad Fox Cover design: Tom Bass Cover photo: © Képregény Kft. / Tamás Dezső Printed in Budapest, Hungary, March 2006. Design & Layout by Createch Ltd. Contents Acknowledgments ........................................................................v Overview ....................................................................................vii List of Contributors ....................................................................xi List of Tables and Figures ........................................................... xv PART I. Introduction ........................................................1 József Hegedüs and Raymond J. Struyk Divergences and Convergences in Restructuring Housing Finance in Transition Countries ...............3 PART II. Framework Elements of Emerging Finance Systems ..................................................41 The Role of Housing Finance in the Housing Policy of Transition Countries ................................43 Mark Stephens Home Purchase Affordability and Mortgage Finance ...........................................63 Raymond J. Struyk Thinking about Subsidies to Housing Finance .......79 Douglas B. Diamond Risk Management and Mortgage Portfolios: Some Applications for Emerging Markets ..............99 Robert Van Order Housing Finance in Transition Countries: Finding Bills on the Street ...................................127 Robert M. Buckley and Robert Van Order iii PART III. Case Studies—Transition Countries .............149 Development of a Commercial-bank-based Housing Finance System in Poland .....................151 Jacek Łaszek An Evaluation of the Hungarian Mortgage Program 2000–2004 ............................................177 József Hegedüs and Eszter Somogyi Housing Finance in Slovenia: The Key Role of the National Housing Fund .......209 Andreja Cirman The Long-lasting Impacts of Earlier Housing Policies on Housing Finance in Romania .........................221 Ileana Budisteanu Residential Mortgage Lending Risk Management and Affordable Housing Market Development in Russia ..............................................................237 Elena Klepikova and Natalia Rogozhina Mortgage Lending and Risk Management in Kazakhstan .....................................................255 Dr. Friedemann Roy, Aset Mananbaev, and Murat Yuldasev PART IV. Contrast—Germany ........................................277 Mortgage Lending and Risk Management in Germany .........................................................279 Dr. Friedemann Roy PART V. Comparative Tables, Selected Bibliography, and Index ...........................................................309 iv Acknowledgments This volume emerged from the International Workshop on Housing Finance and Housing Affordability, organized as a closing project in the spring of 2004 by the Metropolitan Research Institute (MRI) supported by USAID through the Thinktank Partnership Project (Contract PCE-I-00-00-00014-00, task order 803). The workshop provided an extensive circle of researchers from both Eastern and Western European countries with a much needed opportunity to discuss and compare their work. A consensus developed concerning the lack of reliable information and a need to share various experiences with a wider audience. The compilation of this volume hopes to serve that end. With the encouragement and support of Gábor Péteri, then Research Director at the Local Government and Public Reform Initiative, the Open Society Institute took over the implementation of this project, together with FHB Mortgage Bank in Hungary, an external donor that allowed the inclusion of an international data comparison as an annex to the book. We would like to thank the reviewers Martin Lux and Bruce Walker for their accurate work and productive advice, owing to which this book will be a valuable contribution to today’s extensive field of housing finance literature. We are also grateful to Tom Bass for publication management and support throughout the compilation of the book. A valuable contribution was delivered by Nóra Teller (MRI), who coordinated the contributors’ work and participated in data collection. Finally, we express special thanks to Gojko Bezovan (Croatia) and Daniela Grabmüllerova (Czech Republic) who have provided wide-ranging data on their respec- tive countries, rendering the in-depth regional comparison complete. v Overview The transition from a centrally planned to a market-oriented economy in post-com- munist states has taken much longer than most observers anticipated. However, as a consequence of years of privatization and decentralization, the so-called “East European housing model” has now disappeared. Even so, efficient market relations (espe- cially in the housing finance system) have developed very slowly, and this has made any attempt to introduce major social housing programs unfeasible: in the absence of readily available mortgage finance, the state has continued to help middle-class families address their housing problems. If housing is not affordable to the majority of households, the influence of fiscally constrained social housing programs is correspondingly limited. Several positive changes took place in the 1990s with respect to the legal and insti- tutional framework of the housing finance system in the region. However, the creation of efficient, market-oriented housing finance systems in the countries of Eastern Europe and the Commonwealth of Independent States remains a work in progress. The objective of this volume is to summarize the experiences of different countries in the region in developing a housing finance system from the perspective of basic housing issues. This anthology, following an introduction that compares developments across the region, consists of three parts: (a) five “framework presentations,” each describing a certain challenge in mortgage lending and ways of addressing it, e.g., its use to address housing affordability issues or managing risks to banks associated with mortgage lending; (b) a series of country case studies, each of which describes developments in one country and focuses on how it addressed the challenges described in the framework papers, and (c) a special case study on Germany providing a “contrast” to the transition countries showing the main features of a well-established housing finance system. Appendices at the end of the book provide further information for researchers. The first chapter by Mark Stephens provides a conceptual framework for examin- ing the relationship between housing policy and housing finance in transition economies. It concludes that the development of housing finance systems cannot be treated as a purely technical exercise and that economic objectives will become more important as transition economies are integrated into wider regional and global economic systems. The issue of housing affordability is discussed by Raymond Struyk in the second chapter. The chapter argues that the standard affordability indices have the virtue of simplicity, but that this simplicity carries a high price. For one, it masks the roles of the multiple factors that determine both household purchasing power and dwelling unit vii HOUSING FINANCE prices. A second problem is that the indices are generally point estimates—they report on the situation for the “typical household”—and therefore provide little information on the situation for those at other points in the income distribution. Third, there is inconsistency in the results across indices for particular cities and countries. Given these facts, the results from the more data-intensive mortgage underwriting accounting models are strongly preferred for analyzing a country’s or region’s housing affordability. Based on generally ill-defined “affordability problems,” the Eastern European and CIS nations have enacted an array of housing subsidy schemes to lower the cost of home- ownership. In the third chapter Douglas Diamond gives an overview of the rationales for subsidy in general and evaluates the efficiency and effectiveness of the specific set of subsidies employed in Central and Eastern Europe since 1995. He concludes that a more critical and comprehensive analysis of housing finance subsidies (and subsequent reform) is needed as the region moves into a second decade of such subsidies. The fourth chapter by Robert Van Order argues that well-designedrisk