Sector risk, regulation and policy issues in Central and Eastern European transition countries, with a special focus on Romania, Serbia, Croatia, Hungary, Poland and Turkey

After some inertia during the early 1990s, transition countries swiftly built up market-based housing finance systems until ca. 2010. Developing housing finance had been an important public policy goal in order to revive construction activity, which had collapsed in the 1990s from their high pre-transition levels. Despite the significant stock built in socialist times, additional construction was needed to catch up with housing consumption levels in Western economies, to replace obsolete stock, to upgrade and modernize the remaining stock and to respond to migration into new job centres. Yet, only in the isolated case, rental housing construction was revived, in small volumes, e.g. in Poland in 1994 with the ‘TBS’ rent-to-own schemes. Without such a corporate/ communal lending portfolio, housing finance in the region developed almost exclusively as ‘retail’ lending to households essentially by private and frequently foreign banks. A secondary goal of its introduction exacerbating its retail character was to liquefy capital locked in the existing housing stock. Much of the publicly owned apartment sector had been privatized around 1990 to tenants for free and lending against this collateral was implicitly, and at times even explicitly, seen as an income substitute.6 After more than a decade of boom and first signs of market crisis, CEE countries should comprehensively reassess their mortgage finance systems. The regulatory and policy discussion should be sequenced: first primary, then – on the basis of sustainable asset cash flows - secondary market development. This paper discusses what should be done to improve the housing market. Among the covered topics are primary and secondary market regulations, solutions to the FX loans problems, fiscal support and the shortage of rental housing. Policymakers both in the region and their supporter at the EU and international level should understand that a sufficiently diversified and healthy housing sector is a central pillar for both financial sector stability and economic prosperity.