The Puzzle Of Housing Privatization In Eastern Europe
Introduction:
While most attention is focused on the restructuring of the industrial and commercial sectors of Eastern European economies, the evolution of the housing sector towards a market basis is also important to the process of economic reform. The state rental sector typically accounts for 15 to 20 percent of the overall housing stock and over half of housing units in some cities. It consumes large state subsidies while suffering from deferred maintenance and inefficient management.
Pieces of the Puzzle:
There are six policy actions necessary for achieving these objectives:
Phased Rent Increases:
Raising rents on state rental housing to a level equivalent to that of privately-owned rentals in a free market is mandatory for integration of the two sectors. The development of a market-oriented housing sector implies that the private rental housing market offers adequate returns to investors and that households face the true cost of their housing in return for the greater freedom in their choice of housing. But increasing rents is equally important for the sale of state rentals at reasonable (market or near-market) prices-the higher the rent, the higher the value of the unit and its selling price.
Dealing with Implicit Property Rights:
In state rental housing in Eastern Europe, where tenants rights are very strong, there is little incentive for occupant households to move to homeownership. Reforming the law on tenant and landlord rights will be necessary to make rental housing an attractive investment option for private capital. Often, these tenant rights-in some cases, so strong that the distinction between owning and renting is often blurred-have literally been purchased through some payment at the time of initial occupancy.
Market-Rate Housing Finance:
Without adequate finance, effective demand for housing privatization will be limited, as households rely on inefficient alternative strategies beyond typical mortgage financing. The state may then attempt to resolve the problem through the supply side by lowering unit sale prices or offering financing with below-market interest rates.
Property Appraisals and Other Real Estate Services:
In principle, establishing a system of property appraisal and ancillary real estate services should not be difficult, but the lack of established markets undermines the usefulness of many standard real estate service techniques. At present, for example, it is difficult to assemble data on “comparable properties” easily, mainly because of the relatively low volume of private transactions in some countries and the lack of a institutional structure to share and make public information on the sales that do take place.
Housing Allowance:
Housing allowances provide consumer subsidies only to poor households and are tenant- rather than project-based, i.e., the recipient can take the subsidy with him when he moves, rather than having the subsidy tied to a unit.
Private Management of State-Owned Housing:
Because rents will increased many-fold during the transition, tenants will demand genuine improvement in services in return. There is much scope for cost reduction in the management of state-owned housing. Introducing competition into the market for property management services can achieve these cost savings, either by spurring greater efficiency on the part of the state management companies or by replacing the state management companies with private management firms.
HOUSING PRIVATIZATION:
The transformation of several of the economies of Eastern Europe from their central-plan, command system to the market-oriented economic model is now well underway. While most press headlines go to the restructuring and privatization of large state-owned enterprises, the evolution of the housing sector towards a market basis is very important to the process of economic reform as well. In Eastern Europe subsidies to this sector, when comprehensively measured, often amounted to 6 to 7 percent of GDP under the old regimes.
Conclusion:
Finally, governments can also promote a market-oriented housing sector by establishing a regulatory system that acts as a facilitator of private activity rather than an inhibitor. Local governments need to look not only at the sale of state-owned housing as a means of meeting demand for home ownership, but also at the provision of building sites out of the stock of developable state-owned land for households that wish to build new units.
Also Read: A Tangled Web? Housing Policies from a New Government November 2015