East European Regional   

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Housing Sector Assistance Project   

can be utilized in a demand equation and used as a method to estimate the  speed of

adjustment  parameter.

In any case, estimations of both the desired stock and the rate of adjustment of

actual to desired stock (whether inferred from Polish time series data or from international

comparisons) are likely to be highly revealing in two ways: (1) understanding the

differences in potential and effective demand and (2) understanding the degree to which

various barriers impede the process of adjustment toward equilibrium (desired) levels of

housing stock.  Indeed, one could in principle let the adjustment rate be modeled as policy

dependent, whereby, for example, it depended on availability of mortgage credit, mortgage

terms and conditions, and so forth.

In summary, the traditional models are basically  naive  with regard to the

conditions prevailing in transition economies.  They are useful as descriptive devices.

However, more useful and realistic models would take account of particular institutional

and historical features of the transition economies to model explicitly the key barriers to

translating potential into effective demand.

Demand for Mortgage Credit

In some traditional (naive) models of the demand for mortgage credit, demand is

directly linked to demand for housing, assuming, for example, freedom with regard to

determining the loan to value ratio.

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  In this  naive  model, it is assumed implicitly that

mortgages are granted as they are demanded, in effect assuming that there are no

independent determinants of mortgage demand and supply.

Alternatively, based on similar arguments as for the demand for housing, more

realistic models would take account explicitly of supply constraints and borrowing

restrictions.  As an important example, would be borrowers are subject to two restrictions

on ability to borrow one based on housing payments relative to income, the other based

on down payment requirements relative to assets.  The latter issue was noted above as

part of the so called liquidity constraint.  As also noted in section 3.0, Poland may wish to

assess the evolution of the use of mortgage credit in countries such as Spain, Portugal,

and Ireland.  In these countries, although the rate of homeownership is quite high, the use

of mortgage credit is still relatively low; however, mortgage credit (relative to GDP) has

grown very rapidly in the past decade, such that important barriers may have been

overcome.

In summary, a comparison of the magnitudes of housing demand and mortgage

demand from calculations based on models more realistic for transition countries should

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Refer, however, to the literature review above for various approaches and their problems in

understanding and estimating the demand for mortgage credit.