Updated Housing Policy Concept Housing Policy Concept (Updated version of the Housing Policy Concept dated October 1999) Ministry for Regional Development November 2001 CONTENTS HOUSING POLICY CONCEPT 1 UPDATED VERSION OF THE HOUSING POLICY CONCEPT -- FOREWORD 2 A. ANALYSIS OF THE CURRENT SITUATION 3 1. INTRODUCTION 3 2. DESCRIPTION AND ASSESSMENT OF BASIC DEVELOPMENT TRENDS OF THE PAST PERIOD 6 3. ASSESSMENT OF EXISTING SUPPORT AND DEVELOPMENT MEASURES 18 4. SWOT ANALYSIS 28 5. SUBSIDIES FOR HOUSING FROM PUBLIC BUDGETS DURING 1999 - 2001 31 B. CONCEPT 34 1. GENERAL PLANS AND PRIORITIES OF THE HOUSING POLICY 34 2. PROPOSED MEASURES 40 3. QUANTIFICATION OF NECESSARY FUNDS 61 4. PROGRAMS AND MEASURES PREPARED IN 2001 63 Updated version of the Housing Policy Concept -- Foreword This updated version of the Housing Policy Concept from 1999 (Czech Government Resolution No. 1088/99 dated October 18, 1999) is based on: ˙ Government Resolution No. 9/01 dated January 3, 2001 concerning the Mid-term Concept of Social and Economic Development, ˙ Government Resolution No. 10/01 dated January 3, 2001 concerning the draft Methodology of Mid-term Concepts. The updated version of the Housing Policy Concept was prepared in accordance with the approved Methodology of Mid-term Concepts and includes updated data and analyses. Like the original version, the update contains analyses and conceptual proposals. Annexes attached to the 1999 version are not included in the update because they concern areas where no substantial changes have taken place or because the information contained in them is included in the text of the updated concept. In comparison with the 1999 wording, the following has been added to the analytical part of the concept: ˙ a SWOT analysis, ˙ a regional analysis, ˙ an assessment of the effectiveness of instruments supporting the housing policy. With regard to the current situation in the housing sector and the housing policy itself, new topics have been added to the analysis and statistical data have been updated. In the same way as the assessment of the effectiveness of support and development programs, the analysis focuses mainly on developments of approximately the past three years. The concept section of this document is adapted to the requirements of the Methodology of Mid-term Concepts. Proposals for individual measures do not contain only a description of the measure, but also an overview of the expected effect, including the regional impact, the amount funds that will be needed, and a definition of the jurisdiction of individual ministries. In addition, the description of proposed measures includes an assessment of past performance. A. Analysis of the Current Situation 1. Introduction During the period between the Second World War and 1989, the Czech Republic used---in accordance with its centrally planned economy---an rationing housing system where the main role was played by the state (both in the area of housing construction and allocation of dwellings). Despite the seemingly generous approach of the state, exhibited especially in a large number of constructed dwellings and artificial preservation of very low housing prices, the housing sector was plagued by substantial problems (lasting shortage of dwellings, black market, low quality, etc.). Eventually, the rationing system proved to be economically unviable. Nonetheless, its long-term application caused a deformed perception of housing, as people were given the impression that housing is a social service provided by the state. Some people still perceive housing this way. As a result of systemic changes in the society, the entire period from 1990 to the present has had a mostly transformational character. The majority of fundamental changes in the system concentrated on eliminating rationing system of housing and establishing a market-oriented system took place in the first half of the 1990s. This period was marked by a neo- liberal approach which resulted in a situation where elimination of individual elements of the rationing system was not followed by timely creation of adequate support measures. At that time, the government's strongly market-oriented housing policy was based on the assumption that housing is purely a matter of every individual, and the state is only responsible for establishing a basic legal and economic framework and helping the socially weakest individuals. This approach essentially shifted the responsibility for housing from the state to private individuals, municipalities, and other organizations that were not and could not be prepared to assume this role. Development of the housing sector took place under the pressure of macroeconomic changes. One of the negative aspects of this trend was a sharp decline of funds invested into housing which slowed down housing construction. Another important factor of the transformation period was privatization, privatization of the residential dwelling in particular, and deregulation of prices. As regards privatization of the housing stock, the first step was transferring state-owned, loss-making, and often devastated housing to municipalities. As the housing stock was in a rather poor condition, municipalities tried to privatize the newly acquired buildings. Privatization took place chiefly on the basis of municipal decrees that allowed selling entire buildings to legal entities, most often cooperatives formed by tenants. In addition, privatization was allowed by the Act on Ownership of Dwellings which set the conditions for liquidation of housing construction cooperatives perceived at the beginning 1990s as the remnants of the former regime (fortunately, this plan was not entirely successful). Despite some negative consequences1, housing stock has been privatized in most municipalities in a reasonable extent and not through the so- called "give-away" privatization plans which have been used by most transforming countries, almost completely eliminating the rental sector. Liberalization and deregulation of prices, two important elements of the transformation period, brought about an important increase of housing prices, and this course of action further exacerbated the already deformed structure of housing expenditures where the highest portion was the cost of utilities, while net rent was undervalued. These problems---some new, some brought from the previous regime, and exhibited in deformed approach of many people to housing---have not been completely resolved. The liberally-oriented housing policy could not yield the expected results. In mid-1990s, the government began to replace it by a more comprehensive and intervening approach to the housing sector. The basic conceptual document of that period, the "Government Plans and Measures in the Area of Housing" was adopted by the Government in 19972 and subsequently approved by the Chamber of Deputies. Despite some positive aspects introduced by the new concept, the housing sector continued to be afflicted by a number of negative factors, especially a lack of continuity between adopted legislative and economic measures which resulted in their lower effectiveness. To this day, some measures proposed in the above document have not been implemented. The Housing Policy Concept discussed and acknowledged by the Government in October 19993 responded to the situation in the housing sector at that time based on formerly formulated plans. The main aspects of the concept were as follows: ˙ it was consistently based on a housing market which is structurally and territorially (regionally and locally) differentiated, ˙ it understood the housing policy as the resultant and a part of the state's overall economic policy, ˙ it saw state intervention in the housing sector as a necessary precondition for reaching a balance on local housing markets, ˙ it considered elimination of existing deformations as one of the basic prerequisites without which an effective housing policy cannot be developed, ˙ it was based on the necessity to deepen the social aspect of the housing policy. The Housing Policy Concept updated in 2001 is based on the following brief assessment of the situation in the housing sector: ˙ The basic institutional and legal framework pertaining to the housing sector corresponds to the situation that exists in other European countries. The quality of housing is lower, but it roughly corresponds to the Czech Republic's economic performance. Some of the main problems are low financial affordability of housing, unbalanced distribution of the housing stock, and neglected maintenance of buildings. ˙ The situation in the housing sector is considerably territorially differentiated. Mostly derived from economic and social situation in individual regions and settlements, the differences are exhibited in the size of the supply and demand on local housing markets. The size of the housing stock is similar in all regions. ˙ Support measures adopted so far are not sufficiently interrelated and precisely targeted. In consequence, they are not fully effective and mostly have a global character. Their effectiveness is limited by some uncompleted transformation steps in the housing sector as well as the overall economic and social situation. ˙ The situation in the housing sector is affected by a number of external factors. Some of the most important of them is the territorial distribution of business activities and the situation on the labour market; these factors cause local discrepancies between the availability of housing and the existence of employment opportunities in the same locality. 2. Description and Assessment of Basic Development Trends of the Past Period 1. Existing Housing Stock -- General Description According to the 1991 Public Census, the total housing stock comprised of 4,077,193 dwellings, 0.9% of which (37,455) were unsuitable for occupancy. Preliminary results of the 2001 Public Census suggest that the housing stock presently consists of 4,369,239 dwellings of which about 1.5% are unfit for habitation (approx. 65,155 dwellings). In the past ten years, the size of the housing stock has therefore increased by approximately 7.2% (292,046 dwellings). During the same period, the number of dwellings fit for permanent occupancy (total size of the housing stock reduced by number of dwellings unfit for occupancy) increased by approximately 6.5% (264,346 dwellings). According to the 1991 Public Census, the Czech Republic has 3,705,681 permanently occupied dwellings, i.e. 90.9% of the housing stock. As to the remaining 9.1%, more than one third are used for recreation purposes, and most other dwellings are not permanently occupied for other reasons, such as due to unresolved restitution claims. Compared to 1991, the number of permanently occupied dwellings in 2001 was higher by approx. 3.3%, i.e. 123,231. The number of vacant dwellings was higher as well, accounting for close to 12% of the total housing stock---this number includes dwellings which are permanently occupied in reality but are considered as used temporarily for statistical purposes. The size of the housing stock expressed by number of dwellings per 1,000 inhabitants is better than at the beginning of the 1990s. While there were 396 dwellings per 1,000 inhabitants in 1991, this number grew to 424 by 2001. The number of dwellings fit for permanent habitation and dwellings permanently occupied (including temporarily occupied dwellings4) increased from 392 to 418 and 360 to 372 per 1,000 inhabitants, respectively. The Czech Republic does not suffer from an overall housing deficit. Disproportions on local housing markets are mostly due to an unsuitable distribution of the housing stock, and not an actual shortage of dwellings. Further, there are differences in the availability of housing between individual regions. While the best situation exists in Prague, the worst availability of housing can be found in the Zlín Region. The high demand for financially affordable housing in Prague and some other cities which seems to contradict the data on availability of dwellings is due to the attractiveness of these settlements and a shortage of relatively inexpensive housing for lower-income families. In contrast, there is a surplus of vacant dwellings in regions with economic problems (structurally affected regions) and other localities. According to preliminary results of the 2001 Public Census, there are 1,983,521 buildings. Family homes account for roughly 70% of them, and their number has increased by approx. 3% from 1991. About 42% of dwellings are situated in family homes, others, save for some exceptions, are located in apartment buildings.5 The size of dwellings improved during the 1990s. While in 1991, the average living area of a permanently occupied dwelling was 45.9 square meters, it increased to 53.7 square meters in 1999. This improvement is owing to new construction of housing; for example new dwellings completed in 2000 had an average living area of 68.2 square meters. The quality of amenities is fully satisfactory; according to data collected in 1999, 97% of dwellings have a bathroom or a shower, and the same number have a water closet. The average age of the housing stock is relatively high. In 1991, dwellings were 42.4 old, and the average age of family homes was as high as 60.3 years. A problem that exists in this regard are high energy requirements of dwellings. A serious problem is neglected maintenance of the housing stock due to a lack of maintenance over a protracted period of time which has resulted in a decrease of the financial and utility value of residential structures. Specific problems exist in respect of prefabricated-panel buildings. Due to construction and design flaws and insufficient maintenance, these problems are exacerbated by the fact that buildings of this type account for close to one third of the housing stock. Another problem is a lasting lack of funds for regular repairs and maintenance, repair of defects caused by maintenance neglected in the past, modernization, and reconstruction. Housing stock size Number of Total number of Dwellings unfit Available dwellings dwellings for occupancy housing stock* 1991 Public 4,077,193 37,455 4,039,738 Census 2001 Public 4,369,239 65,155 4,304,084 Census Increase in % 7.2 74.0 6.5 Source: Czech Statistical Office * Total number of dwellings reduced by dwellings unfit for occupancy Number of dwellings per 1,000 inhabitants Total number of Available housing dwellings stock* 1991 Public Census 396 392 2001 Public Census 424 418 Source: Czech Statistical Office * Total number of dwellings reduced by dwellings unfit for occupancy 2. Structure of the Housing Stock according tenure In 1991, the housing stock comprised state- and company-owned dwellings (approx. 40%), cooperative dwellings (approx. 20%), and privately-owned dwellings (approx. 40%). Fundamental changes have taken place in the structure of the basic forms of housing since 1989. According to data collected in 19996, the structure of the housing stock is as follows: The private rental sector, created mainly based on property restitutions, accounts for about 7% of permanently occupied dwellings, i.e. approx. 280,000 dwellings (most of them are apartments with regulated rent). The size of this sector remains more or less constant, save for (typically) temporary rentals of individual dwellings owned by private individuals. Taking into consideration the expected elimination of rent control, existing property-owners have retained rental buildings. Investors are not interested in this sector, however, as investment into rental housing has a long period of return in comparison with privately-owned dwellings. The situation in this sector is unsatisfactory. Most problems derive from strict rent control and the fact that rental buildings are in a very poor condition. In addition, the civil laws pertaining to lease of a dwelling are problematic, as they contain non-standard elements introduced before the year 1989 and prevent elimination of illicit activities on the housing market. In 1999, the municipal rental sector, created after 1991 by transferring state-owned dwellings to municipalities, accounted for approx. 24% of permanently occupied dwellings, i.e. about 883,000. The size of this sector is gradually decreasing, as municipalities privatize a part of their housing stock. Privatization schemes include sale of entire buildings to legal entities (most often cooperatives) formed by existing tenants and direct sale of individual dwellings, usually to existing tenants. This sector faces similar problems as the private rental sector. Nonetheless, new dwellings are constructed thanks to state subsidies. Owing to differences between the approach used by individual municipalities and the in-progress elimination of rent control, the form and function of municipal housing are not entirely clear. In 1999, the cooperative sector, which consists mainly of dwellings owned by former Building Housing Cooperatives, accounted for approx. 20% of the occupied portion of the housing stock, i.e. close to 760,000 dwellings. In addition to Building Housing Cooperatives, this sector includes dwellings owned by former People's Housing Cooperatives and dwellings owned by legal entities, mostly cooperatives, established by tenants for the purpose of privatizing their buildings (approx. 1.5% of the total number of permanently occupied dwellings). The size of the cooperative sector is decreasing slightly, as dwellings owned by Building Housing Cooperatives are being privatized---this process started in the first half of the 1990s. From the viewpoint of users, the situation in this sector is relatively satisfactory. Almost no housing construction is taking place, however, as support from the state is not perceived as sufficiently motivating. The owner-occupied sector consists mainly of family homes and individual privately-owned dwellings in apartment buildings---these dwellings have been acquired either as part of privatization of municipal or cooperative housing or come from new construction. In 1999, this sector accounted for approx. 1,809,000 dwellings, i.e. close to 49% of permanently occupied dwellings. Over the long term, the owner-occupied housing sector is the most rapidly expanding segment of the housing market. Factors which contribute to this trend include the focus of government subsidies and the problems relating to rental housing. Structure of the housing stock according to tenure in 1999 Sectors Share in % Owner-occupied 49 housing Municipal rental 24 housing Private rental 7 housing Cooperative rental 20 housing Total 100 Source: Czech Statistical Office - sample survey conducted in 1999 3. Housing Construction New housing construction slowed down substantially after 1990 as a result of the transformation process. The number of dwellings where construction has started began to increase only after 1993. This trend was followed in 1996 by an increase in the number of completed dwellings. The number of dwellings whose construction started was highest in 1998 (approx. 35,000). Subsequently, it declined slightly to roughly 32,000, a figure that corresponds to the situation in 2001. However, this decrease has been compensated by an increase in modernization activity. The number of completed dwellings has been increasing steadily since 1995, but it has not attained the number of dwellings where construction has started. Increases of the housing stock are continually reduced by diminutions of the housing stock which have fluctuated between 2,000 to 4,000 dwellings annually during the past four years. The reason behind the small number of newly constructed dwellings is low affordability of housing caused by a substantial difference between the income of most households and the price of new dwellings. Due to this fact, developers concentrate predominantly on construction of owner-occupied dwellings for people in the high-income bracket. Commercial construction of rental housing leased for market rent is not sufficiently lucrative due to a long period of return of investment and problems in landlord-tenant relations. Another reason for low housing construction is a lack of adequate legislative and economic conditions that would allow building and leasing rental housing on a non-profit principle. While in 1991 apartment buildings accounted for most construction activity (approx. 62% of the total number of completed dwellings), the ratio between the number of newly constructed dwellings in apartment buildings and family homes began to even out in 1993, and since 1995 the number of dwellings in family homes has been higher. In 2000, completed dwellings in apartment buildings accounted for merely 23.6%, while the number of dwellings in family homes grew to 41.4%; 20.8% were dwellings created by enlargements and additions to the above two types of buildings. The remaining completed dwellings were built in non-residential structures or created by conversion of non-residential buildings---they accounted for 14.2% of the total number of completed dwellings. The structure of housing construction from the viewpoint of tenure shows that owner-occupied dwellings, located in both family homes and apartment buildings, account for the largest number of completed dwellings and dwellings whose construction has started. The extent of construction of rental housing is minimal. Save for exceptions, buildings of this type are constructed only by municipalities which can obtain state subsidies for the purpose. Nonetheless, construction of a high number of such dwellings is co-financed by future tenants. Stimulation of housing construction is one of the long-term priorities of the housing policy. However, the pressure on increasing the number of newly constructed dwellings in a situation when some important transformation steps have not been completed frequently results in ineffective use of public funds disbursed for these purposes. Housing construction during 1990 -- 2000 Dwellings Dwellings started completed 1990 61,004 44,594 1991 10,899 41,719 1992 8,429 36,397 1993 7,454 31,509 1994 10,964 18,162 1995 16,548 12,662 1996 22,680 14,482 1997 33,152 16,757 1998 35,027 22,183 1999 32,900 23,734 2000 32,377 25,207 Source: Czech Statistical Office 4. Cost of Housing In 1990, the average purchase price of a completed dwelling in an apartment building and a family house totalled CZK 171,449 and CZK 340,140, respectively. In 2000, these figures totalled CZK 1,285,500 and CZK 2,387,900, respectively. Hence, the cost was approximately 7.5 and 7 times higher, respectively.7 In contrast, during the same period nominal net household income became only about 2.7 times higher. In 2001, the acquisition cost of a new dwelling ranged between CZK 14,000 -- 25,400 per square meters, depending on the construction technology, type of structure, and locality. In Prague and other attractive localities, the asking price usually exceeds CZK 30,000 per square meter. The price of newly constructed dwellings is slowly increasing with some fluctuations. The acquisition price of older owner-occupied housing constantly changes depending on economic developments and the situation on individual local and regional housing markets. It differs substantially based on the dwelling type, quality, etc. In Prague, Brno, and other attractive cities, the price of older dwellings does not vary considerably from the cost of new construction (for example, the average asking price of a dwelling in Prague is CZK 1,207,0008). Conversely, in regions affected by high unemployment and other problems, the market offers older dwellings for prices several times lower than the cost of new construction. At present, three types of rent exist in the Czech Republic: the regulated-ceiling rent, cost rent9, and market (non- regulated) rent. Most rental dwellings (98% according to surveys conducted by the Czech Statistical Office, 90% according to expert estimates) are leased for the regulated - ceiling rent which gradually increases as part of the deregulation process. The rent regulated by price ceiling in an average apartment with a floor size of approx. 60 square meters increased from CZK 134 in 1990 to CZK 1,291 in 200110, i.e. by roughly 860%. The level of the regulated-ceiling rent varies mainly depending on the settlement size, and it is not sufficient---with the exception of Prague---for covering building operating costs.11 The low level of this regulated rent creates non-satisfiable demand for this type of housing, indirectly contributing to increases of market rent which, however, most households cannot afford to pay. Market rent is charged in dwellings built without the use of public funds and vacated dwellings. This type of rent varies substantially, mainly depending on the locality, similarly as the acquisition price of older dwellings. In Prague, the actual market rent fluctuated between CZK 45 to 483 per square meter per month in 2001, and the average rent, i.e. CZK 178 per square meter per month, was by 419% higher than the maximum regulated-ceiling rent in effect in Prague up to July 2001 (CZK 34.27 per square meter per month). Safe for exceptions (such as solid fuels), the prices of other housing-related items are administratively regulated. However, a deregulation process has been under way since the beginning of the 1990s. In the past ten years, water and sewerage fees have become 39 times, solid fuels 7.8 times, heat and hot water 7.6 times, net rent approx. 6.7 times; piped gas almost 6.5 times, and electricity close to 4.8 times higher. Nonetheless, most significant price increases took place at the beginning of the 1990s. A comparison of the aggregate inflation in the second half of the 1990s (51.3% between 1994 and 2000) with the housing index (increase by 125.5% during the same period) shows that housing prices were rising higher than other prices, and their contribution to the overall inflation was substantial. Nonetheless, the pace of increases of the main housing-related expenditures was relatively balanced during this period. Development of the regulated-ceiling rent in an average dwelling12 Year 1990 1995 2000 2001 Average 134 461 1,24 1,29 regulated 1 1 rent CZK/month Year 1990 = 100 344 926 963 100 Source: Ministry for Regional Development Indexes of consumer prices of main housing-related items in %, 1994 = 100 1999 2000 Summary index 145.6 151.3 Total housing 208.2 225.5 Net rent 299.0 319.6 Water 199.5 221.6 Sewerage 197.8 227.1 Electric power 221.1 254.6 Piped gas 225.1 258.8 Solid fuels 202.6 207.4 Heat and hot 216.9 224.5 water Source: Czech Statistical Office 5. Other Housing-related Expenses In 2000, housing-related expenditures of households totalled on average (i.e. in all types of dwellings) CZK 2,793 per month---this sum corresponds to 16.2% of net household income (20.3% in rental dwellings). A comparison of households of employees and retirees shows that the latter are much more burdened by housing-related expenditures, the average share of household expenditures in their net monthly income totalled 24%, while in the case of employed persons it was only 14.8%. For these households, the highest housing-related expenditure was the average cost of energy which comes close to 60% of all housing expenses. Essentially, the differences in the share of housing-related expenditures in income are due to varying income levels. Nonetheless, the internal structure of housing expenses is very similar in households that belong to different social groups. Housing costs are considerably differentiated based on the tenure of housing (owner-occupied, cooperative, rental), the dwelling size, and the size of the municipality where the dwelling is located. The average proportion of housing-related costs per household rises slightly as the municipality size increases. The differences are mainly due to different amounts of rent---the larger the municipality, the higher the proportion of rent in housing expenses. In addition, some differences stem from the technologies used for heating, preparation of hot water, and cooking. A comparison of expenditures in individual types of housing on the example of households of employed persons shows that the highest housing expenses (absolute and relative) were paid in 2000 by households residing in rental dwellings (18.1%). Somewhat lower were expenses of households living in cooperative housing (15.8%), and the lowest sums were paid by households residing in their own family houses (11.7% of net household income). The low proportion of housing-related expenditures in owner-occupied dwellings is due to the fact that in most cases people live in older family houses where the acquisition cost, which is the highest item in owner- occupied housing, has been paid. The lower expenditures in cooperative housing can presumably be explained by low contributions to repair and maintenance funds and the fact that repairs and maintenance are to some extent performed by tenants themselves without having to pay the related costs. Structuring households into ten groups according to net household income and processing data pertaining to these groups shows that while the average net household income in the highest quintile corresponds to approximately the double of the lowest average value, the average housing expenditures (per household) in this quintile is only about 30% higher than the lowest average value. This demonstrates that wealthier families are burdened by housing expenses less than households with a lower income. The amount of housing expenditures paid by households is gradually increasing as a result of the process of deregulation of rent and prices of energy. The problem concerns mainly low- income households, especially single-member households and households of retirees. It is most often found in larger settlements in rental and cooperative housing where tenants are essentially unable to control their housing-related expenditures. The existing housing allowance, one of the state's welfare benefits, does not take into account the actual housing expenses paid by individual households and the extent to which they burden a given household. However, households with very low income can apply for social privation benefits which are intended to provide basic living needs. However, there is no entitlement to these benefits under the law. Average net monthly income and housing-related expenditures per household (2000) Average Household of Household household employed of retirees persons Net income CZK 17,275 20,332 9,257 Housing CZK 2,793 CZK 3,016 2,222 expenses Housing 16.2% 14.8% 24.0% expenses/net income Percentage of individual types of housing-related expenditures in the total of these expenditures (2000) Rent* 21.6% 22.1% 23.1% Regular 9.4% 9.9% 7.4% maintenance Water supply and 11.2% 11.7% 10% other services Energy 57.8% 56.3% 59.5% Total housing 100% 100% 100% expenses Source: Czech Statistical Office * Percentage of total housing expenses in respect of all items 6. Housing Financial System A fundamental transformation of the system used to finance housing has been one of the key elements of the reform of the housing sector since the beginning of the 1990s. The main objective of the transformation is to create a financial system that will reduce the role of public funds and allow utilization of private finances, including capital and savings of individuals and legal entities, and loans provided by financial institutions. Newly introduced elements of the financial system include construction savings plans (since 1993) and mortgage loans (since 1995). Based on the German and Austrian models, the system of construction savings plans has developed considerably and exhibits further growth potential. This is apparent from the gradually increasing number of people participating in construction savings plans (3,424,580 as of December 31, 2000), a growing volume of savings (CZK 110.4 billion as of December 31, 2000), and an increasing amount of government subsidies added to savings (CZK 2,755 in 2000 on average). A factor contributing to the dynamic development of the system are high government subsidies which allow considerable accretion of savings, considering the current low interest rates on deposits. The government contributes 25% of the saved sum annually (up to a maximum of CZK 4,000 a year) to all individuals participating in a construction savings plan.13 Such extensive subsidies are very demanding on the state budget. In 2000, CZK 7,719 billion was paid out, and the sum of subsidies is expected to exceed CZK 9 billion in 2001. Unless the system of construction savings plans is changed, it can be expected that when the system stabilizes (2004 -- 2005), the annual amount of state subsidies will total approx. CZK 13.5 -- 14.5 billion.14 From the total volume of savings, about 53% has been paid out in loans (bridging loans and construction savings loans). However, the sum of all loans accounts for only some 12% of the total number of effective contracts, a fact that shows that most people use this system mainly for the high accretion of savings. Another reason for a low number of loans is a time shift, inherent to the system, between the stages when people accumulate savings and negotiate a loan. Loans, most of which are bridging loans, are used mainly for acquisition of older dwellings and reconstruction or modernization projects; their use in new construction is relatively low (approx. 22% of all loans provided as of June 30, 2001). Overall, the system of construction savings plans functions well, but it will be necessary to investigate possibilities of reducing the demand on the state budget related to the existence of this system. The system of mortgage loans is not developing as rapidly as construction savings plans, as obtaining and repaying a mortgage loan in an amount necessary for acquisition of a property is not affordable for most households. Nonetheless, the system has a high growth potential and has developed rapidly especially in the past two years thanks to a reduction of interest rates (on average 7.19% as of August 31, 2001 for individuals), growing competition among mortgage banks, and people's increasing willingness to become indebted for the purpose of acquiring housing. Mortgage loans are provided against collateral, usually consisting of up to 70% of the value of the acquired property. Most of the nine banks which offer mortgage loans obtain funds for financing them from deposits; financing through issues of mortgage bonds is rather exceptional and unnecessary due to a sufficient amount of available capital. From the introduction of mortgage loans up to June 30, 2001, a total of 37,720 mortgage loans were provided, totalling about CZK 67.7 billion. Since 1995, mortgage loans have been stimulated through interest subsidies derived from the average interest rate on mortgage loans. In 2001, the interest subsidy amounted to two percentage points.15 The purpose of interest subsidies is to reduce installments and increase the affordability of mortgages for households. However, subsidies are paid only for loans used for new construction. Further development of mortgage loans can be expected as the economy grows and household incomes come closer to the acquisition prices of real estate. It is very likely that the system of mortgage loans will become the main financial instrument for acquisition of housing, most likely in combination with construction savings plans which are already used by a large number of people. Construction savings plans from creation of the system to September 30, 2001 (cumulative) Total number of 5,843,723 contracts Total effective 3,898,618 contracts Total savings in CZK 119,606 billion Total number of 491,006 provided loans Total sum of all 66,786 provided loans in CZK billion Source: Ministry of Finance; Association of Construction Savings Banks Mortgage loans from creation to August 31, 2001 (cumulative) Total number of 37,720 mortgage loans* Total volume of 67,679 mortgage loans* (CZK billion) Total volume of 19,846 government- subsidized mortgage loans (CZK billion) Number of dwellings 17,972 acquired with government subsidies Source: Ministry for Regional Development, CEDR * Source: Mortgage banks, as of June 30, 2001 7. Brief Commentary on Regional Differences in the Housing Sector The highest availability of housing, measured by the number of dwellings fit for permanent occupancy (i.e. total number of dwellings reduced by dwellings unsuitable for habitation) per 1,000 inhabitants exists in Prague (476). The Czech capital is followed by the South Bohemian, Pilsen, Liberec, and Central Bohemian Regions where there are roughly 434 dwellings per 1,000 inhabitants. In this regard, the worst situation can be found in the Zlín Region (379) and the Olomouc, Moravian- Silesian, and South Moravia Regions (392; 393; 393). However, these figures have to be confronted with other facts, as it is obvious that regions characterized by larger households, cohabitation of several generations, and larger dwellings need fewer dwelling per capita. Housing construction has a rather different intensity in individual regions. During 1991 -- 2000, the highest absolute number of dwellings were completed in Prague (more than 40,000 completed dwellings), followed by the Central Bohemia, South Moravian, and Moravian-Silesian Regions where the number of dwellings completed during that period fluctuated around 26,000. During 1991 -- 2000, the lowest number of dwellings was completed in the Karlovy Vary (approx. 6,000) and Liberec and Ústí Regions. An assessment of the intensity of housing construction from the viewpoint of the number of completed dwellings per 1,000 inhabitants shows that during the above ten year period Prague was first, followed by the Pardubice, South Bohemian, and Pilsen Regions. The lowest intensity of housing construction can be found in the Ústí, Moravian-Silesian, and Karlovy Vary Regions, i.e. areas plagued by substantial economic problems and high unemployment. The above differences in the number of completed dwellings per 1,000 inhabitants continued to exist in 2000. A comparison of the regional availability of housing with housing construction activity shows that the latter does not necessarily take place in regions with the poorest availability of housing, but rather in regions where a competitive demand for housing exist. Housing construction per 1,000 inhabitants is lowest in regions with low economic output facing social problems and high unemployment. This fact suggests that the key to analyzing the situation in individual regions and their comparison should not be only indicators pertaining to availability of the housing stock, but also indicators which reflect the relationship between supply and demand in the housing sector. Generally speaking, economically strong areas with an ample offer of employment and other opportunities (education, etc.) are characterized by a high demand for housing reflected in high sales prices of new and old real estate, high rent levels on the free market, and also a relatively high volume of new housing construction. The fact that in such areas demand exceeds supply reduces the affordability of housing for the population, especially lower- income households, despite the fact that the availability of the housing stock is above average. Yet, assessing individual regions from these viewpoints is problematic, as the territory of regions is too large for an analysis of this type and effaces differences due to the situation on local housing markets. In general, the lowest demand for housing, reflected in low market-derived prices and low extent of new housing construction, exists in the Ústí and Moravian-Silesian Regions. Further, low demand for housing is typical for other regions situated in the northern part of the Czech Republic, but the situation within these and other regions is more differentiated, and no generalization that would apply to the entire territory of individual regions is possible. The highest demand for housing, exhibited in the highest prices of housing, exists in Prague and the Central Bohemian Region. In other regions, which could be rated as average from the viewpoint of the acquisition price of real estate, the demand for housing is to a large extent differentiated based on the size of the municipality; it is concentrated in and around large settlements which offer employment opportunities. The average housing-related expenditures paid by households (rent, accommodation-related services, energy) are similar in all regions. They are lowest in regions with mostly rural settlements (for example Vysočina) and highest in regions with large cities (Praha, Ústí Region), where expenses are more elevated due to higher rents. Even though the territory of individual regions is too large for analyzing the housing situation, as regions comprise a number of local housing markets, Czech regions can be divided into three groups according to the situation on the housing market. These groups correspond to those identified by a regional synthesis included in the Regional Development Strategy. ˙ The first group includes the city of Prague only. Prague has the best availability of housing and the highest number of newly constructed dwellings. Nonetheless, the situation from the viewpoint of dwellers is the least satisfactory, as the demand for housing, due to the attractiveness of the Czech capital, exceeds the supply considerably, rising acquisition prices of real estate as well as rents charged on the free market. Another factor that contributes to high market-derived rents is a large rental housing sector which is completely blocked due to strict rent control and its housing stock is rented on the black market. In addition, the cost of housing is increased by the income level which is the highest in the Czech Republic. The tension on the housing market has a negative impact especially in low-income households for whom acquisition prices of real estate are inaccessible and regular housing- related expenditures very strenuous. In addition, regular housing expenses are not sufficiently offset by targeted social benefits (housing allowance), as the amount of this allowance does not take into account the fact that housing-related expenditures in Prague are considerably higher than in other regions. ˙ The second group includes the Ústí and Moravian-Silesian Regions, i.e. areas afflicted by structural problems and high unemployment. Although housing is relatively readily available in both these regions, the demand for dwellings is very low, a fact reflected in exceptionally low asking prices of real estate and a low level of market-derived rent which in some settlements is below the regulated rent. The weak demand for dwellings in the Ústí and Moravian-Silesian Regions is also reflected in a very low intensity of housing construction (in 2000, these regions were in the last two places as to the number of completed dwellings per 1,000 inhabitants). The surplus housing stock which exists in both regions cannot currently be used, as the unemployment rate in these areas is high. In the Ústí Region, households are considerably burdened by regular housing expenses which do not differ significantly throughout the region (energy, etc.). However, this load is to a large extent compensated by social benefits which are the highest in this region. The situation in the Moravian-Silesian Region is somewhat different in this regard, a fact due to a relatively high income level of the population employed by the heavy and mining industries (relatively high pensions, unemployment benefits). ˙ The third group includes all the remaining regions. It has no dominant characteristic that would apply to the entire territory of these regions. The situation on local housing markets within these regions is very differentiated. 3. Assessment of Existing Support and Development Measures Up to the year 2000, support measures were financed only with funds from the state budget. At the end of that year, the State Housing Development Fund assumed responsibility for financing some measures aimed at support and development of the housing sector. Direct Subsidies 1. Program of Subsidies for Construction of Rental Housing and Technical Infrastructure (a program administered by the Ministry for Regional Development) The objective of the program is to stimulate construction of rental housing and technical infrastructure by municipalities. Aid is provided in the form of investment subsidies in the maximum amount of CZK 320,000 per dwelling and CZK 80,000 for related technical infrastructure.16 Subsidies are paid to municipalities which as part of financing construction combine them with their own and/or private funds. Most municipalities lack sufficient resources, and construction is often co- financed by development firms or legal entities formed by future tenants who will become owners of their dwellings after the prescribed period (20 years). As a result, government subsidies are often used for construction of high-standard housing for middle- and high-income households that can afford financial participation. Every year, interest in this form of aid exceeds the allocated sums considerably. Although this subsidy contributes substantially to increasing the number of newly constructed dwellings, in most cases it does not help those households which need government assistance most urgently. The program has been co-financed by the State Housing Development Fund since 2000. Year Disbursed Number of state budget completed funds* dwellings (CZK thousand) 1998 2,891,348 5,053 1999 3,381,094 6,777 2000 2,884,058 9,059 2001* 2,011,486 9,634 * Source: Ministry for Regional Development * Every year, some funds are used for financing already started projects. ** Modified budget 2. Program of Subsidies for Construction of Housing with Social Services (a program administered by the Ministry for Regional Development) The aim of this program is to stimulate construction of small- size dwellings for senior citizens and other persons with lower self-sufficiency. Aid is provided in the form of investment subsidies that amount to CZK 750,000 per dwelling. The recipients are municipalities which add the necessary funds for construction from their own budgets. Due to the high amount of the subsidy, the number of applications exceeds considerably the available funds allocated for this purpose in the state budget. Even though the program is relatively well targeted, there are some problems concerning the financing of operations of these buildings, unclear definition of social services, etc. The program has been co-financed by the State Housing Development Fund since 2000. Year Disbursed Number of state budget completed funds* dwellings (CZK thousand) 1998 670,000 1,312 1999 470,646 307 2000 578,098 656 2001* 576,200 680 * Source: Ministry for Regional Development * Every year, some funds are used for financing already started projects. ** Modified budget 3. Government Regulation No. 481/2000 Coll. on the Use of Subsidies from the State Housing Development Fund for Payment of Some Costs relating to Housing Construction Save for subsidies for construction of technical infrastructure, both the above programs have been financed since 2000 not only from budget funds of the Ministry for Regional Development, but also the State Housing Development Fund. This overlapping is only temporary, because in the future the State Development Fund will be responsible mainly for provision of loan subsidies and guarantees. The conditions under which investment subsidies are disbursed to municipalities roughly correspond to the conditions of programs administered by the Ministry for Regional Development. The State Housing Development Fund finances only applications received by the Ministry for Regional Development before the end of 2000. Year Disbursed Number of funds* dwellings for (CZK thousand) which subsidies were disbursed during the year 2000 755,630 1,735 2001* 3,697,759 9,203 * Source: State Housing Development Fund * Every year, some funds are used for financing already started projects. 4. Government Regulation No. 244/1995 Coll., as Amended, Defining the Conditions for State Financial Subsidies for Mortgage Loans Used for Housing Construction The objective of the subsidies is to improve the affordability of mortgage loans through reduction of monthly installments, and to increase the number of newly constructed dwellings. The measure consists of payment of a portion of the interest on a mortgage loan (interest subsidy). The amount of interest subsidies is derived from the average interest rate for which new mortgage loans were provided in the preceding year. In 2000, the subsidy totalled 4%, and in 2001 it declined to 2%. Compared to subsidies for construction savings plans, this form of aid is not as costly, but as it is provided for up to 20 years, it represents a long-term obligation for the state budget. Entitled to the subsidy are individuals, cooperatives, and municipalities that acquire real estate for non-commercial purposes. Individuals and legal entities acquiring real estate for business purposes may also receive the subsidy, but they are not entitled to it. Government-subsidized mortgage loans are used especially for construction of apartment buildings and family homes owned by individuals. As of August 31, 2001, their share in the total number of dwellings built with government- subsidized mortgage loans was approx. 71% (about 65% in respect of the volume of disbursed funds). The subsidy reduces monthly installments, thus increasing the number of households that can afford a mortgage loan. In addition, it helps increase the number of newly constructed dwellings, improves the overall quality of the housing stock, and makes existing dwellings affordable. From the introduction of the subsidy to August 31, 2001, 17,364 dwellings were built and a total of CZK 19.8 billion in government subsidies was disbursed. It is not possible to extend this subsidy to low-income families, as it is often demanded,, as low-income families would be unable to receive a mortgage loan. Further, exclusion of high-income households has proved to be entirely ineffective (for example Government Regulation No. 148/1997 Coll.). Year Disbursed Number of Volume of state budget dwelling loans funds* acquired with (CZK thousand) (CZK thousand) government subsidies 1998 95,917 2,170 1,864,020 1999 178,299 2,946 3,335,370 2000 276,430 4,405 5,257,861 2001* 312,959 6,155 8,334,873 * Source: Ministry for Regional Development, CEDR * Excluding cost of disbursement of subsidies. ** As of October 31, 2001 5. Government Regulation No. 149/1997 Coll. Defining the Conditions for Payment of Additional Financial Subsidies for Mortgage Loans Used for Housing Construction The objective of the subsidy is to facilitate access to mortgage loans for households which due to their initially low income cannot afford to repay a standard mortgage loan, but expect that their income and ability to repay debt will improve eventually. Under this measure, aid consists of provision of a repayable contribution covering a part of the principal and interest on a mortgage loan in the first half of the repayment period. The result of this scheme are low, progressively increasing installments which reflect the recipient's gradually increasing income. There is no legal entitlement to this subsidy which is provided only to individuals with a net monthly income up to four times the subsistence minimum who acquire owner -occupied dwelling. Very low interest (in 1999 and 2000 there were 29 and 1 applicants, respectively) in this subsidy is due mainly to concerns that installments will increase substantially in the second half of the repayment period and may not be counterbalanced by an actual increase of income. Other considerations include higher costs of repayment of the subsidy and a low inflation rate which reduces the real value of gradually increasing installment to a small extent. Due to its low effectiveness, a recommendation will be made to eliminate this subsidy.17 6. Government Regulation No. 148/1997 Coll. on Provision of Interest-Free Loans for Housing Construction The objective of this measure, under which the government offers interest-free loans with repayment deferred by ten years, is to increase funds available to households that acquire owner-occupied dwelling. In addition, the measure aims to stimulate new housing construction, similarly as the instruments described previously. Loans are provided in the maximum amount of CZK 200,000, only in combination with a mortgage loan or a loan received under a construction savings plan. Further, loans are available only to applicants whose income does not exceed four times the subsistence minimum. In most cases, the loan is disbursed in the maximum possible amount, i.e. CZK 200,000. The government has not succeeded in meeting the enormous demand for this subsidy owing to the soft repayment conditions. As a result, provision of these interest- free loans has been stopped, and the 2001 state budget includes no funds for this form of subsidy. In addition, analyses have shown that the loan was often used by high-income households for construction of high-standard dwellings. For this reason, a recommendation will be made to eliminate this subsidy. _______________________________ 1 The most serious negative factors include the fact that the new owners lack funds for maintenance and in some cases deliberately violate their duty to pay their share of the cost of maintaining common parts of buildings. 2 Government Resolution No. 155/1997 dated March 12, 1997. 3 Government Resolution No. 1088/1999 dated October 18, 1999. 4 In accordance with the definition of dwellings intended for permanent use ("principal dwellings") included in the Recommendation for the 2000 Censuses of Population and Housing in the ECE Region. 5 Data collected during the 2001 Public Census have not been processed thus far; the figure was taken from a selective survey of the Czech Statistical Office. 6 Data collected during the 2001 Public Census have not been processed thus far; the figure was taken from a selective survey of the Czech Statistical Office. 7 Data on acquisition prices of new dwellings have a low significance, as source materials do not always include the cost of acquisition and preparation of land, the cost of design, and the cost of financing construction. 8 Price of a standard first-category apartment, 68 square meters of floor size, approx. 30% wear and tear according to KISEB -- IRI price monitoring as of May 15, 2001. 9 This type of rent is charged in buildings constructed with the use of public funds, dwellings owned by legal entities formed by former tenants, and dwellings of former housing construction cooperatives. 10 The figure is derived from a theoretical calculation based on application of coefficients used for regulation of rent. It does not therefore coincide with the figure specified in the survey of consumer prices conducted by the Czech Statistical Office. 11 Comparison was made based on the so-called cost rent calculated at the minimum level as 2.8% of the reproduction acquisition price of property. 12 Theoretical calculation. 13 In addition to the subsidy, construction savings are exempt from income tax and the interest on loans can be deducted from the tax base for calculation of income tax. The latter tax relief is also used to stimulate the system of mortgage loans. 14 Source: Ministry of Finance 2001. 15 Mortgage loans are also supported through tax relief: the yield of mortgage bonds is exempt from income tax, and interest on loans can be deducted from the tax base for calculation of income tax, similarly as in the case of construction savings plans. 16 The maximum amount of the subsidy per dwelling is differentiated within the program. For example, CZK 370,000 is paid for reconstruction of rental housing in former military compounds, etc. Up to 1999, the subsidy for technical infrastructure was paid in the amount of CZK 50,000. 17 The cost of this subsidy is included in mortgage loans government-subsidized through interest subsidies.