Thoughts on Supporting Housing Construction

I have written a great deal in the past about how state support for mortgage lending has no positive economic effect at the national level when viewed from a macro perspective. I will not go into that theory now. Instead, I would like to write about how, in my view, the housing construction industry can be supported and the necessary goal of providing the population with housing can be achieved.

Housing construction should always rest on rising prosperity among our citizens and follow the overall growth of the economy. It should never be a driver of economic growth, because this industry has no multiplier effect at the national level.

Nevertheless, there are specific cases in which housing can have a multiplier effect on the economy. In my opinion, these undoubtedly include the development of agglomerations and large cities. Urban agglomerations reduce transaction costs for business overall, primarily because of transport and logistics. Let me give a small example. If a large company produces dairy products, the transport component of the price will be much higher in small settlements than in a big city. The same applies to the cost of maintaining infrastructure, schools, hospitals and so on. Another aspect is the creation of a competitive labor market. In large cities, competition in the labor market lowers its cost and raises its quality. Therefore, in order to reduce transaction costs for business as a whole, government policy should be aimed at creating the conditions for the growth of urban agglomerations.

But to achieve this, I believe, the state should create conditions rather than provide direct financing for development. First of all, that means building infrastructure: utilities, combined heat and power plants, metros, roads, kindergartens, schools, hospitals, parks, public spaces and so on. Second, public transport needs to be developed. Third, bureaucratic barriers to construction, business creation and the like need to be reduced. When the right environment is created, supply in the market grows.

Mortgage lending is, of course, one of the mechanisms needed to develop the construction industry, since it is meant to stimulate demand. However, mortgages must be strictly market-based.

In this respect, the market has two main problems:

• The cost of the funds that banks raise for mortgages.

• The lack of long-term funds for mortgages.

The cost of funds depends first of all on inflation, and only a general decline in inflation will reduce funding costs. Second, there is the cost of risk, which requires reducing the cost of recovering problem debt. Third, there is no price for long-term money, because there is no long-term money.

The lack of long-term money stems from the complete underdevelopment of the stock market. The stock market makes it possible to turn short-term money into long-term money. And the stock market is underdeveloped, first of all, because of the absence of institutional investors.

Therefore, if we want cheap mortgages, we need to:

• fight inflation (and not only the National Bank);

• reduce the cost of risk by lowering the cost of debt recovery (in our country this indicator is only rising);

• create a landscape in which institutional investors can emerge (so far the landscape is certainly not improving);

• develop the stock market.

Unless we address the root problems, the various state mortgage programs will have only a short-term effect, creating imbalances and price growth down the line. It is understandable that people want results here and now, but for sustainable growth and prosperity we will have to deal with the root problems sooner or later.