Impacts of Rent Deregulation Process on Household Behavior: Lessons from the Czech and Slovak Republics

Impacts of Rent Deregulation Process on Household Behavior: Lessons from the Czech and Slovak Republics Jiří Špalek * Dagmar Špalková Abstract. Rent control can be treated as a measure which aims to subsidize specific group of households tenants. The subsidy takes form of reduced rent which is financed both by the private owners and municipalities (i.e. public budgets). Besides the reduction of such subsidy, de-regulation process aims to improve effectiveness of housing market. This might increase overall mobility of households with subsequent potential positive impacts on diverse economic indicators. Our analysis deals with one potential impact of rent deregulation process changes in tenure choice patterns.existing literature defines several typical factors which influence this key decision every household has to make. The paper examines the potential factors using an econometric model drawing on sample data (the panel data based on investigation of EU- SILC) in the Czech Republic and Slovakia. In our analysis we propose one more factor which might be of interest. Based on the Czech data covering the period of the rent deregulation process in 2007-2011 we assess to what extent rent deregulation itself has influenced the tenure choice patterns. Our analysis using probit model did prove that regulated rents were an important factor affecting tenure choice in the Czech Republic. After deregulation households living in apartments with regulated rent preferred to buy house rather than stay in rental sector. Keywords: housing, tenure, rent, deregulation, regression. JEL Classification: D12, P36, R21. 1 Introduction Rent control can be treated as a measure which aims to subsidize specific group of households tenants. The subsidy takes form of reduced rent which is financed both by the private owners and municipalities (i.e. public budgets). Besides the reduction of such subsidy, de-regulation process aims to improve effectiveness of housing market. This might increase overall mobility of households with subsequent potential positive impacts on diverse economic indicators. Our analysis deals with one potential impact of rent deregulation process changes in tenure choice patterns The decision to buy a house or to rent a flat belongs to key decisions made by any household. Tenure choice how is this decision usually referred could be affected by lots of factors (see e.g. Boehm 1981, 1982, Burgess 1982, Henderson, Ioannides 1983, Krumm 1984, Coolen 2002, Andersen 2009). Discussion on the different approaches in details is introduced in Špalková, Špalek (2014a). Research in housing economics is oriented on application of these factors on selected issues of public policy. Our analysis introduces one of such application in CEE context. We profit from the rent deregulation process which took part in both parts of former Czechoslovakia. The aim of the paper is to evaluate possible influence of the rent regulation on tenure choice. We hypothesize that the existence of regulated rents might shift tenure choice patterns compared to those in western countries (see e.g. Bazyl, 2009, Špalková, Špalek, 2014 for summary). The issue of tenure choice has been studied in the Czech context as well. Several factors have been touched - Lux and Sunega (2012) assessed the influence of the tenure on mobility, Tsharakyan and Zemčík (2011) studied impact of rent deregulation on households renting behavior or their ownership status, Špalková, Špalek (2014b) assessed the influence of rent deregulation process on tenure choice itself. The analysis presented in the paper uses the methodology from the latter one. Based on the results of the econometric model, we have defined the factors that affect tenure choice of Czech and Slovak households over the period 2006-2011. Using the acquired factors we have further quantified their impact on the sample of Czech households in the rental sector. The data from Slovak survey do not allow replicating the analysis also for Slovakia. The aim is to assess, whether and to what extent has rent deregulation influenced the tenure choice patterns. * doc. Mgr. Jiří Špalek, Ph.D.; Masaryk University, Faculty of Economics and Administration, Brno, Czech Republic; spalek@econ.muni.cz Ing. Dagmar Špalková, Ph.D.; Masaryk University, Faculty of Economics and Administration, Brno, Czech Republic; dasa@econ.muni.cz 256

2 Material and Methods The research presented in the paper takes form of quantitative analysis of sampled data. As the tenure choice can be characterized by dichotomous variable, we employ a probit regression (e.g. Wooldridge, 2006). The model enables to calculate the conditional probability of the choice of a particular type of housing depending on a given factor, provided that the values of other factors are constant. Details of the probit model used in our analysis (explanatory variables, coefficients) can be found in Špalková, Špalek (2014a and 2014b).. The analyses included in this paper are based on the data pertaining to Czech and Slovak households collected by the Czech and Slovak Statistical Offices. The data were collected under sample surveys of income and living conditions of households between 2007 and 2011 (called hereinafter the "EU-SILC"). The data set contains information on the social structure of households, their incomes and expenditures. The dates relate to the date of the investigation, i.e. the defined date in the spring of that year, only incomes are listed for the previous year. The sample selected is considered to be a minimally distorted representative sample of Czech and Slovak households (e.g., a total 8,866 Czech households and 5,801 Slovak ones were examined in EU-SILC 2011). To make this subsample of households applicable for the entire country, a new PKOEFF coefficient showing the weight of each household examined was constructed. Households in both countries preferred homeownership to rented housing and keep increasing over time. The ownership percentage grew from 73.5 % in 2005 to 80.4 % in 2012 in the Czech Republic. Similar trend we can observe in Slovakia, where the percentage grew from 82.1 % (2005) to 90.4 %(2012). In the Czech Republic there used to be approximately 80 per cent of rented flats with reduced rent. The low level of rent, however, was not derived from the characteristics of the tenants (e.g. low income levels), but it was derived from the type of the flat (flats where the former owner used to be state). Such unbalanced situation where tenants were favored on the account of owners used to be processed by the gradual increase of the rent. The difference between the regulated rent and the market one was such large made that the process of successive harmonization was very slow. Long tradition of rent control in the Czech Republic together with the reluctance of politicians against the risky topic ended into the more than 15 year process of the abolishment of the rent control. The process was characterized by ongoing discussions and conflicts of the various interest groups and other actors. Only a few years ago under the deregulation act (Act No. 107/2006 Coll.), a unilateral increase in rent for housing (hereinafter referred to as "deregulation Act"), a process of deregulating apartment rents was begun (in January of 2007), intended to lead to a convergence of regulated and market rents. The beginning of the deregulation process was also tied to the introduction (redefinition) of social benefits intended to ameliorate its impact on households. By 2013, rent controls were therefore to be completely eliminated, with rent prices exclusively determined by the market (Jahoda, Špalková, 2009). In Slovakia the problem of rent control pertained only to small fraction of flats (compared to the Czech Republic) with the rent control applied only in less than 6 per cent of overall housing stock. Unlike in the Czech Republic, until 2000 there has not been any correction (i.e. increase) of the rent level, even covering the indexing due to inflation. Since the year 2000 the regulated rent has been gradually increased. Similar to the Czech reality the process was very slow and incapable to harmonize the controlled and market rent. The final process of abolishing the rent control was initiated later compared to the Czech Republic (in 2011 by the Act. No.260/2011 Coll.). The process is to finish in 2015. The de-regulation process in Slovakia was accompanied by the adoption of the housing conception document which arranged the relationship among renters and owners on the housing market. In the Czech Republic the rent control applied to approximately 750 thousand of flats (Jahoda, Špalková. 2009), while in Slovakia it was not more than 900 flats (with more than 80 per cent flats located in the capital city of Bratislava MTCRD, 2008). 3 Result and Discussion We divided our analysis into two steps. First, the factors affecting tenure choice of the complete sample of Czech and Slovak households are derived on the tenure choice model. Second, the effects of the rent deregulation onto the tenure choice are tested via subsample of households living in the rental sector. We presume that these types of households are those which might have been influenced by the deregulation process most. The process might force the households to move their house and to doubt the changing of the tenure. In line with the analysis carried out to date, we focused on the examination of the impact of the demographic and socioeconomic characteristics of the households on tenure choice. To some extent, the range of potential factors is determined by the used data source. Potential factors mostly comprise characteristics monitored within SILC survey (i.e. our source of data), or variables that can be derived from monitored characteristics. Therefore we have concentrated on the household heads their age, gender and marital status and also on the household from the perspective of its economic status, disposable income or number and age of children. 257

4 Housing Tenure Choice Complete Czech households sample First our attention is paid to the complete sample of Czech households in our data set. As noted above, this sample comprises 8,866 Czech households. In order to distinguish a real impact of investigated factors on tenure choice it is necessary to use the econometric model, based on the probit estimation. Results of the regression analysis examining tenure choice determinants are summarized in Table 1. Marginal effects k are computed not only for the year 2011 but they also cover a seven-year time span (2007-2011). This enables to assess trends of development of these effects. Table 1.Probit Estimation Results for Housing Tenure Choice in the CR and Slovakia (1=owner) Factor (xk) Constant 258 Czech Republic Marginal effect ( k) ** Slovakia 2007 2009 2011 2007 2009 2011 4.928 6.287 6.114 2.345 1.904 2.424 Household size (number of persons) 0.148 0.189 0.149 0.150 0.122 0.089 Number of economically active persons 0.012 0.000 0.004-0.090-0.027-0.083 Number of self employed 0.179 0.118 0.049 0.107 0.101 0.085 Age of household head 0.017 0.019 0.016 0.017 0.025 0.027 Household head - male -0.063 0.026 0.014 0.111-0.140-0.040 Education (1=both primary school. 0-higher) -0.223-0.342-0.315-0.107-0.299-0.244 Marital status of household head - single * 0.100 0.223 0.233 0.119 0.129 0.206 - married * 0.435 0.459 0.479 0.061 0.482 0.492 - divorced * -0.081 0.019 0.118-0.205 0.041 0.128 Household with children * 0.094 0.044 0.199-0.133 0.021 0.041 Fully unemployed household -0.142-0.086-0.017-0.094-0.136-0.082 Fully retired household -0.263-0.168-0.004-0.067 0.042-0.124 Household resides in Prague/Bratislava region * -0.635-0.500-0.627 0.293 0.138 0.258 Number of rooms per person 0.716 0.647 0.582 0.412 0.489 0.505 Household income (disposable) 0.271 0.355 0.368 0.202 0.121 0.202 Notes: * dichotomous variables take values 1 (Yes) / 0 (No) **All values are statistical significant at 99% level (t-statistics are upon request by authors) excluded the coefficient market n Source: Authors. As expected, one of the most significant factors affecting the choice of type of housing in 2011 (as in other years) was the marital status of the household head. If the household head was married (β 2011 =0.479), the odds of choosing homeownership increased. The analogous assumption, i.e. that single or divorced persons would more likely prefer rented housing, was not confirmed. On the contrary, the singles were more likely to choose homeownership even if the strength of this factor was far weaker. The next strongest factor was the net disposable income of households (β 2011 =0.368). Higher-income households tend to prefer homeownership to renting. The importance of this factor was growing over the covered period. Among other strong (and statistically significant) factors, affecting tenure choice in 2011, was education of household members (β 2011 =-0.315) and residence in Prague (β 2011 =-0.627). Our findings showed that households with lowest level of education (both primary education maximally) and Prague households were more likely to choose rented housing. The latter can be linked with a high proportion of rented flats as compared with privately owned flats (or houses) in the capital city and so renting is a much faster and simpler way to acquire a new home there. Prague is also a university city, where many students and mainly graduates obviously prefer renting. Others factors affecting tenure choice can be found. Own flat (or house) is characterized by higher number of rooms (β 2011 =0.582). Rented housing was chosen with high probability by the households with a lower number of persons (β 2011 =0.149). So the results corroborate the assumption that homeownership is affordable only for higherincome households, which usually corresponds to higher education. This housing type is preferred by families (not individuals), i.e. a higher number of persons per household, and also by households, whose members work, since it is necessary to make regular mortgage payments (i.e. the past significance of the number of economically active

persons grew much weaker in 2011). For the first time children within a household became significant towards choosing homeownership in 2010-2011. The influence of other factors, i.e. the number of self-employed, age or gender of the household head was not established. Table 2 also indicates the development trends of the individual factors in tenure choice over the period 2006-2011. By contrast, a sharp decline in the significance of self-employed persons per household as a determining factor for tenure choice was observed throughout the period. While in 2006 a higher number of the self-employed per household markedly increased the odds of homeownership choice, ( 2006 =0.178), by 2011 this factor nearly lost its significance ( 2011 =0,049). An impact of the number of economically active persons, single or divorced persons or fully unemployed persons is rather variable and hence uncertain over the long term. Throughout this period the following factors had a decisive effect on tenure choice: income of the household; education of its members; whether the head of the household was married or not. If the head of the household was married, the members of the household had a higher than basic education and a higher income, it implies the choice of homeownership. Our results in this respect correspond to the results of similar foreign studies. Ulker (2008) in his article showed that there was a highly significant influence of socio-economic characteristics, such as income and education on the tenure choice of households in the USA. Both Ulker and Bazyl (2009) confirmed a decisive impact of marriage on tenure choice of households throughout all monitored European countries The question is which above mentioned changes in the time span of our analysis can be linked to the rentderegulation process. We hypothesize that three major changes could be mentioned. First, households of pensioners with the end of the process move their house out of the rental sector. Second, the households with children start to prefer ownership much intensively. And third, household income plays more significant role for choosing owner sector. 5 Housing Tenure Choice Complete Slovak households sample Secondary our attention is paid to the complete sample of Slovak households in our data set. As noted above, this sample comprises 5,801 Slovak households. The most important factor that influences the tenure choice decision for Slovak households is number of rooms per person (β 2011 =0.505).This means that ownership is more typical for the households which prefer flats with more rooms. As expected, the other significant factors of choosing homeownership were: marital status of the household head marriage (β 2011 =0.492) and the net disposable income (β 2011 =0.202). While the influence of the income is somewhat weaker compared to the Czech Republic, the marriage of the household head is slightly stronger. In contrast to Czech Republic for owning is determining household resides in capital (Bratislava) or in this region (β 2011 =0.258). Again, if the household members have lower education (β 2011 =-0.244), there is high probability that the household will move to the rental sector. Besides these key factors other factor that influence the behavior of Slovak household can be found fully retired household. The factor of choosing rental is used to be a household with retired members (β 2011 =-0,-124). Further is interesting the development of the influence of the rate of economic activity in the household. Alike as in the Czech Republic the factor is of low importance. But while the Czech households with higher economic activity are more likely to choose ownership of the house or apartment, the Slovak households preferred rental housing. The influence of other factors, i.e. age and gender of the household head, household with children or fully unemployed household was not established. The influence of rent deregulation process is not visible in the Slovakia during the analyzed period. This might be due to different timing of the process (start in 2011with end in 2015). On the other hand, the data cover period after 2000, when the rent was gradually increased. 6 Influence of rent control on the housing tenure choice subsample of Czech renters One of the principal aims of our analysis is to assess potential influence exerted by rent deregulation (and its phasing out in the CR) on the spectrum of factors influencing tenure choice. Therefore our attention is focused on the households in rented housing only (whether with market or controlled rents). We thus explored behavior of almost a fifth of population (19.4 %) in 2011. We chose only the households really affected by the deregulation process and could face the decision whether to remain in deregulated rented housing or to leave for the ownership sector. In order to simulate hypothetical decision-making on (not) moving a house, we deduced their household tenure choice from their housing type in the following year. The results of regression analysis exploring the tenure choice determinants are summarized in Table 2. Borderline effects of individual factors k are calculated not only for the base year 2010 (and related housing type in 2011) but also include the entire period of the last deregulation stage in the CR, i.e. from 2007 to 2011. In such a manner we can evaluate potential development trends in this field. 259

Factor (xk) Table 2.Probit Estimation Results for Housing Tenure Choice for Renters Marginal effect ( k) ** 2007/08 2008/09 2009/10 2010/11 Constant 4.413 2.872-0.523-1.394 Household size (number of persons) 0.151-0.079-0.060-0.028 Number of economically active persons 0.008-0.037 0.239 0.344 Number of self-employed -0.326-0.125-0.313 0.063 Age of household head 0.000 n 0.014 0.007 0.001 Gender of household head (0=F;1=M) -0.145-0.037-0.005 n -0.033 Education in the household (1=both primary school. 0-higher) -0.096-0.524-0.146-0.024 Household head is single* 0.220 0.408-0.107-0.141 Household head is married* 0.154 0.169-0.056-0.117 Household head is divorced* 0.083 0.186-0.089-0.195 Household with children* -0.225 0.027 0.272 0.153 Children under two years* -0.254 0.230-0.005 n 0.125 Fully unemployed household -0.361-0.045-0.326 0.391 At least one retiree 0.070-0.226 0.124 0.590 Household head works in public sector* -0.589 0.358-0.019 n 0.183 Household resides in Prague* -0.083-0.709-1.460-1.383 Total floor area per person 0.007 0.001 0.004 0.000 n Household income (disposable) 0.155 0.076-0.161-0.232 Regulated rent 0.219 0.268 0.068 0.090 Notes: *dichotomous variables take values 1 (Yes) / 0 (No) **All values are statistical significant at 99% level (t-statistics are upon request by authors) excluded the coefficient market n Source: Authors. Compared with the results shown above (3.1), the established factors and their impacts differ considerably. The influence of household income is also observed but in contrast with previous results it is mixed. While in early stages of deregulation the influence was fairly standard and higher-income households were more probable to prefer owning to renting, after deregulation the trend was completely reversed. After the year 2010/11 a decreasing income had a tendency towards increasing homeownership probability (β 2010/11=-0.232). On the other hand, Prague residents increasingly tended to choose rented housing. Undoubtedly, it was strongly affected by the fact that the sample of rented apartments continuously diminished and households in Prague, where the rental sector is traditionally most strongly represented, played more and more important role. The deregulation process also changed the behavior of households with children, which more often bought their own housing, particularly towards the end of deregulation (in 2007 it was exactly the opposite). A gradual drop in the households living in rent-controlled apartments during that period resulted in gradual weakening of the deregulation factor (variable regulated rent) and its influence on tenure choice. Its direction, however, remained the same throughout the entire period households living in rent-controlled apartments were more likely to choose home ownership rather than renting. Household head status as well as their education played a very uncertain role in our sample of households in rented housing. The results failed to confirm the formerly established trend which married household heads with higher education chose to own their housing. 7 Conclusions Rent deregulation process brings about variety of socio-economic consequences. One of the key question is whether (and if so then how) this process changes housing market and housing structure in the country. One of the aspects of interest is tenure choice. The Czech and Slovak Republics, due to the same history and economic policy in the past, represent unique example where the possible influence of the rent (de)regulation on tenure choice can be studied. By comparing the tenure choice patterns in both countries in the period when the rent deregulation process took part (2007-2012), we can hypothesize about the factors being affected by the process. 260

The results presented in our paper show that both Czech and Slovak housing market prove to be influenced by several factors which are the same as in the western countries. Marriage together with high income of the household head point to owner occupied sector. On the other hand, lower level of education is more likely connected with rental sector. One of the strongest factors that increase the probability of being renter is in Czech Republic the residence in Prague. In Slovakia, on the other hand, the residence in capital city (Bratislava) is more likely connected with ownership. The reason might be by far larger proportion of regulated rents in Prague compared to Bratislava. Rent deregulation process as pictured by the subsequent analysis of renters in the CR changes the patterns economically active persons or households with children prefer home ownership in 2011 (the end of the rent deregulation) compared to first year of the liberalization process (2007) when they preferred rent. Acknowledgements The preparation of this paper was supported by the project: MUNI/A/1232/2014: Alokační efektivnost a redistribuční spravedlnost veřejného sektoru. (Efektivnost a spravedlnost VES) References [1] Andersen, H. S. (2009) Explanation for preferences in Denmark for surroundings and location of the home. Paper for ENHR conference, Prague. [2] Bazyl, M. (2009) Factors influencing tenure choice in European countries. Warsaw School of Economics, Working paper No. 1-09. [3] Boehm, T. P. (1981) Tenure Choice and Expected Mobility: A Synthesis, Journal of Urban Economics, 10 (3): 375-389. [4] Boehm, T. P. (1982) A Hierarchical Model of Housing Choice, Urban Studies, 19 (1): 17-31. [5] Burgess, S. L. (1982) Determinants of Homeownership: A Comparison of Single Female and Single Male Headed Households, Housing and Society, 9 (2): 87-94. [6] Coolen, H. - Boelhouwer, P. - Van Driel, K. (2002) Values and goals as determinants of intended tenure choice, Journal of Housing and the Built Environment, 17: 215-236. [7] Eurostat (2014) Distribution of population by tenure status, type of household and income group. [on-line] http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_lvhoo2&lang=en [8] Henderson, J. V. - Ioannides, Y. M. (1983) A Model of Housing Tenure Choice, The American Economic Review, 73 (1): 98-113. [9] Jahoda, R. - Špalková, D. (2009) Analyzing the Distribution Aspects of Rent Regulation/Deregulation in the Czech Republic, Urbanismus a územní rozvoj, 12 (4): 28-37. [10] Krumm, R. J. (1984) Household Tenure Choice and Migration, Journal of Urban Economics, 16 (3): 259-271. [11] Lux, M. - Sunega, P. (2012) Labour Mobility and Housing: The Impact of Housing Tenure and Housing Affordability on Labour Migration in the Czech Republic, Urban Studies. 49 (3): 599-614. [12] MTCRD (2008) Ministry of Transport, Construction and Regional Development of the Slovak Republic, Informácia o údajoch zistených z prihlasovania nájomcov bytov v bytových domoch súkromných vlastníkov [13] Špalková, D. Špalek, J. (2014a) Housing Tenure Choice and Housing Expenditures in the Czech Republic, Review of European Studies, 6 (1): 23-33. [14] Špalková, D. Špalek, J. (2014b) Does Rent Deregulation Influence Housing Tenure Choice? The Case of the Czech Republic. Journal of Economics, 67 (7): 692-708. [15] Tsharakyan, A. - Zemčík, P. (2011) Rent Deregulation, Tenure Choice, and Real Estate Price Expectations, CERGE-EI Working Papers wp430, The Center for Economic Research and Graduate Education - Economic Institute, Prague. [16] Ulker, A. (2008) Household Composition and Housing Expenditures in Rental-Occupied and Owner- Occupied Markets, Family and Consumer Sciences Research Journal, 36 (3): 189-207. [17] Wooldridge, J. M. (2006) Introductory econometrics: a modern approach. 3rd ed. Mason: Thomson/South- Western. p. 890. 261