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Potential effects of mortgage and subsidy programs on housing affordability: The cases of Budapest and Moscow

Author: 
Nadezhda B. Kosareva
Content: 

After more than 10 years of transition, the housing sector has been restructured and can now be characterized as one with a significant privatization of the tenure sys tem, cuts in subsidies, total restructuring the construction industry, new players like developers, a new financial sector and a new role for state housing policy as well.

Nevertheless, at the end of the 90s a general lack of housing finance remained. This is a problem, because the lack of the long term loan makes housing unaf fordable for the majority of households; this in turn puts strong pressure on the government for subsidies. Moreover, most subsidies can easily create disincentives for financial institutions to offer loans and for households to take loans at market interest rates.

Without long term housing finance, residential mobility is lower than it could be, which may impede economic restructuring; and households' adjust ment in their housing consumption is more rigid, leaving room for distortions (like increased preferences for cars and other durable goods for which financial con straints are less important). Affordability has become the key term in housing poli cy in both developed and transition countries. In transition countries, the puzzle is that high P/I ratio is accompanied with low level of housing cost/income ratio, which means that most of the transactions are based on cash transfers both inter generation (inheritance) and intrageneration (family help).

There are different explanations for the low level of borrowing, factors both on the bank side and on the consumer side. However, very few analysts have addressed the problem of how different loan products effect affordability. A recent joint HungarianRussianU.S. project tried to explore this problem in comparing the si tuations in two markets, Budapest and Moscow.

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City: 
Moscow, Budapest