Central and Eastern European Mortgage Finance
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Studies & Data

The Urban Institute

Institute for Market Economics (IME)


Housing Finance in South Eastern Europe

By József Hegedüs

The paper is based on the seminar organized by Council of Europe on housing finance for the South East Europe Housing Network on Housing Finance1

A. Introduction

1. Transition from the centrally planned economy towards the market economy has taken much longer than most of the observers had thought. The transition recession lasted almost 10 years for the most developed countries in the region, and the GDP in the "latecomer" countries has not even reached the pre-transition level. Housing is one of the most complex areas of the economy where changes take place more slowly than in other areas, especially in the field of housing finance. Housing stars in the most advanced transitional countries have not reached 80 % of the pre-transitional level, and housing finance is in a premature state.

The debate on housing in transition countries raised the issue of the possible roles of housing in transition. Two options were discussed: (a) housing as a shock absorber or (b) housing as an agent of changes (Buckley-Gurenko, 1996, Struyk, 2000, Hegedüs, et al, 1996, etc.). The experiences of the past few years support the approach that housing has not played an "independent" role in transition beyond privatisation, but was much more a consequence of the reforms in other areas.

2. The reform of the housing finance sector in the transitional countries has to deal with the legacy issues. Housing was considered to be part of "social goods", and not a commodity. Even if this was more a part of the ideology and rhetoric in politics than a part of the reality of the socialist housing system (Hegedüs-Tosics, 1996), it has an important effect on today's housing policy.

In the pre-transition period the typical financial institutions (if they existed at that time) were part of the state economy. Their "behaviour" was closer to state organizations (allocating subsidies and resources) than to market institutions. Typically, state owned banks were responsible for extending housing loans with very long maturities, low fixed interest rate regulated size of the loan, and there were no underwriting procedures. Loans were more a type of subsidy than loans; real estate developers were part of the state planning process rather than real estate markets.

The real hardship of the transition is that legal changes are not enough; a radical change of the behaviour of the institutions is needed as well. It requires the introduction of new incentives to force the institutions to adjust to the changed environment or setting up new institutions with new rules.

The households are just as important as the institutional environment. In the transition household attitudes have to be changed as well. They have to adapt to the new conditions. The changes of the housing expenditures, the housing prices, and the decline of real incomes, etc. have forced the households to adapt to the new situation. It would be very important to increase the role of the housing mortgages in the transition, as it is just the tool to encourage the thrifty long-term, "middle-class behaviour" as an element of the household adjustment process.

3. Housing finance -- that is, the financial issues of the housing sector -- relates both to the stock of housing and the investments part (both in new construction and in transaction). The housing policy, which segregates the new housing construction from the operation and maintenance is very ineffective as it lacks the basic understanding of the real estate economy. (Renaud, 1995) The importance of this statement is underscored by the fact that in most of the transitional countries the sector is in "deficit". The operation of the sector is not and could not be financed by the household sectors, and the state subsidy contribution is not enough for the "reproductions" of the stock. Households do not pay the bills for housing services, the state subsidies are decreasing as well, which leads to a steady deterioration process.

The institutional and management structure of the housing stock has an important effect on the speed of the transition. The service providers in the housing sector remained mostly within the public sector, although different outsourcing methods have been introduced. The restructuring of the old-fashioned maintenance companies in urban areas is an important task of the housing sector reform.

4. The South Eastern European countries are in a very different situation today, even if they had a common period of the socialist housing system, following the second World War, up until the beginning of the 1990s. (Hegedüs-Tosics, 1996) However, not even this can be considered as uniform across the countries, as Yugoslavia followed a special path of socialism (based on self-administration and open relations to the West), while Albania can be considered as just the opposite, having been the most separated, closed country among all. Croatia is in the best situation, which finished the war in 1993, and has the best chances to recover based on its high political stability in the region. Romania and Bulgaria have not been involved in the war, but were quite slow in structural reforms, which had a bad effect on their macroeconomic situation. The war in countries like Serbia, Bosnia-Herzegovina, and in Macedonia even in 2001,and political tensions have made today's situation quite difficult. The fragile situation in the region is illustrated by the Albanian financial crisis of 1997, a country which was considered in the beginning of the 1990s as a miracle of economic growth. But this growth was based on foreign aid and the remittances of the Albanians abroad, and not on the real structural changes. We cannot deem the political situation today as stable, the corruption and the general decline of the public sector have remained a critical issue.

5. New legal foundations and new housing finance institutions cannot be built up in an environment where the housing equities are insecure, in a situation where legal and enforcement procedures do not work, and the deterioration processes are not localised. A strategy for building up a new, market-based housing finance system should include the financial management issue of the stock as well. In housing finance the financial agent has a long-term commitment on both the demand and supply side, which depends very much on the long-term stability of the economy, and on the steady, uninterrupted development of the economy. Thus the reform on housing finance should be parallel to the reforms in the economy, and real changes can only be expected with the stabilisation.

Note: This report is available in its entirety in the Portable Document Format (PDF).

1. The author of the paper would like to thank the country experts for their contribution.