Housing finance beyond individual mortgages – how to finance new forms of affordable housing in Eastern Europe?
Introduction:
This paper aims to be both an analysis of the limitations of the current housing finance system, and of the possibilities for the development of new forms of housing finance in the Eastern European region, and specifically in Hungary. In terms of new forms of housing I will focus on housing cooperatives, but the main arguments can be broadened to other forms of institutionally owned rental housing as well. In Eastern Europe, there is a sore lack of such organizations, which is closely linked to how the rental housing market is regulated and financed.
Limits to an individual mortgage-based housing finance system:
2015 was a turning point in terms of European housing finance. Until then, the effects of the 2008 crisis could be strongly felt, especially in various countries on the peripheries of Europe. As a consequence of pre-crisis lending, many families defaulted on their mortgage payments, many were evicted or went through severe financial hardships.
However, from 2015 onwards banks were called on to clean their portfolios in order to prepare the rollout of a new wave of mortgages. This new wave of lending is stronger in some places than others. In Hungary, it is exceptionally strong, boosted by a series of government measures. These measures include a nonrefundable subsidy for home purchase based on the number of children a family has, subsidized mortgages and also a free-purpose, large-sum consumer loan linked to childbirth, which in practice is used by many for housing purposes.
New housing organizations: the need and the response through finance:
In Eastern Europe, there is a nearly complete lack of institutionally owned rental housing. That is, housing associations or “social landlords” practically do not exist; there is a very small stock of social housing most often directly in the hands of municipalities, and beyond that, the rental market is dominated by small individual private landlords. This lack of institutional actors has historical roots: the drastic privatization of previously state-owned housing at the beginning of the 1990s resulted in an entirely fragmented housing stock. However, the fact that the sector of organizations owning and managing housing did not develop until today following this privatization wave, is more a question of political and legislative choice and of financial possibilities.
Steps for overcoming the bottlenecks:
Shifts in policy are important because as long as regulation is very vague concerning rental housing, corporate actors will be more reluctant to shift their practices in this direction. Cooperative housing is even more a grey zone than pure rental housing, since this tenure is in between the more conventional forms of both ownership and rental. In order to reassure different actors and to shift the risk off individuals or smaller housing organizations, the regulatory framework and legal guarantees of both rental and cooperative housing need to be clarified. Additionally, the focus of government subsidies on mortgage-backed homeownership is also counter-productive to the development of any other form of housing tenure. Thus, a fundamental shift in these housing subsidies would also be needed in many Eastern European countries.
Conclusion:
A more long-termist approach would generally be direly needed on Eastern European housing markets, which are fundamentally characterized by volatility. The expectation of short-term returns in itself has an effect of increasing house prices and reducing the stability of housing perspectives for individuals. If financial instruments of patient finance and institutions of rental and cooperative housing could develop, then fundamental shifts could begin on these housing markets.