Chapter V.9 Housing
- International Monetary Fund
- Published Date:
- December 1991
Housing conditions in the USSR are a major economic, social and political issue. Housing is one of the primary sectors where the problem of balancing economic efficiency and equity considerations in the process of creating a new economy is evident. Widespread shortages and rigid allocation mechanisms have adversely affected household living conditions, labor motivation, and enterprise operations. The housing system shares many features with the other socialist economies, but the USSR has maintained the dominant features of a centrally planned housing system for the longest time and in their most traditional forms. The process of increasing centralization and state controls continued until the mid-1980s. The present housing system is characterized by planning and financing by decree, highly centralized production decisions, the dominance of monopolistic organizations producing industrial large-panel housing units in cities, the dominance of public ownership in urban areas, tight control over the allocation of housing units by the government and restrictive individual housing property rights. Land pricing mechanisms are absent, the ownership status of land among various types of government entities is ambiguous, and it is allocated in an arbitrary way. Households and other participants in this housing system have invested a considerable amount of skill and effort in dealing with it over a period of 60 years. Because of the magnitude of the housing sector and the impact of reforms on the entire population, moving to a market-based system will be a major challenge.
This chapter explores why market mechanisms are needed to improve performance in the housing sector, the economic and social benefits of moving rapidly during the transition, and the contribution that a housing privatization program can make to economic and social stabilization. Introducing market mechanisms in a 60-year old centrally planned housing system would be a major task in any country. In the USSR the problem is compounded by the size of the country and the diversity of its population.
The first section reviews current housing conditions in an international perspective. Available indicators show that central planning mechanisms and direct state controls over the financing, production and allocation of housing in the USSR remain the most extensive among socialist countries. The next section addresses housing allocation problems which the economy shares in various degrees with other reforming socialist economies. A third section considers the economic and social benefits that could derive from successful housing reforms. Two further sections consider respectively a strategy for market oriented reforms in housing and organizational issues related to the transition to a market-based housing system.
2. CURRENT HOUSING CONDITIONS
a. Planning system
In the USSR, housing is assigned on the principle of equal distribution. Citizen rights to housing, sanctioned in the Constitution, have been given effect not only through public development and maintenance of the housing stock, but also through the generalized application of low subsidized rents and utility charges. Households have been restricted largely to holding their savings in financial assets—mainly currency, and savings deposits (Table III.3.7)—rather than private housing. As a result, households generally have had little control over the flow of funds that affect their housing, although with municipal, enterprise, cooperative and other types of housing, the extent to which payment is outside their control has varied. Expansion of the housing stock has thus led to a rapid growth in the volume of state and enterprise subsidies. Also, as a result of this bureaucratic system, it is possible to observe simultaneously excessive levels of housing consumption in some areas and severe shortages elsewhere.
Housing is a very complex economic good to analyze because of its durability, heterogeneity (in terms of design, age, and utilities), spatial specificity (with the influence of neighborhood ecological, sociological, and infrastructural qualities), and its extensive regulation by government. In addition, the social, demographic and economic characteristics of households vary widely. Therefore, when planners are substituted for the decentralized decisions of households that would prevail in a market, vast amounts of information are required for proper policy analysis and decision-making. Unfortunately, the present housing information base is inadequate. Crude indicators of housing consumption such as square meters of “living space” or “usable space” for new housing disregard critical qualitative characteristics of housing units. Simple floor space indicators cannot reflect the diversified supply of housing that is required. Inappropriate units are built because so-called housing kombinats are rated according to the volume of square meters they produce and not on their success in matching demand.1 Their salaries and bonuses are based on the total cost of their output rather than quality and response to well surveyed local needs.
The present policy goal is to provide every family with a separate apartment or individual unit by the year 2000. To meet the target of one dwelling unit per household, the housing plan submitted to the May 1988 session of the Supreme Soviet requires the construction of 4.4 billion square meters. This figure implies an annual rate of output of 340 million square meters which is more than 2.5 times the current annual level. Given the present composition and capacity of the housing industry, this plan is not likely to be fulfilled.
Given the low-wage system, one would expect households to receive a net bonus in the form of low-rent housing as part of total labor compensation. But recent studies report that over the entire period 1922-1985, the volume of funds for state investment into housing has stayed very close to the combined volume of rents and income taxes (today 13 percent of cash wages) raised from cash wages.2 This suggests that direct budget subsidies to housing are fully financed from taxes and that indirect subsidies provided via enterprise social funds are the main—but less visible—source of net subsidies. Moving enterprises to a hard budget constraint will therefore greatly affect the interaction of wages, social funds and housing finance.3 Housing finance comes from the state budget, social funds of enterprises and work organizations, housing cooperatives financed with household downpayments and long-term loans, private housing funds coming from individuals, and collective farms in rural areas. Between 1988 and 1989, there was a major switch in funding from the state budget, which was dominant in 1988, towards enterprise social funds, containing the budget deficit while permitting an increase in housing floor space constructed of 4 percent (Table V.9.1).
|(million square meters)|
Four state-owned banks are now involved in housing finance to varying degrees: The Industrial Development and Construction Bank (Promstroibank), the Housing and Municipal Service and Social Development Bank (Zhilsotsbank), the Agro-Industrial Bank (Agroprombank), and the Savings Bank (Sberbank). In terms of housing finance the most important banks were Promstroibank (32 percent), followed by Zhilsotsbank (29 percent), Agroprombank (23 percent) and the Savings Bank (16 percent). All financing of housing is indirect; there are no mortgage loans directly from these banks to households and loans are assumed by the organizations initiating new housing. The investment in housing represented 15.5 percent of total investment in the economy in 1989 (Table C.3, Appendix II-1).
The state banks operate as disbursing and supervisory agencies of the government rather than as financial intermediaries. They are specialized in specific economic sectors and therefore enterprises within these sectors cannot choose freely among them. Most of the banks are now in the process of conversion into stock companies having as shareholders other state banks or enterprises. The financing of housing was modified in 1986 with the Law on Social Enterprises which was implemented with the Twelfth Five-Year Plan (1986-90). Better types of loans for cooperative housing and individuals were introduced in 1988, but their impact has yet to be felt.
The Savings Bank, which collects deposits from the population, is the only bank financing (indirectly) individual housing, but its involvement in that activity is minuscule: as of January 1, 1989 its total assets were rub 301.87 billion out of which only rub 4.73 billion (1.6 percent) were in long-term loans to the population. The Savings Bank only accounted for 16 percent of the stock of housing credits in 1988 (Table V.9.2). The other three banks also finance municipal infrastructure (water supply, sewerage systems, and district heating). Zhilsotsbank finances urban transport systems, while Promstroibank finances the construction of educational, health and medical, cultural and recreational facilities. To support the commercialization and privatization of housing to individual households, these banks will need to be reorganized.
b. Individual housing
The role of individually-owned housing, which is a restrictive form of private ownership, has been declining steadily. New individual housing production has been officially prohibited in cities over 100,000 inhabitants for years. Since land cannot be sold (or until now leased), it is allocated by local governments which derive little bureaucratic or political benefit from encouraging individual housing, which represented less than 22 percent of the urban stock of floor space in 1989. A notable feature of the Twelfth Five-Year Plan period was some increase in the role of private housing construction for the first time in several decades: the share of private investment in total housing investment rose from 8 percent in 1982 to 13 percent in 1989, but it is still small. Substitution of private for public resources has been typical of other socialist economies after initiating reforms, and the USSR is a latecomer in this respect.
Tenure categories in the USSR and other socialist countries differ from those of market economies. As of January 1990 the total stock of housing consisted of 4,540.1 billion of square meters, 63.7 percent urban and 36.3 percent rural. The share of housing owned by the state sector in Soviet cities is one of the highest among socialist economies; in those other countries, the role of urban housing cooperatives is considerably more developed. Only since 1985 have housing cooperatives been encouraged in the USSR through lower downpayments and, more problematical, very low interest loans. These cooperatives operate under the close supervision of the local governments, but they offer to those households able and willing to pay considerably more than state renters the possibility of access to housing of better quality. The growth of cooperatives, which could become a major vehicle for privatization, is presently modest. Cooperatives must order units from monopolistic local industrial housing kombinats, but these are not very interested in their orders for three reasons. First, the cooperatives supervise the building process more closely and expect higher quality than the state. Second, in the case of cooperatives, builders cannot retain 10 percent of the constructed units for their own staff, which is a very important means to attract construction workers. Third, cooperatives are less likely to tolerate cost overruns than state organizations.
The willingness to buy housing is difficult to estimate during this period of changing public expectations. However, the latent demand for individually-owned housing is evident and quantitatively significant. This demand will be an important starting point for the development of a market-based mechanism and the conversion of financial savings into real estate assets. Suggestive of potential demand, the dachas (country houses) and garden houses surrounding cities constitute a major segment of private Soviet life and are a vehicle to accumulate wealth. These secondary homes have become assets of refuge both financially and socially for households that have limited control over their assigned city apartments. This has occurred despite the insecurity of tenure and sporadic destruction of these units (especially garden houses) until the recent past. Inflationary pressures are most clearly revealed in that segment of the economy: the price of individual country homes has been rising extremely rapidly and appears to have doubled in just a few years around major cities.
In the transition to market mechanisms, the role of the present individual housing stock will vary considerably according to city size; it is only in small urban concentrations and rural areas that traditional detached private units can be expected to play a significant role. In large and medium-size cities, the stock of individual (private) units is generally unattractive; it is old, lacking in most amenities, and of very low quality. Much of this individual housing must either be replaced or, if well located, completely rehabilitated. The unfulfilled demand that needs to be met today is for a new and different kind of housing that is more diversified, better designed, of higher quality, in multi-unit buildings of smaller scale, located in fully serviced neighborhoods. If such modern housing is available for ownership, some redirection of household resources away from dachas to this higher quality housing is likely to take place. A complementary reform would be to use the existing public housing stock to develop both private ownership and a genuine rental market where realistic, unsubsidized rents will be charged; as a result units would be easily exchanged, and administrative allocation would become unnecessary.
c. Investment levels
The USSR, like other centrally planned economies, has systematically underinvested in housing compared with market economies. Available estimates indicate that the share of housing in the total reproducible assets of the USSR is less than 18 percent while it is above 30 percent in the United States, 33 percent in the Federal Republic of Germany and 45 percent in France.4 Sustaining high levels of aggregate investment (largely for heavy industry and the military) in a relatively low productivity economy has meant a severe squeeze on the household sector, consumer markets and housing.5
The share of housing investment in total investment outlays has fluctuated significantly during the postwar period but it never rose above 20 percent of total investment. Such a share contrasts with other socialist countries such as Poland, Hungary, and particularly China where housing investment has risen above 20 percent since 1980 and ranged between 25 percent and 30 percent of gross fixed asset formation until 1988.6 It must be noted that housing production rose during the 12th Five-Year Plan (1986-90) from 15.9 percent to 17.3 percent of total annual investment in 1989, in spite of the overall economic slowdown. Such a ratio had not been reached since the 1960s. However, actual performance may have deviated from the plan in 1990, as selective construction materials shortages developed in the economy. Housing investment in recent years had actually suffered fewer delays that other investments in terms of the volume of incomplete projects compared to scheduling norms; in 1988, almost 18 percent of total investment in the economy was subject to delays, compared to only 3 percent of housing investment. By most accounts, however, the actual level of delays is underreported in official statistics.
Compared to other socialist countries the share of housing investment in GDP has been low (around 4 percent in 1989). International experience suggests values ranging between 5-7 percent. Such levels have not been seen in the USSR, however, since the 1960s.
d. Regional housing disparities
Housing availability differs between republics and, within republic, between cities. The western and Baltic republics enjoy better housing, as do the larger cities, especially the administrative centers such as Moscow, measured in terms of population size. Poor housing conditions and massive physical and social infrastructure shortages in Siberia, new industrial centers, and other areas where natural resources need to be exploited, are a major obstacle to manpower stability and economic development. The quality of the rural housing stock is invariably lower than that in the urban areas.7
e. Chronic shortage
Whether measured in terms of access to an independent unit, floor space, or quality of services, housing shortage is a very serious problem in the USSR. Due to the neglect of housing during the Stalin era and war destruction, the USSR had an extremely low per capita housing level of 4 square meters of usable space in the 1950s. Following massive housing production efforts, especially in the 1960s, the current average level is 15.8 square meters of usable space per capita, but due to the unequal distribution of housing the median is about 12 square meters. This is less than half of the average of Western Europe, and there are major differences in housing quality and efficiency. According to the 1989 census, about 13 percent of reporting households indicated that they did not have a separate housing unit and instead lived in such accommodations as communal apartments (5 percent) and workers’ hostels (6 percent) or renting space (2 percent). Half of total households were living in apartments and the remainder either in individual houses (about one-third) on in a part of a house (less than 5 percent). The official definitions of households and of housing conditions which underlie such data probably understate the scale of the housing shortage by a wide margin.
Communal apartments, where several families share the same kitchen, bathrooms, toilets and corridors, are still prevalent, especially in cities with an old housing stock such as Leningrad, where 36 percent of the population was still living in such apartments in 1986. The ratio of households to dwelling units has declined, however, from 1.29 in 1960 to 1.17 by 1989. Nonetheless, this does not compare with ratios in Western countries now well below one. The USSR has one of the most severe shortages among socialist countries, which as a group performed consistently worse than market economies.8 Indeed, the ratio of households to dwellings in the USSR increased again during the 1980s (1970: 1.12). The ratio of new units to the number of marriages and divorces has deteriorated since 1975 from an already inadequate level of 0.7, and has stabilized at about 0.6. The current ratio implies that a large proportion of new social needs is unmet each year and that the backlog is expanding. The basic target of one housing unit per household set for year 2000 is unlikely to be reached.
Another ratio with particular political visibility in the USSR is the number of persons per room; Lenin had defined housing adequacy as having one person per room. This criterion was originally used to reallocate existing units among workers. In Western countries, there are more rooms (usually one or two) than persons. In the USSR the usual situation for new units is still that the number of rooms is one or two below the number of persons. On average there were 1.4 persons per room in 1989. In state housing the ratio is 1.5, in private housing 1.2, and in communal apartments 1.8 person per room.
In addition to the limited average space per person noted earlier, there is a misallocation of space, which is most visible between young families with children and retired households with extra space which they cannot share because of allocation rules or do not wish to share. In 1989, almost 80 percent of young families lived in dwellings with less than 15 square meters per capita while some 83 percent of pensioners resided in dwellings with more than 15 square meters per capita.
f. Rents and housing quality
The housing stock is deteriorating steadily due to the very poor cost recovery associated with the low-rent policy. The rent control system is basically unchanged since 1928. Monthly rent in state housing is either 13.2 kopeks or 16.5 kopeks per square meter of living space depending on the size of the city; it bears no relation to location or quality. For the apartment space above the norm the rental rate is tripled. However, few families are affected because this norm is set at 12 square meters of living space per resident, plus 6 square meters for the family as a whole; this would mean an apartment of 50 square meters of living space (73 square meters of usable space) for the typical family of 3.7 living in a state urban apartment. For state-owned units the state pays 75 percent of actual maintenance, yet these amounts cover less than 40 percent of estimated needed maintenance. Estimates are that rents would have to be raised more than tenfold to achieve genuine full economic cost recovery. Housing accounted for only 2.8-3.0 percent of expenditure of workers and employees during 1987-89, which was less than spending on alcohol and tobacco. In 1989, reported household access to various amenities was rather low (Table V.9.5). Moreover, the gap between the quality of housing in the state sector and private housing is considerable.9
|(sq. meters)||(In percent)|
|(Ratio of usable to living space)||(1.41)||(1.47)||(1.44)|
|(In percent of population)||(100.0)||(1.5)||(11.5)|
|Gas stove (Bottle)||81||75|
|Bathroom or shower||77||8|
g. Price distortions
The official cost of housing production was rub 256 per square meter in 1989, but the 1990 trading value of old and new units ranges from rub 400-1,500 per square meter in Moscow, up to rub 1,000 in Leningrad, and more than rub 500 per square meter in Tallinn. Such market prices are derived from a small volume of exchange, and with a broadening of the market they would undoubtedly decline, but they do provide an indication of scarcities prevailing under present conditions. In a broad, balanced housing system, the ratio between trading price and housing supply cost is typically close to one. In the USSR, this ratio is about two to one in the cities with the smallest shortages and above four elsewhere. For an apartment unit of 55 square meters, the ratio at these exchange prices ranges between 8 and 14 times the average income of a household, which is a very high housing price-income ratio by international standards.
h. Regressive subsidies
Production and rent subsidies are linked to apartment units and not to the demographic and socio-economic characteristics of households; the larger the apartment unit, the more subsidized is a family. Contrary to the egalitarian intentions of the Soviet system, housing is therefore a major source of inequality. There is statistical evidence of a strong correlation between socio-economic status and access to housing, and it is also important to note that, in spite of so many distortions, the structural parameters of housing demand are very similar to those of market economies. This evidence is reinforced by the results of the 1989 census which show the correlation between socio-economic status and availability of housing space.
i. The building industry
A significant proportion of funding presently goes to subsidize inefficiencies in production.10 The current organization of the building industry around economically and technically inefficient large-panel industrial housing is not compatible with the development of a competitive, diversified, market-based housing system. Innovation is stifled because planning and production decisions are concentrated in a single decision center in many cities. Reorganization of the building industry is therefore a high priority.
The largest share of new urban housing consists of high rise apartment units located in large housing estates. This housing is produced by a network of some 590 technically obsolete, energy and capital intensive industrial housing plants. Typically a city will have three such plants under the control of the construction commission. One plant produces 1-5 floor apartment units, the second 5-9 floor units, and the third will produce 10-22 floor units. These plants have a total annual capacity of 53 million square meters but they produce at 80 percent of design capacity. Nationwide, in recent years the typical composition of building types has been about 30 percent of 1-4 floor, 25 percent of 5 floor, 38 percent of 6-9 floor and about 7 percent above 10-floor. In large cities about 85 percent of the total production comes from industrial housing kombinats. The balance is built by enterprises for their own use.
Enjoying a monopoly position in an environment of shortage, the housing kombinats tend to be unresponsive to the preferences of the population. The composition of their output in terms of unit types does not match the changing composition of the urban population, and the rate of design innovation is very low: less than two new types of apartments per decade. The quality of the new finished units is poor: upon delivery, household recipients of a unit reportedly must spend an average of about 10 percent of production costs to upgrade their unit to a desirable level. Due to severe shortages of industrial parts or inadequate infrastructure, it is not uncommon for housing kombinats to attempt to deliver buildings that are not in full operating condition. The type of investor has an important impact on quality; as noted, enterprise- or cooperative-financed housing is of better quality than state-financed housing. The performance of the kombinats is measured in terms of square meters produced, and salaries and bonuses are related to total project cost so that a kombinat has a vested incentive in cost overruns. Such overruns are of course facilitated if the organization ordering the units is itself able to accommodate such overruns with additional resources from the state.
Serious competition for resources has emerged between the need for large net additions to the housing stock and rapidly rising maintenance requirements. The irregular quality of industrial housing methods combined with low cost recovery from rents has created a major maintenance problem. A high percentage of the 15- to 30-year old housing stock is now entering a phase of very high maintenance costs. Extensive renovation or major reconstruction is needed for the units produced during the massive housing effort of the 1960s. In particular, the early 5-floor industrial blocks have acquired a reputation for their poor quality.
The case against the type of “closed” industrial housing systems that still dominate the building industry had already been convincingly made in the 1970s,11 and Western European countries had abandoned that building technology by the early 1960s. However, statistics suggest that increases in the total production capacity of such systems might still be taking place in the USSR. The continued use of this approach to building, especially in rural areas, is not easy to justify. Because these industrial housing firms usually have a high break-even point—around 3,000-4,000 housing units per year—their use in rural areas leads to construction costs that are about one quarter higher than in cities: rub 325 per square meter against rub 265 per square meter in 1988. Clearly, the choice of technology is especially inconsistent with the rural environment.12 For all of the above reasons, reform of the building industry must be a high priority.
3. ADMINISTRATIVE HOUSING ALLOCATION
While housing allocation was never perfectly fair nor effective, it has become increasingly corrupt—and resented—over time. The problem of housing allocation has two dimensions: waiting lists and the residence permit (propiska). The current housing conditions of a household may determine its access to better housing in the future. The system is a major impediment to labor mobility across cities. More than any other single factor, housing prospects affect choice of career, acceptance of a specific job, marriage decisions and choice of partner, divorce and child scheduling.
a. Waiting lists
In 1988, the percentage of all families registered on waiting lists ranged from 12 percent to 36 percent according to city, even though enrollments were restricted by norms and the propiska. These waiting lists have been growing, and fully 18 percent of all Soviet families have been on the lists for 10 years. The management of lists is very complex and lends itself to manipulation, especially as there is little transparency to the process.13 The Moscow city government has identified 56 different categories of households and 120 different paths to achieve access to housing.
There are, in fact, several waiting lists which are managed separately but not independently: municipal waiting lists, cooperative waiting lists and enterprise waiting lists. Inscription on a housing waiting list is not automatic. It is based on needs and related to affiliation with a specific work unit, but household income is not a consideration. The most important indicator of need is that of “square meter of living space per capita”.14 Its maximum value for inscription on a waiting list usually ranges between 5 square meters and 7 square meters, although some cities fall outside that range. This needs-based criterion can be misleading. It deliberately eliminates critical aspects of housing quality such as shared facilities in communal apartments, location and neighborhood socio-economic and ecological quality. In cities like Leningrad under the “living space” criterion, residents of communal apartments which have more than 5.5 square meters per person—but no privacy—are seriously penalized. The maximum floor space for registration on cooperative lists is higher than for municipal lists.
b. Residence permits: the propiska system
The propiska system of internal passports has been used extensively in the past as an instrument of “labor discipline” and of “population distribution policy and spatial planning.” It is a major source of inequity and economic inefficiency, often subjecting rural residents to a form of serfdom by denying them the opportunity to move to cities. The population of favored cities like Moscow has been stabilized through this passport system, and during the recent pervasive consumer good shortages, the local propiska was often required when shopping. Temporary residence permits of a few months are issued to meet short-term needs in sectors experiencing serious labor shortage, but such permits do not give a right to housing. Proposals to abolish the propiska are under consideration, and such a decision would have a direct impact on waiting lists and more generally on the housing system.
The bureaucratic allocation system is a major impediment to labor market adjustments. In most cities whose population must be controlled according to the regional and spatial plans, employers are not allowed to expand their staff freely; they are only allowed staff substitutions. When they are permitted staff additions, enterprises and other organizations may have to pay the city for the implicit housing cost of the new staff. In the case of Moscow, this charge has reportedly increased to rub 30,000 per employee.
c. Methods of housing exchange
In a well-functioning housing market, the percentage of units exchanged every year for job or family reasons ranges between 10 percent and 15 percent. In socialist housing systems subject to shortages and administrative rationing, this exchange rate is around 1 percent or less and this is the case in most Soviet cities. As a result of controls, convoluted and expensive systems of housing exchange involving several units (often up to seven) have developed. They are tolerated but so far are not legal, and they remain subject to arbitrary administrative decisions by local government officials without recourse. As noted, the exchange value of one square meter of housing in these transactions is very high, and expanding the volume of transactions would help to lower them. Since 1988, housing exchange cooperatives have sprung up to facilitate transactions. They should be encouraged because they perform a valuable service and are important to the transition toward a market.
d. Government liabilities and the “socially guaranteed minimum”
Housing reforms must take into account two important liabilities, people on the waiting lists and the widely accepted principle of a “socially guaranteed housing minimum.” The outstanding rights incorporated in the waiting lists are especially important when developing a privatization plan, for instance as under the Moscow privatization decision decreed on June 29, 1990. The concept of “socially guaranteed minimum” is best represented by the minimum living space per capita of about 5 to 7. Reform proposals usually suggest that rent increases and privatization be implemented on the basis of a two-part tariff: the “guaranteed” amount of living space would be given free of charge or at nominal cost but anything above that minimum amount would be made available at an “economic” (presumably a full cost recovery) price.15
4. HOUSING REFORMS AS PART OF STRUCTURAL REFORMS
Housing reforms are a high priority for macroeconomic stabilization, economic efficiency, and equity and social stability. Housing is not considered an “economic sector” in the USSR and consolidated data are not available on total financial subsidies to housing for rents, subsidized utility costs, and the various subsidies to new construction. However, the evidence available from other socialist economies in Eastern Europe and China suggests that housing subsidies in the USSR could easily range between 3 percent and 6 percent of GDP, and might be higher given the predominance of state housing. The potential scope for asset substitution between financial savings and housing assets appears to be significant, particularly in light of the sizable “monetary overhang” thought to exist in the USSR (Chapter III.3). In 1989, financial assets per household averaged rub 5,170, of which rub 4,070 were held in savings accounts. At the same time, the official construction cost of a standard 55 square meter urban housing unit was about rub 16,500.
The structure of total labor compensation has become increasingly distorted by low cash wages, bureaucratically allocated in-kind income (including heavily subsidized housing), and second economy earnings which have become progressively more important. Combined with the residency permits, housing rigidities prevent workers from increasing their contribution to society by moving from jobs where their productivity is low to others where their productivity would be greater. Housing is a very inefficient labor incentive especially when tenure rights are strong: first workers have to wait a long time for a unit, then once they receive one there is little further to motivate them. Successful housing reforms require that social funds be reintegrated into the cash wage of households. This will create serious problems for unprofitable firms under a hard budget constraint, but raise efficiency because the firms have no comparative advantage in providing housing services.
The labor compensation system combined with the state allocation of housing causes losses of welfare compared with what households could experience under a full cash wages and market allocation of the equivalent amount of housing.16 Studies of public housing policies in the United States have shown that in the case of both similar housing units and households with similar demographic and income characteristics, those households which are administratively restricted in their housing choices consistently report a lower level of satisfaction compared to those that choose their housing unit freely.17 Preliminary analyses of housing reforms in China also show that very significant welfare gains can be achieved by allowing free exchanges of housing units, even without expanding the present size of the housing stock.18 This deadweight loss caused by an imperfect allocation system compounds the costs imposed by queueing.
In market economies, the housing stock forms a major share of national wealth (20-25 percent of reproducible wealth); the housing construction industry is linked to numerous production branches of the economy and its annual output usually represents a large share of accrued investment (15-20 percent) and GDP (5-7 percent). The present system of large scale industrial housing in the USSR is neither technically nor economically justified. It has survived solely because of its monopoly position and it is not consistent with market oriented reforms. It produces an undifferentiated output which is mismatched with the increasingly diversified needs of the Soviet population. Reforms need to promote an efficient housing industry as an important element of the economy and to eliminate shortage.
The new, large, suburban areas of Soviet cities do not fully utilize their large investments in infrastructure, and Soviet cities are also unnecessarily energy intensive. Housing reforms can raise the efficiency of urbanization. Land prices derived from the development of a land market would reveal some of the present resource misallocation and play a critical role in this process. Effective housing exchange systems also improve the internal efficiency of cities. Various studies show that job relocation created by new or relocating enterprises can affect from 3 to 5 percent of all jobs every year in a dynamic urban environment. In the absence of housing trades, rigid housing allocation will impose increasing time and money costs on households, needlessly raise the daily volume of commuting and accentuate the need for infrastructure investment. Resources will be scarce for infrastructure and the production of new urban land properly serviced with roads and various types of utility networks. The present urban planning system can adapt to this environment by changing its master planning techniques into more flexible and less costly coordinating and regulatory techniques.
5. A STRATEGY FOR MARKET-ORIENTED REFORMS
The existing stock of housing and its new production are interdependent and market-oriented housing reforms must deal with both simultaneously. There are four major areas of concern: (1) property rights and privatization; (2) rents, sale prices and subsidies; (3) financing; and (4) production.19
a. Property rights and privatization
Privatization of the housing stock should not have as its primary purpose the hasty transfer of this stock to individuals at greatly undervalued prices in order to free the state from part of its housing subsidy burden. The aim of privatization is the efficient and rational use of the existing stock, and this requires developing a functional rental housing market managed by social or private owners who will use the stock more effectively. Thereby they will also meet the needs of a variety of households who for various reasons prefer or need to rent. Given an initially very high (but distorted) housing price-to-income ratio, the proportion of renters could be expected to remain large,20 but as the reforms progress and the market expands it could be expected to fall rapidly, although the relative price of housing will probably continue to remain high compared to market economies.
From an economic perspective, major increases in rents should precede changes in property rights in order to create incentives to buy. However, from a political perspective, this may not be the shortest path toward successful market reforms and starting with property rights may be better. Experience in other countries suggests that tenure security is the core component of a housing market system and that the clarification of property rights induces better pricing and cost recovery. Property rights reforms imply at least three contemporaneous changes: (1) a strengthening of ownership rights; (2) the conversion of “permanent and guaranteed” administrative tenancy rights to fixed-term renewable rights; and (3) the free and unrestricted exchange of existing units.
To manage the complex urban environment of a modern economy, both public and private property rights must be clarified and publicized. In addition, these property rights must be continuously updated as needed in courts of law through appropriate and efficient legal proceedings, preferably at the local level. In the housing sector, three types of rights must be clarified: land use rights, the ownership of buildings or individual housing units, and the ownership of infrastructure and other public assets by the central government, local governments, and non-profit or private organizations. Given the range of services to be delivered in a modern urban economy, the division of labor between the public and private sectors can vary considerably with respect to both the ownership of production facilities and their maintenance and management, as well as the setting of prices and the collection of fees.
The clarification of property rights will take time. The relative balance between the public interest and individual property rights varies significantly across market economies and has fluctuated over time within the same country between more emphasis on the public interest and more attention to individual rights. In the USSR, the first priority is to remove the web of laws and administrative regulations that are systematically biased against the free and effective use of private housing property. But reforming and clarifying ownership rights for a housing unit (typically an apartment) will not be enough. Soviet cities are confronted with the absence of land markets. In some countries such as China, rather than returning to full private ownership of urban land, important experiments are in progress to develop a long-term leasehold system comparable to that in effect in Hong Kong. Under a leasehold contract, the state maintains permanent ownership of the land, but land-use rights can be traded and inherited according to the terms of the lease. In the USSR, there is also considerable confusion about which level of government or which state enterprise owns which state assets, and who owns and must maintain public spaces and urban utilities. Another potential problem regarding maintenance is the mixing of tenure and different types of owners in a single apartment building.
There are a number of difficulties facing privatization. First, without rent increases, there will be little incentive to buy. Second, the valuation of existing units and the selection of the sale price will involve difficult technical issues given the uncertainty with respect to housing prices following rent increases. Third, it must be decided who should be eligible to buy; specifically whether others than the sitting tenant will have this right. Issues of fairness will be very important in the treatment of the existing state housing stock, along with the goal of a more efficient use of the stock. Sales must avoid unwarranted favoritism to the sitting tenant, but sitting tenants would need to be assisted in case their is any displacement process.
Fourth, there is the issue of how the purchase will be financed, given the relatively high price-income ratio. Long-term mortgage lending will be difficult to provide on an adequate scale, but on the other hand, lease-purchase contracts and seller financing may not meet the short-term cash-flow objectives of the seller. To solve the problem of high housing price/income ratios, some transitional form of financing of purchase might be considered. Moreover, a concern would be a process of adverse selection in the sales of social housing, since the better housing stock will be most wanted even though the pricing of less desirable units can affect the choices of households. This process could result in the concentration of the least desirable stock in the hands of the state. The sale of newly produced units should be started very quickly. This requires sale prices which take into account current shortage conditions, but rents could not be freed abruptly to short-term scarcity levels. The exchange of all types of units should be encouraged, and monetary compensation permitted. Sound rules for listing, information systems, and brokerage services should be developed.
b. Rents, prices and subsidies
Rent reforms and utility pricing reforms are absolutely necessary to the successful reorganization of the housing stock. The two central principles of the rent reforms should be to ensure that rent will not only cover the maintenance of the unit but the full economic cost of housing (i.e., market clearing rent), and to provide social subsidies directly to families and individuals in need rather than through the allocation of a specific subsidized unit. Rent increases moving toward full economic rent should be coordinated with both wage reform and the price liberalization of consumer goods, as well as the privatization of various segments of the state-owned stock. The intended results of rent reforms are to eliminate regressive subsidies favoring the more affluent households; using direct subsidies, to allow disadvantaged households the possibility of choosing among alternative suppliers and location of rental housing; to encourage a shift of household tenure to ownership, or, at least, towards renting and owning more equally; to create the possibility of more diversified suppliers of rental housing by allowing private housing rentals to become economically viable; and to help enterprises and other work units to free themselves from their housing burden.
A first difficulty during the transition will be the selection of the actual economic rent level. The process may vary according to the available local information. Rent adjustments should be no less often than annual to avoid abrupt increases, especially during periods of inflation. Transitional subsidies may be necessary before shifting to a system of targeted housing allowances. Due to the practical problems of estimating household incomes, targeting might be based on the socio-economic characteristics of households as is done in some market economies using direct, needs-based housing subsidies. Given the past poor maintenance of the existing stock it may also prove effective to combine rent increases with the provision of improvement loans to the owner of the unit whether it is an individual, a non-profit organization, or another type of owner. Utility prices should be shifted to full-cost pricing, individual metering should be the norm and peak-load pricing should be introduced.
Current subsidies to production include subsidized loans and operating subsidies to builders, subsidized prices on building materials, underpriced or free land, and subsidized infrastructure. Subsidies and allowances for new construction should be rechanneled away from the construction industry directly to households and targeted to needy social groups.
At present, the USSR does not have a developed housing finance system. Whereas many aspects of reform should be implemented in a decentralized way by lower levels of governments, housing finance must be developed at the national level as an integral component of financial sector reform. Restructuring the flow of financing through the housing system can have a very positive impact on its modernization and diversification. Households must be given a greater role in allocating funds and particular attention must be given to the financial viability of long-term mortgage loans. During the transition toward market level wages, special mechanisms may be needed to improve affordability while minimizing subsidies. The main problems in housing finance are (1) the lack of genuine financial intermediaries in the sector and a severe shortage of banking skills. Financial innovations are required both in terms of new long-term lending instruments and new institutions; (2) interest rates that do not play a role in allocating credit; (3) the problems already noted of housing and mortgage affordability in periods of significant inflation and real interest rate volatility; and (4) a mixing of long-term finance and subsidy transfers which could cause contingent liabilities for the financial system to grow rapidly and become very large.21
Priority measures should be (1) to initiate housing finance reform with the selection of a financially viable adjustable long-term loan instrument;22 (2) to separate clearly subsidy elements from financial credit during the transition and beyond with a transparent funding of the subsidy. As a result, during the transition there might be a three-part funding structure: household savings, mechanisms to solve the price affordability problem (non-credit subsidies and/or shared appreciation mechanisms), and a flexible unsubsidized mortgage instrument; (3) to implement effective forms of loan guarantees and/or foreclosure laws; (4) to encourage new lenders, whether specialized lenders such as credit unions and mutual housing banks, or universal commercial banks. There should be open entry into mortgage lending but the entire housing finance system should be closely supervised; and (5) to take local market conditions into consideration when selecting the financial services to be provided and the specific housing activities to be financed; for example, the need for middle-income units as opposed to low-income units, the demand for improvement loans to upgrade the stock, or for the financing of existing units for privatization.
Introducing competition among producers will be easier as households gain greater control over financing decisions, subsidies are redirected, markets for building materials develop, and access to land is facilitated by local governments. Preferential treatment for large state firms should be eliminated. Reducing the usual unit scale of urban planning, as well as significant changes in existing building codes is needed to accommodate greater diversification of housing types and smaller, more flexible housing projects.
(1) Diversification of the housing industry
The shift to a market-based housing system, and in particular the reorganization of finance and subsidy mechanisms, will facilitate major changes in the structure and performance of the building industry. The problems of the building industry could be summarized as follows: (1) the present supply system is able to produce large amount of floor space but the units produced do not match housing demand by households; (2) builders, skills are adequate but developers, skills are almost entirely missing; (3) supply is driven by production targets not by demand; as a result the composition and location of production is distorted; (4) in most cities, housing production is dominated by one large supplier who sets standards and prices; (5) local monopoly situations limit the quality and quantity of the housing supply; (6) design innovation is stifled; on-going work to develop new types of housing should be effectively supported; (7) land use planning is arbitrary. Land values do not reflect location preferences and site value. Land use standards are wasteful due to the rigidities created by the industrial housing process; (8) the analysis of production costs for managerial purposes is weak or sometimes completely lacking. Economic trade-offs between design alternatives cannot be quantified effectively. As a result, a significant proportion of current housing subsidies go to finance production inefficiencies; and (9) the prices of building materials and other production inputs are distorted and do not provide the right incentives to builders to produce the best housing.
The main factors that will stimulate the development of a diversified and competitive building industry are: (1) the enforcement of open competition among housing developers and the emergence of private developers. This may require not only the elimination of the pervasive and systematic biases against small and medium private developers but their active encouragement; (2) the rapid dismantling of the monopoly supply of building and construction materials, systems of “state orders”, and fixed prices; (3) the phasing out of preferential access to finance and building materials given to large state builders; (4) the comprehensive review of the rules and regulations affecting planning and building with the general objective of removing unnecessary regulations and moving from specific norms describing specific materials to be used to performance standards describing the qualities of the housing to be produced; (5) the total revision of the urban planning system which was designed to fit the needs of large scale industrial housing production and tends to magnify land, transportation and infrastructure requirements; and (6) the reorganization of large industrial housing firms from “closed” systems building large panels or entire housing units into “open” systems building multi-purpose building components, and the coordination of building processes through industrial standards and contractual means rather than bureaucratic means and rigid engineering.
(2) Reform of the urban planning system
One major cause of the high price-income ratio for housing is the costly and time consuming urban planning system which was conceived for large-scale industrial housing and usually works against efficient small and medium size housing producers. To remedy this situation the following steps should be taken:
The systematic review of a large number of urban laws and regulations should be undertaken to eliminate unnecessary or repetitive approval steps often carried out by various levels of government which do not contribute anything to the quality of urban investment. In addition, the role of the master plan in Soviet cities should be reconsidered. The master plan should be the instrument to decide on the location of primary infrastructure and public investment. It should not be the prime regulatory instrument over individual development projects and builders. There should therefore be a rapid revision of the master plan regulations applied to builders. The aim should be the regulation of private sector activities based on property and development rights monitored through an open, public review process.
The review process for private development projects should also be decentralized to the local level with no imposition of choices from higher levels of government. It should be based on ownership rights. This process should be a consensus identification mechanism to solve frequent but legitimate conflicts of interest among various members of the local community. Moreover, to encourage more efficient patterns of urban investment and the rapid emergence of small and medium-size builders, optimum use should be made of existing urban land. This can be achieved by facilitating access to smaller parcels of urban land already served with infrastructure, changes in land-use density regulations, and auction sales of surplus land hoarded by various state organizations. Finally, the system of infrastructure and utility provision and its pricing should be adjusted. Primary infrastructure provision should remain principally the responsibility of the state, but lower levels of infrastructure should often be incorporated in the development projects.
(3) Management of local government assets
A critical issue will be the management of local government assets. To avoid the squandering of real estate assets at a time when local governments are facing severe liquidity problems, there will be a need for local accountability and supervision with three essential components: a local review process, periodic central government audits and the timely publicity of the results of both activities.
6. ORGANIZING FOR MARKET-ORIENTED REFORMS
a. Inter-governmental coordination
The introduction of a market-based housing system will be a lengthy process. The Government has not begun to organize for the coordinated development of market mechanisms for housing. The implications of housing reforms for the reorganization of central and local government institutions are major, and radical change cannot be carried out successfully without an appropriate institutional infrastructure. A vacuum created by the sudden abolition of the old housing mechanisms should be avoided to prevent any collapse which would then spill over into output, employment and social stability. Today, housing is managed as a social service subordinated to other priorities and with fragmented and uncoordinated administration. Nowhere are economic, financial, legal and technical issues related to housing brought together.
b. Issues for technical assistance
A program of technical assistance to facilitate the introduction of market mechanisms in housing should take the following into account: (1) the implications of developing a housing market are not fully understood, even by some reformers; (2) few appreciate the nature and magnitude of the legal, institutional, professional and financial infrastructure that must be developed to support a housing market; (3) the assignment of responsibility and legal ownership of assets between different levels of government is unclear; (4) analytical tools for policy analysis need to be developed, and the information is not available generally to evaluate the costs and benefits of reform for different groups; (5) financial instruments and institutions for the housing sector must be developed within the broader framework of financial sector and banking reforms; (6) the existing vertically integrated industrial building companies must be restructured and the emergence of a diversity of more efficient producers encouraged; (7) institutional and pricing mechanisms for a land market do not exist; and (8) monitoring systems are needed to track the progress and implications of reforms and thereby clarify choices.
In a very large and differentiated country such as the USSR, a flexible and decentralized management structure for the housing system is needed. The form and nature of the technical cooperation that could be arranged will depend on the evolving institutional structure of the sector. Technical assistance for the formulation for a national policy framework, property rights reform and a sound housing finance system might be most effective at the union level or just below it. On the other hand, given the diversity of Soviet cities and the need for some experimentation, technical assistance with respect to production, management and regulatory issues may be more effective on a smaller scale such as a region, or better yet at the city level. Successful results could be extended to other urban areas.
Some of the more important types of technical assistance that might prove useful are:
(a) an analysis of alternative forms of Soviet housing ownership rights and the economic and social benefits of possible reforms that might be undertaken. Because housing units and related infrastructure and social services form a functional whole, this task might include a review and identification of needed reforms of the property rights and responsibilities of local governments and local organizations providing residential urban services. A parallel and concurrent study might look at the economic benefits of similar legal and regulatory reforms for commercial real estate;
(b) advice regarding the restructuring of financing mechanisms for the housing sector, the development of sound adjustable long-term financial instruments for the voluntary transfer of part of the existing state housing stock and new housing to households, and the establishment of genuine financial intermediaries capable of mobilizing household savings for housing;
(c) an evaluation of the costs and benefits generated, as well as management problems posed by the transfer of public housing to households (especially free transfer, as decreed for instance by the Moscow city government in June 1990);
(d) a study of the building industry, its organization, behavior and performance, needed new forms of enterprises, contracting methods and financing, and reforms of the supply system of building materials;
(e) an inventory and evaluation of the laws and regulations affecting the production of housing. This would be a regulatory audit of the rules and incentives affecting the economic performance and output of the housing sector. It would identify the laws and regulations that are either outdated or unnecessary for current Soviet city conditions. Such an audit could build upon analyses of a few selected cities; and
(f) a study of the legal and institutional requirements for the more efficient use of urban land and the development of urban land markets as substitutes for the present ineffective and inefficient methods of administrative allocation.
The term “housing kombinat” is used to designate the vertically integrated state building companies producing industrial housing units in cities.
Flow of funds data according to source and type of investor were not available for this report.
Comparative data on levels of housing investment over time in socialist and market economies can be found in Renaud (1988).
See Matras (1989).
Private housing refers to both urban and rural housing that is used around the year, not to summer dachas or garden houses. It should also be noted that statistics on water connections, hot water, electricity, bathrooms, toilets and district central heating are considered misleading in terms of quality by Soviet housing specialists, because supply interruptions are common. Hot water supply may be cut off for several weeks in entire districts, especially during the summer.
The losses of the present production system have not been measured, but they are probably quite large given the very high percentage of urban housing which is currently produced by industrial housing kombinats.
A “closed” industrial housing system is based on a proprietary and rigid design of fully finished units that requires total vertical integration of production. Such systems may be contrasted with “open” systems producing housing components that can be used by architects to design a variety of units independently of the producer of these components. Another problem with industrial housing is that many of the performance indicators guiding engineers and designers emphasize engineering qualities that have little significance to the users. For a good technical and economic analysis, see Strassmann (1978).
Attempts to geographically concentrate housing demand in rural areas in a way that is compatible with the scale requirements of industrial housing and infrastructure investments may have been a factor in the 1980s scheme to classify rural towns into “towns without a future” and other towns that would continue to benefit from state investments.
The statistics on waiting period can be manipulated, e.g., by dropping earlier applicants from the list and registering them again under a more recent date.
For many statistical purposes, 1 square meter of living space can be converted to 1.46 square meters of useful space.
For a discussion of alternative ways of calculating rents in a socialist housing system and their implications for subsidy burdens, see Wang (1990).
Technically, deadweight loss is the economic criterion which measures how freeing the housing choices of households and reforming wage policies would generate large net gains to the economy. In market economies, this important criterion is used to compare alternative tax policies and identify those that least affect individual motivation and productivity. Hausman and Poterba (1987).
For an overview and further references, see Bradbury and Downs (1981).
See Tolley (1990).
A detailed framework for reform has been developed for other socialist countries; see World Bank (June 1990).
The Federal Republic of Germany, which has a high housing price/income ratio of about 6 and policies that favor renters, had only 42 percent of home owners in 1990. The United States, which has a price/income ratio below 3, has tax policies that favor ownership and a 62 percent ownership ratio in 1988.
In some countries such as Hungary, the extensive use of subsidized credit and the imprudent use of mortgage loans at extremely low fixed rates is currently leading to a very heavy fiscal burden. Such a problem can develop very rapidly. See Sagari and Chiquier (1990).
Particular attention should be given to the dual-rate adjustable mortgage loan (DRAM) in environments where inflation is high and real wages are stagnant or falling.