Productivity and long term growth

Economic Survey of the Slovak Republic 2009: Adjusting housing policies in light of euro adoption

 

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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of the Slovak Republic published on 9 February 2009.

 

Contents

 

Developments in mortgage borrowing need careful monitoring

Many challenges related to euro area entry, such as the need for flexibility and the effects of easier financial conditions, manifest themselves in the Slovak housing market. House prices have risen substantially in recent years, driven by higher household incomes, lower real interest rates (partly in anticipation of euro area entry) and a slow supply response in the construction sector. In line with this development, mortgage borrowing has increased rapidly and banks have been easing lending standards. Even though rapid credit growth is a natural consequence of financial deepening, the authorities should monitor developments closely to limit risks to the financial system, in particular the risk of an unsustainable bubble. Given this background the Slovak authorities should not hesitate to tighten regulation, such as lowering loan to value ratios, if there are indications of overheating in the housing market. That said, it is clear that their scope for action is limited by the possibility that the essentially foreign owned banking system could escape Slovakian supervision by switching from a subsidiary to a branch structure. For this reason, the Slovak supervisors should enhance cooperation with foreign supervisors.

 

Make the housing market more flexible

The housing market is crucial in improving the adjustment potential of the economy through the labour market. The current market structure is characterized by a dominance of owner-occupation and a small share of rental housing, almost all of which is publicly provided. This structure significantly hampers the geographic mobility of labour, which is amongst the lowest in the OECD and one factor behind the persistently high rate of long-term unemployment. A more flexible housing market    notably the deeper development of a private rental segment    will be essential to better cope with the structural change that the economy will go through as well as to lower the wide dispersion of unemployment rates across the country.

 

Occupied dwelling stock by tenure
% of total

 

 

Note: Data refer to 2004 unless stated otherwise.
Source: Housing Statistics in the European Union 2005/06.


The rental market should be strengthened

One factor behind the lack of a private rental market is the right-to-buy legislation, which allows tenants in the municipal housing flats built before 1998 to purchase their home under very favourable conditions. This legislation should be phased out or, at least, sales prices should be raised to market values. A further factor hindering the expansion of a private rental market is the fiscal treatment of housing, which is heavily skewed towards supporting owner-occupation. The real estate tax rate, which is set by municipalities, is very low and based on out-of-date housing values. This favours investment in owner-occupied housing over other assets and is pro-cyclical in that the effective tax rate falls as house prices rise. The real estate tax rate should be raised to neutral levels and should be based on a measure of actual market values for real estate.


Investment in owner-occupied housing is also supported through various schemes providing mortgage loan interest subsidies, premia for deposits in home savings bank accounts and the granting of loans at favourable interest rates through the State Fund for Housing Development. Even though these subsidies have been reduced in recent years, the government should continue to cut subsidies for owner-occupied housing.

 

Property tax revenues
% of GDP, 2007 ¹


1. 2006 for Australia, Belgium, Greece, Mexico and Poland.
Source: OECD, Revenue Statistics, 2008 edition.

 

Housing support should be more flexible

State housing support for low-income households is currently mainly provided through the public rental housing sector at regulated low rents (where rents are less than a third of private ones). Although access to public housing is means-tested, income controls are weak and many households often remain in their flats after they have surpassed the eligibility criteria. This lowers labour mobility and leads to an inefficient allocation of the housing stock as it crowds out private rentals. In contrast, housing allowances are quite small as eligibility is very strict (only recipients of social assistance receive them) and benefits are low. As recipients lose eligibility when they take up work, the current scheme implies serious work disincentives.
To better target housing support and make it more effective, the government should consider raising public housing rents closer to market levels; at least, tenants who no longer fulfil the eligibility criteria should pay market rents. More generally, public housing should be made more targeted and housing allowances should be expanded in order to raise labour mobility. Housing allowances should be available to those who work (but who are poor) and the allowance should reflect local housing costs in order to encourage movement to rapidly growing (and high cost) areas of the country.


A further impediment for private rentals is the excessive tenant protection for rental contracts of indefinite duration, which locks in tenants enjoying such protection. For these contracts, the landlord must provide the tenant with alternative accommodation if the lease is terminated. The current tenant protection regulation should be phased out.

 

A stronger housing supply response could be encouraged

The flexibility of the housing market would be further increased if the supply of new dwellings were to be more responsive to demand, thereby also helping to dampen housing cycles. During the current upswing of house prices, construction has reacted only with long lags (which in itself contributed to the rise in prices) and the new dwellings that have been constructed mainly serve the upper end of the housing market. Addressing inefficiencies in the land planning process and monitoring whether the construction sector is sufficiently competitive would be useful initiatives in trying to increase the housing stock.

 

How to obtain this publication

 

The complete edition of the Economic Survey of the Slovak Republic 2009 is available from:

The Policy Brief (pdf format) can be downloaded in English or in Slovak language. It contains the OECD assessment and recommendations.

 

Additional information

For further information please contact the Slovak Republic Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Felix Hüfner and Isabell Koske under the supervision of Andreas Wörgötter. Research assistance was provided by Béatrice Guerard.

 

 

 

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