The Challenges of Slovak Rental Housing Policies in Slovakia in the Broader Context of Central Europe.

Koloman IvaničkaDaniela Špirková

Slovak University of TechnologyInstitute of management

Housing markets during the planned economy period in Central and Eastern Europe

• markets almost did not exist except for illegal black markets

• housing considered as a social rather than an economic good

• single party political control over the housing sector

• lack of competition among housing agencies (bureaucratic coordination), and broad control over the allocation of housing services

Housing construction

• During the times of centrally planned economy the new housing construction was funded mostly by the state and built by the public companies or by the people themselves.

East European Housing Model before 1990

• Production, consumption and allocation of housing dominated by state, functioning of market subordinated

• Housing- the social right serving the housing needs, but not commodity (Hegedus, Teller 2006)

• Public rented housing – at the forefront of socialist housing model

Creation of housing markets after 1989

• Privatization and the restitution of the housing stock

• Properties were sold for low prices that were quite distinct from the economic fundamentals

• Only after several years the prices on the residential markets became more realistic, but the problem of the adequate supply and demand is still not solved

Transformation to market economy

• At the beginning – the general decline of incomes of population

• Existing housing funding mechanisms were mostly dismantled, and the new forms of the housing finance and housing subsidies were not existing

• Construction of the new housing units dropped substantially, while the prices were growing

• In Nineties the housing reforms were not considered to the priority

New dilemmas

• Actual outcomes of housing privatization and restitution in CEE countries are modest and far from excellent

• Growing homelessness• Decline of housing production• Inadequate upkeep of the public rental

housing and insufficient funding• No renovation subsidies for private landlords

New dilemmas

• Lacking institutions for private rental housing (with some exceptions)

• TBS – Towarzyszstwa budownictwa zjednoczonego – TBS – Poland

• Nonprofit housing organizations in Slovakia – that are rather marginal, however

• The new experience with social housing developers in Montenegro

Subsidies of interest rate for private landlords in Slovakia

• These subsidies existed for very limited period (approx 3_4 years) at the beginning of 21 th century, howeve later they were abolished. The impact of these subsidies on housing rental production was negligible

• The private landlords were not interested to build such housing, perhaps because the expected profits were too low for them

High homeownership rates• The very high homeownership rates in CEE transition countries

are a relatively new phenomenon, which emerged in the early 1990’s.

• After the abolition of communist regimes, the new governments sought to move away from highly centralized economies with collective ownership towards liberalized market economies. In the housing sector this was achieved by rapid privatization of publicly-owned property through the sale of dwellings to tenants at low prices.

• As pointed out by Clapham (1995), this was done without any explicit debate about privatization and its merits or demerits. The general belief at the time was that privatization of publicly-owned dwellings and housing construction enterprises would relieve public expenditure, create much needed funding, and lead to new housing construction.

The changing structure of homewnership after 1990 in Slovakia

0

10

20

30

40

50

60

70

80

90

100

Cooperative property

Rental dwelling

Other property

Cooperativeproperty

22,12 14,92 3,64

Rental dwelling 26,76 8,12 2,71

Other property 51,13 76,96 93,65

1991 2001 2008

Sustainability of the Market with High Rate of Homeownership

• Market with the very high rate of homeownership is not very sustainable

• Homeownership can be insecure. The property market now sees a clear downturn, and prices decline. Residential property prices in Slovakia fell by 8% in 2011, according to the Global Property Guide, and flats in Dublin, Ireland, are 62% lower today than in 2007.

• In Spain the average price of a home has fallen by 35% since 2008. The result is that many new homeowners, often young families, have been forced to sell with a great loss. ---http://ecahousingforum.eu/2012/04/rental-housing-as-a-key-to-housing-crises/

Support of rental housing sector in Slovakia (directed on low income people)

• Rental housing sector in the Slovak Republic in comparison with developed countries of Europe is considerably undersized, as illustrated by the percentage of GDP support

0,24

1 1

0,09

1,1

1,93

0,28

1,7

0,56

0

0,5

1

1,5

2

2,5

Bel

giu

m

Cze

chR

epu

bli

c

Den

mar

k

Est

on

ia

Fin

lan

d

Fra

nce

Ger

man

y

Au

stri

a

Slo

vaki

a

(%)

Rental Housing. Mobility and Unemployment

• Character of labor market depends very much from the well functioning housing market that enables higher geographic labor mobility, which in turn enable to reduce the unemployment rate

• Structural change may be more difficult without well functioning rental housing market

Rental Housing Sector and Mortgage Market

• Competition in the form of rental apartment houses could push up the interest rate on housing loans. In an environment where people have no alternative and the demand for loans for their housing is growing every year, the banks do not have the incentives to reduce the interest rates on housing loans.

• While the euro area housing loans grew year on two percent, in Slovakia it was about more than 18 percent. Strong demand for mortgage credits allows Slovak banks (which are foreign owned) to ask higher interest rates than their counterparts in the euro area.

Living conditions of young people

• According to Eurostat statistics in Slovakia, 60 percent of youth aged 18 to 34 years live with their parents, the highest share in the European Union. Approximately forty percent of households are overcrowded.

• The reasons for such a high share should be studied however more in detail (other factors than the lack of finance may play here its role).

Social housing• In most transition countries, social housing is not

really defined in the legislation, however, public rental housing gradually assumes this function. However this sector is often quite limited unlike the situation in the developed countries – se the graph

20%

22%

36%

25%

16%

17%

0% 10% 20% 30% 40% 50% 60%

Austria

Sweden

Holland

Social rental sector Private housing sector

Affordability of New Condominium Housing

• Yet problems: prices for the new condos rose in CEE capital cities to levels above Western European capital cities. In many Western European countries the average condo costs 4 to 5 average yearly gross incomes, but in many CEE countries , this ratio was above 10 in some cases even above 20 (Amman 2011)

Homeownership and Unemployment

• High share of homeownership may be one of the main reasons for high unemployment in Europe.

• According to estimates (Oswald), every 10 additional percentage points of homeownership increases the unemployment rate by 2 percentage points.

• Homeowners in the event of job loss are less willing to move into rental housing due to higher costs of relocations (which includes the costs associated with the sale of an apartment and paying for two housing units until the original one is sold).

• In case of losing the job, the period of their unemployment is longer than for tenants.

Homewnership and unemployment

• Based on his research Oswald also shows that regions with higher share of homeownership have generally more rigid treatment of land use planning and legislation that restricts the development of business activities (Oswald, A.J.,1996).

• negative impact on labor supply elasticities with respect to wage and unemployment differences, making regional disparities more profound and persistent

• Later research has shown that the impact of homewnership on unemployment is less strong than was found by Oswald, nevertheless it is substantial

Misdirected consumer choice in Eastern Europe

• Misdirected consumer choice, because of insufficient supply of affordable rental housing

• Rental housing should be the option in housing markets especially for young households and domestic migrants. In the past, house price risks were increased by giving out mortgages to households that could not really afford them

• Legislation on rental housing, social housing, maintenance and related topics is inadequate and needs the new solutions

• The hostile legislation toward social rental housing in Hungary (Erdossi, Hegeduss): The subsidies are channelled to ownership sector (housing construction benefits, interest subsidies, local subsidies, employer subsidies as well as tax relief (purchase of privately owned housing, savings linked subsidies)

• It is more expensive for households to rent than to buy or build housing

Rental housing in Slovakia

• Rental housing in Slovakia is often understood as housing for people with the lowest incomes, the marginal groups who have different social and personal problems. Ensuring rental housing development is currently primarily the responsibility of municipalities, whose main source of financing are the state grants and a loans with a low interest rate.

• Despite subsidies from the state and affordable housing loans from commercial banks there remains a group of people with average to low incomes, for whom the provision of separate accommodation is unattainable. They are often well educated young people.

Share of municipal rental housing units from total number of completed dwellings in Slovakia (%)

10,4

16,9

28,4

12,113,7

14,8

19,1

15,3

12,2 12,710,6

0

5

10

15

20

25

30

2001 2002 2003 2003 2005 2006 2007 2008 2009 2010 2011

The lack of rental housing was and is the result:

• improper implementation of the concept of privatization of housing,

• problems of economic transformation (slow transformation of the housing sector) - rent deregulation was done slowly to avoid disruption of social peace,

• improper incentives for the development of rental housing (for rent private apartments and lack incentives to social housing - unsustainable system of subsidies)

• missing tax breaks and preferential credit conditions mainly commercial banks,

• absence of a non-profit developers to a greater extent, although the legal preconditions for it are created.

Changing attitudes to rental sector in Czech Republic

• The Czechs are retreating from their mortgages, and cast into regular monthly payments to their home. The Realtors Association of the Czech Republic reports that the rental housing business grew, roughly by one fifth.

• Czech real estate brokers have noticed increased interest in the rental housing, not only among people who are afraid to tie on home loan repayment. And there is growing demand for good rental apartments for managers with parking. The growing interest for renting the family houses is also observed

• Before: The young people consídered the rental housing as the very bad option.

Availability of capital for rental sector

• There is hardly any long term investment capital available at attractive conditions for rental housing ( UNECE 2005)

• PPP schemes for housing: are almost not developed

• Some succesful initiatives were realized in Slovakia, however the further dissemination of these initiatives did not obtain the poitical and gocvernmental support.

Recommendation (OECD)

• Remove obstacles to the expansion of a private rental market

• End the right-to-buy policy or make it less �attractive by adjusting conditions closer to market prices.

• Increase the taxation of real estate by basing it on �actual property prices and by raising the tax rate to neutral levels.

• Further reduce the subsidization of owner-�occupied housing.

Recommendations

• Consider bringing the rent level in public housing apartments closer to market levels. At the very least, tenants who no longer fulfil the eligibility criteria should pay market rents. (This is the marginal problem in Slovakia, however in some contries it is the serious problem)

• �housing supply policies are needed to be developed in addition to to labor market policies aiming at the same thing.

Recommendations

• Consider phasing out the tenant protection for indefinite �rental contracts.

• A common feature of the housing allowance is its marginal significance (OECD research). Its role is limited to income maintenance for the lowest income families, rather than being an effective demand-side housing policy instrument. The many restrictive conditions apply to the possibility to receive the allowances (income ceilings)

• Consider raising housing allowances, make them more widely available (also to persons in work) and take into account regional differences in housing costs when setting the amounts.

Conclusions

• Rental housing sector in CEE countries is really emerging sector, that is still in infancy

• The majority of subsidies are regressive in nature, supporting access to homeownership, while little government funding is directed to public rental housing, means-tested support or assistance of low income households

• There is the necessity to study and research above mentioned problems in detail and based on them to propose the incentives for teh develoment of the rental sector