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Overview
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Papers by Same Organization
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| Problems of developing specialized financial services for housing are acute in socialist economies in transition. Contractual savings for housing (CSH) are often advocated in Central and Eastern European countries as a primary solution. CSH systems were indeed used successfully in Europe for reconstruction after World War II. The issue today is what role CSH can play under very different financial conditions in latecomer countries that want to develop competitive and flexible financial systems capable of successfully integrating with the global financial markets. Problems of developing financial services for housing are acute in transitional socialist economies. Lea and Renaud examine contractual savings for housing (CSH), which are often advocated as a primary solution, especially in Central and Eastern European countries. A CSH instrument links a phase of contractual savings remunerated at below market rate to the promise of a housing loan at a rate also fixed below market at the time the contract is signed. This contract can contain a variety of options. CSH were used very successfully in Europe after World War II. The issue today is not whether such specialized instruments can work. They clearly can under low inflation. The issue is whether CSH systems are advisable today in latecomer countries with vastly different financial technology and financial policy environments. Lea and Renaud focus on two influential CSH systems: the ""closed"" German Bauspar system and the ""open"" French pargnelogement. In a ""closed"" CSH system, access to a housing loan is based on queuing: a loan can be made only if funds are available in the specialist institution. In an ""open"" system, the saver can legally call his or her loan at contract maturity, regardless of the liquidity conditions in the CSH system. From the perspective of households, CSH contracts facilitate the accumulation of equity and offer the prospect of a low interest loan. They promote savings discipline and provide a concrete goal that many households find important. But CSH instruments leave the objective of providing a primary loan unmet. In addition, even moderate inflation quickly leads to very low loan to value ratios for CSH loans and a large financing gap for housing purchases. From the perspective of financial institutions, CSH can help overcome the severe information asymmetries they face in transitional socialist economies, where there are no retail financial markets, no credit bureaus, and problematic income reporting. CSH are very effective in screening, monitoring, and establishing the reputation of steady savers as future borrowers, and they are good at lowering credit risks. With their saving periods of four to five years, CSH also help bridge the gap between long-term loans and short-term deposits. Finally, CSH can be an important commercial tool for developing cross lending activities. But CSH can be risky. When the interest rate on outstanding contracts is low compared with current market rates, holders of mature contracts will want to call their loans. And new savers will be reluctant to sign on at very low contract rates. Eliminating this liquidity risk with a ""closed"" CSH system erodes the attractiveness of CSH. From the perspective of government, a CSH instrument can work in a non inflationary environment, yet a CSH system would have no justification in fully developed and competitive financial markets today. CSH instruments can play a useful but not a dominant role in housing finance. After stabilization, they can provide ""additionality,"" overcome information constraints on financial contracts, and contribute to higher financial savings rates. CSH instruments are best used to finance home improvements. They can also be used as part of a social policy to reach targeted social groups. This paper --- a product of the Financial Sector Development Department is part of a larger effort in the department to develop sustainable housing finance in transition economies. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rozzy Garner, room G8010, telephone 2024737670, fax 2025223198, Internet address rgarner @worldbank.org (57 pages) The full report is available on the World Bank FTP server Provided by Eldis, a GDNet content partner |
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| Reforms of institutional settings and regulatory frameworks |
| By Busse, M.| Groizard, J. L., 2006 |
| Produced by: Policy Research Working Papers, World Bank |
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| Themes: Macroeconomics and Economic Growth |
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