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Abstract
The article aims to analyse housing finance efficiency in the Czech Republic, especially so called ‘intermediation efficiency’. ‘Intermediation efficiency’ applies to a set of institutional factors, risks (such as interest rate, credit and liquidity risks), government subsidies and legislative conditions that affect the cost of intermediating housing loans.
The methodology of the research combined quantitative and qualitative surveys among mortgage lenders and housing-savings banks in the Czech Republic with an analysis of secondary data. The purpose of the research was to get an idea about how efficient the market-based housing finance in the Czech Republic is and to point out its potential weaknesses and shortcomings. Despite several shortcomings described in this article, the ‘intermediation efficiency’ of financial institutions providing housing loans in the Czech Republic could be considered relatively high.
Acknowledgments
The work on this article was supported by the Grant Agency of the Czech Republic, grant no. 403/06/0915.
Notes
a Calculated using the average exchange rate for 2000 published by Czech National Bank (1 EUR = 35.610 CZK).
*in the case of Czech Republic expenditure on individual household consumption at current prices.
Notes
1. If state subsidies are set too high, the scheme could even become very high financial burden for state budget – it could serve under such circumstances rather as attractive saving instrument than a tool for collecting funds used for granting housing loans.
2. Another reason for such delay could also be the different attitudes of potential borrowers: people resisted long-term liabilities (like mortgage loans) as they were afraid of the unstable economic situation and, possibly more importantly, they were not accustomed to this kind of housing acquisition (during the former regime it was mainly the state who was responsible for housing provision and who often allocated flats with low rents and strong ‘quasi-homeownership’ tenure protection free-of-charge).
3. Such information is crucial, mainly for the transition countries that became ‘super-homeownership’ states due to the massive privatisation of public housing. There the state of the housing finance system influences the financial affordability of housing for the majority of new households and has a direct impact on labour mobility. However, the importance of this kind of efficiency assessment has also been stressed in transition countries where privatization of public housing has been slower and partial – for example in the Czech Republic by the Czech National Bank (CitationPašaličová & Stiller, 2004).
4. Calculated using the average exchange rate for the period from January to September 2006 published by Czech National Bank (Central bank) (1 EUR = 28.441 CZK).
5. The ‘tilt’ problem refers to the situation of high nominal interest rates in an inflationary environment: annuity repayments are high in nominal values and thus create the mortgage loan affordability barrier during the first years of loan repayment.
6. The interest subsidy amounted to four percentage points during the years when the average interest rate from newly granted mortgage loans was higher than 10 per cent, to three percentage points during periods when the average mortgage interest rate was equal to or higher than 9 per cent and lower than 10 per cent, to two percentage points during periods when the average mortgage interest rate was equal to or higher than 8 per cent and lower than 9 per cent and to one percentage point during periods when the average mortgage interest rate was equal to or higher than 7 per cent and lower than 8 per cent.
7. The weights were the banks' shares in the total amount of residential loans granted to citizens up to 31 December 2004.
8. We used the average costs of funds because the majority of mortgage loan providers in the Czech Republic use funds from deposits and mortgage bond issuance to finance mortgage loans. We used two methods of calculation of the spread between the costs of funds used by banks for financing mortgage loans and the average cost of mortgage loans (i.e. average interest rate). In the first case the cost of deposits were approximated by 5 years interest swap. In the second case we used as an approximation of (alternative) costs of deposits the average yield to maturity of 5 year government bonds.
9. Calculated using the average exchange rate for 2004 published by Czech National Bank (1 EUR = 31.904 CZK).
10. Calculated using the average exchange rate for the first quarter of 2005 published by Czech National Bank (1 EUR = 30.014 CZK).
11. We used two methods of calculation of the spread between the price of funds used by banks for financing mortgage loans and the average cost of mortgage loans (i.e. average interest rate). In the first case were cost of deposits approximated by 5 years interest swap - IRS (the spread was 1.07 percentage points in this case). In the second case we used as an approximation of (alternative) costs of deposits average yield to maturity of 5 year government bonds (the spread was 1.35 percentage points in this case).
12. The weights were the banks' shares in the total amount of residential loans granted to citizens up to 31 December 2004.
13. The weights were banks' shares in the total amount of residential mortgage loans provided to citizens up to 31 December 2004.
14. Herfindahl index (or Herfindahl – Hirschman Index, HHI) is defined as the sum of the squares of the market shares of each individual bank.
15. The main aspects of the reform were the reduction in state premium (see above for more details) and the extension of the saving period from 5 to 6 years.
16. The weights were the banks' shares in the total amount of outstanding residential loans granted up to 31 December 2004.
17. To make a proper comparison of gross margins between housing-savings banks and mortgage lenders we certainly should take into account the options. However, in 2006, only one mortgage lender offered a loan with the possibility to prepay anytime without a penalty. The gross spread on loans from this lender ranges between 1.13 and 1.44 percentage points (the value depends on the ways of approximation of deposit costs used in calculation – see above). It seems that the housing savings scheme is less efficient than mortgage lending. However this ‘conclusion’ should be interpreted very cautiously (because is based on insufficient data) and should be verified by future research.
18. The five largest building savings banks in the Czech Republic (measured from the total volume of deposits up to 31 December 2004) control 96.3 per cent of the market. The value of the Herfindahl index on 31 December 2004 was 2,251.