Housing credit access model: The case for Lithuania

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Abstract

The research described in this paper aimed at achieving two major goals. First, to identify and describe rational credit access development in advanced industrial economies as well as providing recommendations for Lithuania. The multiple criteria quantitative and conceptual analysis of rational credit access in developed countries and in Lithuania allowed for the identification of areas where the Lithuania situation is comparable, partly comparable or quite different from levels attained by advanced industrial economies. The data of this quantitative and conceptual analysis was used to identify rational credit access development trends in Western Europe and the USA as well as providing some recommendations for Lithuania. The determination and realization of efficient housing credit access in Lithuania would create better conditions for the functioning of the housing system.

Second, the paper contains a description of a suggested method in choosing efficient housing investment instruments and lenders. The quantitative and conceptual databases that are being developed at present, give an exhaustive description of housing investment instruments and allow for their multiple criteria analysis. This helps to determine efficient investment instruments for the countries in question. The databases and multiple criteria analysis offered could also be used in searching for efficient lenders.

The methods suggested in this paper can also be applied to solving similar problems in other countries.

Introduction

When considering the number of flats per 1000 people, Lithuania lags behind other European countries. At present, i.e. 2001, there are 375 apartments per 1000 people in Lithuania and most of these construction facilities were built before 1990 and very often are in need of renovation. On average, only 1.16 new flats per one thousand inhabitants are built in Lithuania each year and this is one of the lowest indices in Europe.

Today, more and more flats are being built using credit that is extended by commercial banks. Recently however, the situation has become somewhat better. In 2001, about LTL 50 million (US $12.5 million) was set aside for statutory housing loans on easy terms. The State provides a 6% deduction on the interest for housing loans during the first half of the repayment period and subsidizes up to 20% of the borrowed amount. If the loan is insured with the enterprise “Building Loan Insurance” a loan can be obtained by making a down payment of 5% on the property’s value. In the case of an uninsured loan, a down payment of 30% of the property’s value must be paid.

Presently in Lithuania, housing credit terms and the terms for the issuance of State guarantees for such loans are more favorable than in most East and Central European countries. Currently, the enterprise “Building Loan Insurance” is the only company in Eastern Europe offering housing loan insurance services. Since the insurance of loans reduces risks associated with housing loans, on the establishment of the enterprise “Building Loan Insurance” as a result, the competition between banks providing housing loans has increased. Consequently, loans are provided at a lower interest than would be available in the case of uninsured housing loans. Housing loans for the sale of flats has increased considerably also due to better credit facilities. Even flats in basements and other less appealing parts of buildings have been sold because loans have increased the demand.

State guarantees are very important for the market and due to the system of these guarantees housing loans have become available to wider groups of people and risks to creditors and investment bankers have decreased somewhat. The loan system has also promoted the growth of businesses and the economy on the whole.

The Japanese PHRD Fund has provided Lithuania with a US $0.5 million guarantee for the preparation of a new housing strategy. On drawing up the Lithuanian housing strategy a request for a loan will be necessary for its implementation. The housing strategy will indicate whether social housing, renovations and/or support for young families and retired persons should to be made top priority or not.

Having already restructured the system of the Immovable Property Cadastre and the Register, a hypothetical infrastructure has been set up in Lithuania. Therefore, commercial banks have started offering more housing mortgage loans because of the restructuring.

The efficiency of the housing policy depends not so much on the support from the State and international organizations as on the private financial sector as well as its initiative and ability to extend credit services. At the present time, housing credit terms and terms for the issuance of State guarantees for such loans in Lithuania are more favorable than in most Eastern European countries. However, judging by the experiences of other countries, various alternative crediting instruments that would assist further development of the Lithuanian housing credit market, could still be proposed. Such alternatives could include loans to residents on easy terms, the establishment of state institutions which would provide respective guarantees to banks, subsidies provided directly to residents and state guarantees that are given to certain groups of loans, etc.

Several alternative ways of the State‘s participation in the housing financing market are being currently discussed in Lithuania. Examples of this are, the average person’s income tax concession to receiving a housing loan, subsidies to saving programs, full compensation of a loan’s insurance premiums, compensation of interest paid on loans taken by homeowners and various associations related to this aspect, etc.

Due to the ever-changing micro- and macro-levels of the environmental conditions, the efficiency of alternatives under consideration will vary. Therefore, in the future new crediting instruments that are better adapted to the new micro- and macro-levels of the environmental conditions might be necessary. Each of these alternatives has both advantages and disadvantages. The implementation of some of these crediting instruments would cause serious problems due to the absence of the necessary legal basis or a population at the lower level income bracket and other factors.

The level of maintenance of the existing housing, especially apartment buildings, as well as their renovation is also a cause for concern. The Government continues to implement its project for Housing Renovation and Energy Saving in Housing, which started in 1996 by using a World Bank loan. Presently negotiations with the World Bank for a new loan will be carried out.

The objective of this paper is to identify and describe rational credit access development in advanced industrial economies as well as provide recommendations for Lithuania. The paper contains a description of a suggested method in choosing efficient housing investment instruments and lenders.

The paper is structured as follows. Following this introduction, Section 2 outlines housing finance systems in advanced economies. In Section 3 we describe the main stages of forming a Lithuanian housing credit access development model. The development of a rational conceptual Lithuanian model for housing credit access is introduced in Section 4. The determination of rational housing investment instruments and lenders is presented in Section 5. In Section 6 we describe a case study and present the proposed multiple criteria analysis method. Finally, some concluding remarks are provided in Section 7.

Section snippets

Housing finance systems used in advanced economies

The housing finance systems differ greatly from country to country. As Renaud [12] stated, there are profound differences among the 180 developed and developing countries that are now members of the World Bank. The advanced housing finance systems can be found in OECD countries. Renaud [12] shows that, these systems grew out of two main traditions: Anglo-Saxon systems where the building societies of the UK and the savings and loans from the US are mutual forms of housing finance. There is also

Main stages of forming Lithuanian housing credit access development model

This research’s aim was to produce a model, consisting of conceptual and quantitative parts for rational housing credit access in Lithuania by undertaking a complex analysis of credit institutions and instruments affecting the institutions. Also recommendations on the increase of its efficiency have been made. The research was performed by studying the expertise of advanced industrial economies and by adapting it to Lithuania. A simulation was undertaken to provide insight into the creating of

The development of a rational conceptual Lithuanian model for housing credit access

The development of a rational conceptual model of housing credit access for Lithuania was done by means of an analysis of experiences and knowledge of advanced industrial economies and by their adaptation to Lithuania. To illustrate the conceptual model’s part, a sample problem solution based on this approach is given in Table 1.

Different versions of advanced industrial economies practical experiences and policies in the field of housing credit access were analyzed. A determination of credit

Determining rational housing investment instruments and lenders

Medium and long-term credits are used for housing investment and certain factors and interested parties have an impact on the efficiency of alternatives of housing investment instruments.

Sample application

To illustrate the efficiency of the model suggested, a sample problem and solution is given below. Firstly, a study case will be described and the problem formulated.

A family of three persons would like to obtain a mortgage loan for purchasing a two-room apartment. An approximate value of the housing to be bought is 96,000–104,000 Litas. The amount of the loan is 80,000 Litas. Then net family income per month is 3200 Litas. The maturity of the loan is 10 years (1 US dollar = 4 Litas 2001).

Conclusions

The improvement of housing conditions in Lithuania requires access to credit. Barriers to rational credit access for low incomes are among the most important obstacles faced by Lithuanian households in seeking affordable dwelling today. Efforts to expand access to rational housing credit have led to reforms in lending practices of advanced industrial economies and to the creation of alternative credit institutions and instruments.

This research is based on the analysis of the expertise of

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