What can we learn from the past 15 years’ experiences? The studies in this book il-lustrate that from a common point of origin a great variety of housing finance systems emerged, each reflecting the historical, economic, and political realities of the particular country. The specific attributes of each new housing finance system can be explained by the combined influences of existing institutions (“path dependence”), efficiency of “knowledge transfer,” and the role of local politics. Looking at the main funding structures, the cases studied demonstrate that different countries are following different models (characterized with the relative shares of mortgages originated or funded through contract savings, commercial banks, mortgage banks, and secondary institutions). This is not a surprise if we look at the European housing finance systems which essentially follow the same diverse pattern. Even in a single country we find different models, for example, Germany, where different housing models compete with each other.
There are no simple explanations why a certain country has chosen a particular model. Why has the Polish market been closed to the big bausparkasse banks? Why did the Slovenians base their institutional development on the Housing Agency? Why did mortgage banks became so important in Hungary? It would be difficult to explain the various developments as well as the specific cultural, social, and economic needs of the country. Arbitrary factors played a role even as path dependent and situational elements were important. Moreover, one should not overlook effects of the advice and marketing
of specific models and instruments by Western aid agencies, financial institutions, and insurance companies looking to develop new markets.
The basic question is how the institutional developments in themselves affect the efficiency of the housing finance system. The term “efficiency” has been used in very different ways in scholarship on the subject, and is not easy to define. The difficulty is caused by the fact that we should compare the output, impact, and cost of the pro-grams, after controlling other effects like macroeconomic and macro-financing. One important element of an efficient housing (and economic) system is that the standard level of housing is affordable for the majority of the population both in the owner-oc-cupied or rented sector.
The choice between models does not in itself determine the efficiency of the hous-ing finance system, because it depends on the institutional and technical details inside the models such as the existence of competition, the regulatory capacity of the govern-ment and central bank, and the efficiency of the housing subsidies. Efficiency is also influenced by the capacity of the housing system (governments, banks, households) to correct the rules and their behavior in a timely manner when necessary. The effect of a certain combination of financial tools depends on several factors such as the real benefit to borrowers and lenders, households’ capacity and willingness to take advantage of the tools, and the fiscal and economic effects of certain solutions. There is broad agreement among experts that the contract saving schemes (“bausparkasse”), contribute less to an efficient housing finance system,than other funding systems. This approach is generally less efficient. In contrast, the efficiency difference between the mortgage-bank dominated systems (like Hungary’s) or the retail-bank dominated systems (like in Poland) depends on the details of how the systems operate and therefore their overall regulation.
One major recommendation is that governments build their capacity so that public policy analyses can improve the legal and financial regulations whatever housing finance system they have chosen. Correction of unforeseen negative effects caused by ill-advised steps, inefficient institutional arrangements, and regressive subsidies may be the most important elements in ultimately determining efficiency. It is important to remember that public debate on the relative advantages of different models is dominated by the views of those representing specific institutional interests. Governments must have the capacity to have an independent view on public policy issues and not to be captured by special interest groups.
The basic question is how evolving institutional reforms will influence the effective-ness of the housing finance system. The high growth rate of outstanding mortgages is generally a healthy trend but only if the interest rate and liquidity risks of these large balances are properly managed. Governments have to evaluate their policy from the point of view of financial and fiscal sustainability. A short-term “generous” but longer-term unfeasible program could cause more damage as supporting the illusion that housing is public responsibility.
This volume demonstrates that without an efficient housing finance system no socially committed housing policy can be developed. A key recommendation based on the experiences of the transition countries studied in this volume is that governments must undertake the very substantial efforts essential to designing institutional reforms where needed, and even offering the subsidies that may be necessary to induce the institutional cooperation needed for reform implementation.
To improve governance in the housing sector is a key recommendation. It is critical for the responsibility of the design and implementation of interventions in both hous-ing finance and in houshous-ing assistance to be shared among different private and public stakeholders. Without this type of cooperation, experience suggests that even the best administration is inadequate. An additional conclusion is that creation of fair competi-tion is one of the most important elements of a well-funccompeti-tioning system.
Social housing policy needs a well-targeted subsidy system. However, on the basis of our experiences, targeting is not politically feasible without the support of the middle class. If housing is not affordable for the middle- and even upper-middle-income groups, subsidy programs will become regressive—helping higher income groups more than low income groups. An efficient mortgage finance system makes housing affordable for the middle class, sometimes through shallow housing subsidy schemes (tax advantages, interest rate subsidies, etc.) and frees up budget sources for social programs.
Increasing the efficiency of the housing finance system turns our attention to the immature social housing policies in the region. Fairness and efficiency should be com-plementary and not act as substitutes for each other.
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ENDNOTES
1 We would like to thank Robert Buckley, Jacek Łaszek, Martin Lux, and Bruce Walker for their useful comments on earlier drafts of this paper.
2 The terms “housing system” and “housing sector” are used interchangeably for describing both the institutional/legal environment and the technical aspects (housing units, production, and housing related services) of the residential living conditions of the population. Housing policy is used to describe the legal and financial means of intervention used by governments.
3 The common elements of the different financial schemes used in privatization were their “give-away” character, meaning that prices were free or not more than 15% of market prices. The negative consequences of privatization were related to that fact that management and affordability issues of privatized units were neglected. However, it is questionable whether more complicated institutional solutions such as housing associations, cooperatives, or shared ownership models could have been feasible.
4 See especially Struyk (1996, 2000), Hegedüs, Mayo, and Tosics (1996), Diamond (1999), Lux (2003), Dübel (2004), several conferences such as OECD 2000 and UN 2005.
5 The Metropolitan Research Institute (Budapest), the Institute of Urban Economics (Moscow), and the Urban Institute (Washington) carried out a comparative research project on the relation between the mortgage market and housing affordability in Budapest and Moscow. Work on this project was supported by the US Agency for International Development, through the Thinktank Partnership Project, Contract #PCE-I-00-00-00014-00, Task Order #803. The main results of the program were published in Hegedüs et al (2004).
6 Data on housing tenure, one of the basic characteristics of the housing system, are very questionable.
We do not have reliable data on the private rental sectors as private landlords tend to evade registration for tax reasons.
7 This approach could be conceived as a “soft structuralist” approach, which combines “rational choice”
(policy choice or agency choice) with structural elements. In our earlier work we followed this argumentation, for example, in the explanation of “self-help” housing in Hungary (Hegedüs 1992).
8 One of the outliers is Bulgaria, where a high level of urbanization was accompanied by a small pubic rental sector. This demonstrates that high levels of homeownership do not mean that the housing sector is market oriented. State control over owner-occupation could be as strong as state control over public rental (typically, in other countries tenants in the public sector enjoyed important property rights).
9 Buckley and Tsenkova (2003: 19) characterized the market-based housing system as one in which market mechanisms dominate production, allocation, and consumption of housing; where there is sufficient competition among agents and institutions in the interrelated markets for housing finance, resources, and services; and governments provide subsidies that are relatively transparent, progressively targeted, and budgeted in sustainable ways.
10 While structural changes were postponed in the social service sector, new elements emerged partly related to the housing sector.
11 Kemeny’s two models (Kemeny 1995) are frequently used as real policy options.
12 This problem can be illustrated with the excellent book edited by M. Lux (2003), which had to introduce a separate heading for Bulgaria, as a separate model. In an earlier paper, we used the same approach (Gerőházi, Hegedüs, and Tosics 2000).
13 CEE (Central East Europe: the Czech Republic, Poland, Slovakia, Hungary, and Slovenia; Baltic (Baltic states): Latvia, Lithuania, and Estonian; SEE (Southeast Europe): Bulgaria, Serbia, Albania, Croatia, and Romania; FSU–A (Former Soviet Union—A): the Russian Federation, Ukraine, Belarus, and Moldavia; FSU–B (Former Soviet Union—B): Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan.
14 In the case of Slovenia, Cirman (in this volume) argues that housing construction by individuals remained at the same level, thus the decrease was completely due to state sector withdrawal.
15 “Quasi” because the feedback mechanism to correct the disequilibrium of demand and supply was under state control.
16 We have to add that the methodologies used to measure house prices in European countries are far from standardized (ECB 2003).
17 It is worth mentioning that in the last decade house prices tend to increase continously in real terms in most part of the world.
18 We used a robust method to determine the P/I ratios in the transition countries. The regional price differences could “disturb” the results.
19 The average house price was calculated with weights (20% type 1, 5% type 2, 20% type 3, 20% type 4, and 35% type 5); the average household income was calculated as 25% type A, 25% type B, and 50 type C for two- earner households.
20 See Struyk in this volume.
21 See Hegedüs and Somogyi in this volume.
22 See Hegedüs and Somogyi in this volume.
23 In Hungary, the housing funds were set up at municipal level.
24 See Cirman in this volume.
25 The size of contract saving cannot provide the funding for a mature housing finance system.
26 See Buckley and Van Order in this volume.
27 See Van Order in this volume.
28 The typical currency used for these loans were US dollars, deutschmarks, Swiss franks, and euros.
29 One illustration of the unproductive debates is the dilemma of cash grants versus interest rate subsidies. In general, both have advantages and disadvantages, and its is impossible to balance these without understanding the economic and social environment in which they are to be used.
30 See Buckley and Van Order in this volume.
Framework Elements of
Emerging Finance Systems
The Role of Housing Finance
in the Housing Policy of Transition Countries
Mark Stephens
ABSTRACT
This chapter provides a conceptual framework for examining the relation-ship between housing policy and housing finance in transition economies.
The paper distinguishes between first- and second-tier housing objectives, and economic objectives. “First-tier” housing objectives are identified as basic access and affordability housing objectives. Even the most developed housing finance system cannot meet first-tier objectives alone, as many households will require subsidies to access owner-occupied housing and rented housing will be more suitable for others. The design of the housing finance system also impacts on the nature of the wider housing system, which itself is subject to legitimate “second-tier” policy choices. These include trade-offs such as those between risk and opportunity, opportu-nity and stability, and cohesion and opportuopportu-nity; and these may affect a government’s view as to the development of its housing finance system.
The housing system is also relevant to both micro- and macro-economic objectives, notably labor mobility and the relationship between housing wealth and consumption. It is concluded 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.
Policy of Transition Countries
Mark Stephens
1. INTRODUCTION
Governments share (in broad terms) an objective of achieving adequate and affordable housing for their citizens. This objective is expressed in a number of international dec-larations. The United Nations Universal Declaration of Human Rights specifies that
“Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family including food, clothing, housing, and medical care” (UN 1948, Article 25[1]). The Council of Europe’s (revised) Social Charter expresses an ex-plicit “right to housing” and commits signatories to take measures “to encourage access to housing of an adequate standard, to prevent and reduce the state of homelessness with a view to its gradual elimination, to make the cost of housing accessible to people who do not have sufficient resources” (Article 31, quoted in European Housing Forum 2000). While such “rights” are seldom legally enforceable by individuals, at least they express commonly shared aspirations towards which policy can aim. They also provide a benchmark for the discussion of policy in the chapter.
This chapter examines the relationship between housing policy and housing finance in transition economies. The paper aims to provide a conceptual framework for exam-ining this relationship. It draws on examples and evidence from transition economies, the EU–15, and the USA, but does not attempt to provide a systematic survey of the evidence. Inevitably, it contains many generalizations that will not apply to all of the countries in a particular category.
The relationship between housing policy and finance is explored in three ways.
• Housing finance and “first-tier” (access and affordability) housing objectives Within the wider framework of housing policy, the development of housing finance systems in transition economies is often treated primarily as a technical exercise. This approach implies that certain universally applicable principles can be applied to these countries with predictable and desirable consequences.
Moreover, because housing finance is often treated as a discrete topic, it can sometimes be conflated with housing policy.1 The first aim of this chapter is
to examine the way in which housing finance alone can meet the “first-tier”
housing finance and affordability objectives outlined in the opening paragraph.
It also aims to identify the supporting role that wider housing policy can play in achieving them.
• Housing finance and “second-tier” housing objectives
The chapter then goes on to widen the discussion beyond the relatively narrowly defined “first-tier” objectives of housing policy (above).2 Its second objective is to explore the ways in which the housing finance system can influence the nature of the housing system as a whole. It does this by exploring what can be termed
“second-tier” housing objectives, such as the avoidance of tenure polarization.
These help to define the nature of the housing “system.”
• Housing finance, the housing system, and economic objectives
The third purpose of the chapter is to explore the relationship between the housing system and the achievement of the economic objectives of housing policy. Economic objectives are likely to become more important as economies become more integrated into regional or global economic systems, such as, in some cases, the European Union. These are defined here as the microeconomic consequences of the housing system (for example its role in facilitating or hinder-ing labor mobility) and its macroeconomic consequences that could arise in the future. The latter follows from the Kok report’s analysis relating to the European Union’s adoption of the Lisbon Strategy that identified measures to make the EU economy by 2010 “the most dynamic and competitive knowledge-based economy in the world” (quoted by Kok 2004: 6).