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Ministry urges that rent caps be raised to boost building

Despite partial liberalisation of housing market prices at the beginning of this year, the Construction Ministry is pushing for further de-regulation to boost housing construction and put an end to subsidised rents that economists say are stifling the supply of houses.
Experts have pinpointed the nation's housing supply as an acute problem, affecting both rent and sale properties. The shortage is keeping workforce mobility at a low ebb, preventing people from moving away from employment blackspots into more thriving cities, such as Bratislava. But if people are forced to pay higher rent on state-owned properties, the government theorises, the state in turn will have more cash to spend on building new houses.
However, despite pledging to help hike the volume of state-financed housing to alleviate the supply problem, the Construction Ministry has said that Finance Ministry intransigence on the issue is delaying its plans.

Despite partial liberalisation of housing market prices at the beginning of this year, the Construction Ministry is pushing for further de-regulation to boost housing construction and put an end to subsidised rents that economists say are stifling the supply of houses.

Experts have pinpointed the nation's housing supply as an acute problem, affecting both rent and sale properties. The shortage is keeping workforce mobility at a low ebb, preventing people from moving away from employment blackspots into more thriving cities, such as Bratislava. But if people are forced to pay higher rent on state-owned properties, the government theorises, the state in turn will have more cash to spend on building new houses.

However, despite pledging to help hike the volume of state-financed housing to alleviate the supply problem, the Construction Ministry has said that Finance Ministry intransigence on the issue is delaying its plans.

Vladimír Cvacho, head of the department for housing conception at the Ministry of Construction, said that his ministry had been urging the Finance Ministry, which prepares legislation connected with housing market de-regulation, to push for full liberalisation for a long a time, but had not got any response.

The Finance Ministry was unavailable for comment on the claims.

Cvacho said that the economic importance of raising construction levels should be recognised by the Finance Ministry. "From the point of view of labour mobility, this can only be supported by massive construction of rental dwellings," he said.

Supply and demand problem

Partial de-regulation at the beginning of this year saw the total amount of residences in Slovakia under regulated (subsidised) rent cut to only 8%.

Regulated rents originally applied to two groups of people. The first were those who living in dwellings that were returned by the state to their former owners after the fall of communism; the state required that the old tenants, if they were allowed to stay on, be charged only what they used to pay the state. The second group were people who lived in flats owned by municipal governments, but who had never bought the property even though they had the chance after 1992.

The regulated rent system, analysts said before partial de-regulation this year, had dire economic consequences in distorting what otherwise would have been a simple supply and demand situation on the housing market.

"People need to be able to take a temporary residence to move into an area and begin work," said Ján Tóth, chief economist at ING Bank in Bratislava. "By subsidising rents, the state affects supply because people are able to pay very low rent on some apartments, sometimes holding a second one and limiting what's available on a market in say, Bratislava. This limited supply forces prices to be kept higher than they may otherwise be.

"This means that there are apartments not offered to people who are willing to pay a market price for them. If you stop regulated rent, the market should even out supply and demand and may actually, with supply very tight as it is, see prices fall. People should be left to make the decision themselves as to whether they will pay the optimal price for an apartment," Tóth said.

He added that the rental situation also affected the market for the sale of apartments. Prices were pushed high [on apartments for sale], to an almost prohibitive point in places like Bratislava, because the supply of flats was limited in consequence of rent regulation. The increase in general supply on the market as a consequence of full deregulation would spill out into the buyers' market and bring down prices.

"That new price may enable someone from Prešov [where unemployment is 30% - ed. note] to buy a flat in Bratislava [where unemployment is 6% - ed. note]," the economist added.

According to Cvacho, if the state built a flat for one million crowns and rented it out it would, in a de-regulated market, receive about 4,000 crowns per month and get the investment back in "a reasonable time", somewhere between 40 and 50 years. However, the same state investment on a regulated market would take "much, much longer" to recoup through rent - which in turn would reduce funds for new housing construction, furthering the need for de-regulation.

Data support the advantages of deregulation to the state In 1995, the private sector built 3,090 flats and houses with the total number of dwellings built by the government in the same year at 1,546. But by 1999, the private sector was turning out 8,926 dwellings against only 827 built with government support.

The January legislation has prompted some analysts, however, to question the importance of further de-regulation. According to Martin Barto, head of strategy at the state-owned bank SLSP, "any [further] de-regulation is a question of political compromise, but it wouldn't really change the situation [regarding prices] as only a few people now pay regulated rent".

"I believe that mortgages are the future of housing construction in Slovakia," he added, explaining that a one million crown mortgage with a 30 year maturity would allow a person to make a monthly payment of just over 5,000 crowns. "I think that this is much better than 4,000 crowns per month for rent," Barto said.

Barto was supported by Petr Sekanina, an analyst with J&T Bank in Prague, who said that in the Czech Republic, more people had started to take mortgages. "The amount of mortgages has been growing in the Czech Republic because people can use the building they are going to buy to secure the loan they take," Sekanina said.

Under current Slovak legislation, though, this is not possible and Slovak government officials say that there is little sign that the legislation on mortgages is likely to be changed in the near future. Analysts have said that mortgages are so difficult to obtain that they are almost exclusively for the extremely rich elite of Slovakia.

Cvacho said that many Slovaks found it difficult to even consider owning a house or flat, and had little option but to rent.

Katarína, a 35 year-old lawyer from Bratislava, said that most people prefered taking mortgages to paying rent because after a while they became tired of investing into something they did not own. They were largely denied this opportunity, she said, by current legislation.

"If I were to choose between taking a mortagage for my flat and paying rent after de-regulation, and if these two were approximately the same figures I would definitely go for a mortgage. But of course, [only] if I could use the flat that I'm taking the mortage for as a collateral for that mortgage," she said.

According to union leaders, the lack of response from the Finance Ministry to Construction Ministry prodding on deregulation may be due to the unpopularity of further changes to the system.

In January, regulated rent prices were hiked by 70%. However, this still left the rental prices of two-room flats in prime locations, such as the second district of Bratislava, frequently at 500 crowns per month ($10), while a similar-sized flat in the same area on the de-regulated market could cost as much as 9,000 crowns per month ($180).

"We have to consider this issue [de-regulation of the housing market] together with overall living conditions in the country. When we, for example, look at state employees, their salaries haven't been increased for about two years. The government simply cannot de-regulate rents from one day to another without considering the social situation in the country. It has to be very careful in considering the impact of further de-regulation on the average Slovak citizen," said Miloš Križan, an advisor of the KOZ union umbrella organisation's economic department.

Križan explained that some of the people who now pay regulated rent would have difficulties paying de-regulated prices. "We simply cannot tell these people to leave their homes and live on the streets," Križan said.

However, he agreed that de-regulation of the housing market would certainly boost housing construction in Slovakia. "Higher rent and a quicker return on an investment would boost housing construction financed by public money. All this has to go hand-in-hand with an increase in real wages," Križan said.

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