ANNEX I

MACROECONOMIC AND MICROECONOMIC MODELS OF

THE DEMAND FOR HOUSING AND MORTGAGE CREDIT

1.0

INTRODUCTION

The feasibility of estimation of models of the demand for housing or residential

credit in Poland (and in other transition countries) is limited by a major problem:  that of

translating  potential demand  for housing and residential credit into  effective demand. 

Indeed, this is a critical problem not only in the transitional economies but also wherever

government policies and institutions have not been designed to be responsive to market

signals concerning demand.

Problems of inadequate  effective demand,  as commonly perceived, can result from

policy failure on both the demand side and the supply side of the housing market.  For

example, households occupying heavily subsidized housing, that would with smaller or no

subsidies consider moving to another dwelling or even another city, may have little or no

incentive to move as long as subsidies exist.  Similarly, incentives to change dwellings will

be minimal if available housing is priced beyond the means of most households perhaps

as a result of government imposed restrictions on land development or house construction.

Regarding mortgage credit, parallels exist concerning either demand  or supply side

barriers to translating potential demand into effective demand.  If the possibility of

government subsidized credit exists for a household, even if it must wait for years to take

advantage of it, the household will be reluctant to seek unsubsidized credit at market rates

of interest.  This is a demand side barrier to effective demand for private mortgage credit.

On the supply side, any policy that either rations credit or increases its price (such as

inefficient administrative practices in granting credit or failure to manage credit risk

properly) will restrict the ability to translate potential demand into effective demand.

Any study of the demand for housing and mortgage credit should seek as far as

possible to identify the key barriers on both the demand and supply sides of the market for

housing and credit and to quantify their relative impacts. By so doing, priorities can be

established for policy, administrative, and institutional reform. Potential beneficiaries of a

better framework and better information about barriers to realizing effective demand for

housing and credit include households (particularly those wishing to move), producers of

housing, land developers, banks and other financial intermediaries, and both local and

central governments.

Studies to identify and quantify barriers to effective demand should be conducted

so as to identify both the magnitude of potential demand and past and current effective

demand and, by doing so, illustrate the stakes of modifying current policies and

institutions.  They should then also attempt to find the sources of shortfalls in effective