"Real Estate and Investments. Legal Regulation", the journal

Issue 2-3 (3-4) 2000

Take Other People's Money but Return Your Own One Once for All

Report of the Major of Moscow Y.M. Luzhkov at the Second interregional conference "Long-Term Housing Financing and Mortgage Lending in Russia" June 9, 2000

Dear participants of the conference!

Now, much is spoken and written about the hypothecation. By this criterion, it is possible to tell that our conference is dedicated to a rather vital topic. But those who are older should remember how during the sixtieth years there was an overall planting of corn. Again, if to judge by this criterion, it would be possible to name corn the most urgent problem of Russia of those times. We remember how it was all going on. But the abnormalities have been completed. The life has placed correct accents and corn is being cultivated only there, where it is useful. The same will happen with hypothecation crediting, but the earlier it will happen the better. That is why now it very actual not to favor of the hypothecation, but to discuss this problem in the context of new experience and new reality, to point out strategic priorities of development of regional programs and inter-regional interaction in the field of long-term housing financing and hypothecate crediting.

I shall begin this discussion from several paradoxical affirmations. Speaking objectively, hypothecate crediting is the way of earning rather large incomes by financial organizations of the at the expense of maintenance of understandable desire of the citizens to have worthy living conditions earlier, than they have earned enough. There is even a song: "No, no, no! We want it today! No, no, no! We want it now!".

It is obvious, that there are enough stimulating factors for the development of hypothecation at the expense of the private initiative and enterprise, without any interference of authorities. Moreover, if to look in this specter, it is possible to say, that it is less necessary for us, than for those who issue mortgage credits and receives incomes.

But as the authority is responsible for the provision of housing the country, it is necessary that the instruments of redistribution of financial streams for the benefit of housing sphere and we are constrained to pay those who execute this useful function. Hypothecate instruments allow to make it with minimum expenditures. And it is a paradox that it becomes very necessary for us that was not necessary at all at the first sight. But for this purpose hypothecate system should become a large-scale financial stream, through which 5-8 % of all financial resources of country weeps, but it hasnt happened yet. I have already given arguments of reasons of this phenomenon on the counsel of the builders only two weeks ago. But it is such an important problem, that we will discuss it again, but under a new sight angle.

The period of excitement, the period of expectation from the hypothecation not only the solution of housing problems of the population, but also a boom of construction and adjoining areas of science and production; hopes for fast and mass introduction of the system of hypothecate crediting is completed. The realities of modern life have cooled the hot heads from rushing to commit instant "a great saltus" into the bright future.

Nevertheless, the hypothecation has appeared, lives and sometimes is realized in rather intricate forms, became a real instrument of the housing problem solution for many our compatriots. The practice of dialogue with the builders, population and representatives of financial organizations daily reconfirms, that the hypothecation has been already claimed by our society. The builders see in it a source of ensuring additional, still small, solvent demand for the housing. And in the long term they see the hypothecation even as a grand source of the expanded reproduction of the building branch. The hypothecation is claimed also by population as a real financial instrument that allows to satisfy current housing need at the expense of the future incomes. And certainly, this instrument is claimed by banks, as I have already spoken.

At the same time I would like to convert your attention to the fact that sometimes there occurs a fallacy that the hypothecation is a new form of a notorious "for free". It is far from being so. The loaner to become the holder of acquired under the hypothecate credit housing, should utterly change his psychology and lifestyle - to provide a possibility of high and stable personal earnings, to care about the personal contribution to ensuring the stability of state authority and legislation. State is also interested in such modification of the man.

Therefore the hypothecation is not being introduced, is not moving, and is tramping on one place, not looking on a mode, set of publications, counsels and conferences. I think, it happens so because we construe the hypothecation problems separately from a set of housing problems, we apply differentiated, instead of system approach.

I have already said, that a hypothecate debt shapes the desire to earn. But if we shall arrange the economic system so that there will be no place to earn will have nothing to do but recall an old proverb: nobody it is forbidden to desire. It is possible to tell even more: if workstations, submitted to the citizens, do not give the possibilities to earn enough money, the problem is not decided also. But you cant earn a lot of money on the out-of-date technology. And it is a new problem! You all of know, how it is difficult to introduce new technology in our country.

That does not exhaust the enumeration of systemic problems, which should be solved, for the hypothecation to become an important instrument. If the money, earned with such difficulties, will be invested in out-of-date, ineffective, energy-ineffective constructional, industrial and operation technologies, there will be also a systemic lockup. Now, perhaps, that is all in main.

Now you see what skein of problems should be solved to make this useful element operate. That is the problem of regional and federal authorities. I hope that our conference will bring its contribution to the solution of this strategic, systemic problem. I do not want to say that there are no interior instrumental problems in hypothecate matter. There are; we have already met them on practice and are trying to solve them. The improvement of instruments is very important. But it is even more important to have premeditation of the housing problem solution in a whole and to build into this integrated system of hypothecate credit, coordinating details and tempo of development with the systemic premeditation and common level of the development of economy.

First, I shall discuss general philosophy, and then I shall pass to particular problems of hypothetical instruments. For understandable reasons, while analyzing the approaches to the solution of the development problems of the system of long-term housing hypothecate credit, further I shall use the experience of our capital, the experience of Moscow Government.

On the conference of builders, at the end of May, I succeeded to convince the participants on the example of housing construction that most of things are going wrong, because there are really serious systemic problems. And if not to apply radical measures on the department, territorial and federal levels, the negative consequences from these unsolved problems, will accrue so long until they wont kill, like carcinoma, the whole organism. To specify, I can tell that if to leave everything "as it is", the debt of the society for those who provide the citizens need in worthy housing, will increase steadily and will result in the bankruptcy of the whole system.

I shall remind the essence of the problem. Everyone knows: that for the steadily development of any society, every state should pay for the accomplishment of many important functions. Besides the payment for the operation of all levels of the state system, the society should find the finance on housing and public utilities, on feeding and, unfortunately, on smoking and alcohol, on public health services and medicine, on transport, on recreation, on clothes and many other. The allocation of the restricted resources between all by these elements of life support requires keeping definite balance relations. Nobody would manage, for example, to allot systematically 90 % of the gross national or regional product on the housing needs. The country where it can happen will surely collapse. There will be no finance for other essential needs: maintaining of the infrastructure, protection of the citizens and the country, education, health services, development of culture and science, protection and recovering of nature and on many other necessary elements. I have already discussed all this with the builders.

The world practice shows that in the steadily developing country on housing needs can be allotted not more than 20-24% GNP. In USA, for example, at the end of 80s the beginning 90 years less than 18 % GNP was allotted on housing needs. Thus the housing expenses can be carried out in two schemes. It is possible, as in our country, to collect more taxes and then subsidize housing expenses of the citizens; but it is also possible to leave this money for the citizens and carry out only address subsidy for concrete families, at special circumstances. The second way is more productive from the public point of view, as thus the price paid by the society for the satisfaction of housing needs is lower on 20-30%.

Having received, that, not offending the economic balance, it is possible to spend on housing 20 % of gross regional product (GRP), we have counted, that even for maintaining the current level of housing need, which was formed before the reforms, the builders would lack about $ 0.5-0.7bil. annually. This deficiency wont be covered at the expense of other items. Both the city budget and the balances of firms of all kinds of property have no free resources of such volume. The serious threat of bankruptcy of the system of housing construction is obvious. It can be called as a housing crisis. And if we wont take care of it beforehand, it can really happen. We have carefully studied all possible ways of its prevention.

The borrowings, if they wont be accompanied by adequate growth of GRP, will not prevent the bankruptcy, but will only gain time before its approach and make it more painful. The definite extenuation of the problem could occur at the expense of engaging the finance, accrued by the population. But it is naive to think that the accrued capital in large sums will direct into the country, where hired man brings only one thousand dollars of profit for one year. And if to subtract from this sum all the expenditures, the profit can become even negative. If we, counting first of all on the accrued savings, wont involve them into the reprocessing cycle, they will also bring only temporal facilitation.

We have come to an agreement that the problem exists and is very serious, especially if to take into account, that in the given approximate calculations we were using rather low cost of a square meter and were guided by maintenance of present housing level. If we have had a task to double the housing or if the housing will be more expensive, it would need the GRP of more than 10 thousand dollars on the man per one year. It is even more difficult problem. But if we want to provide the steady favorable tendencies of development of the country and steady growth of the citizens quality of life, then we have no the right to hide our head in the sand. It is necessary to search for constructive ways of the housing problem solution. Maybe it will sound too pompously, but it is our duty to provide the constitutional law of the Russians on worthy housing.

Unfortunately, the complexities are not exhausted by the threat of systemic bankruptcy. The second most serious problem is connected with the problem of income allocation of the population. All over the world the housing problem is characterized by an index of availability of housing, in abbreviation IAH. This figure indicates the percent of the citizens, whose salary is being not below average, who can buy housing on the average price. It is considered that if IAH in the country is lower than 80 % it is alarming. In steady developing countries IAH is even more than 100 %. It means that the average housing can be bought practically by all families, for which per head income is not below average and even some of the families which income is below average. In our country, because of large variance of the incomes of the richest and the poorest, IAH is about 10 %. It means, that extra to the difficulties of payment for construction there will be difficulties with the effectual demand. Those who have money do not require housing, and the one who requires, has no money.

That is why the strategy of the solution of housing problem should provide a systemic complex of measures, which I am going to discuss further.

First of all, the radical modification of the technology of housing construction is necessary. It is, certainly, not your problem, but during the process of engineering the plans of development of financing systems of construction it is necessary to take into account, that this system of measures really allows to reduce the cost of housing. Both building, and operation. The last is extremely important, especially for our country, as we havent paid much attention at this factor before and we inherit many erratic solutions dictated by the ignoring of this factor.

We have counted, that even rich America would not sustain expenditures on the solution of housing problem according to their current standards, if the Americans would have to pay for our technologies and ours energy-spending, but for their quotations.

The special attention should be given to the problem of durability of the buildings. If the operating life increases twice, the expenses on recovering of housing decrease twice, with other things being equal.

The explosive development of repair technologies and recovering of the buildings and also the development of efficient technologies of utilization of houses and elements of their reconstruction which have fulfilled their term of service is vitally needed. During the sixties we cared about how to construct more in the shortest time to give housing to the greater amount of people. Now the problem of maintaining such buildings can be compared with new construction. When in Moscow there will be over 400mil.sq.m. of housing, the new construction will amount to about 5-6mln.sq.m. per one year, and recovering and utilized housing will number less than 8mln.sq.m. per one year. We shall go bankrupts, if not to upgrade the technology of recovering the worn-out housing.

All these directions of amending of the expense and income balance were discussed with the builders and we see, that if all this will be realized, we, on the one hand, will decrease the expenditures on construction, and on the other, increase the efficiency of the working hour of those who use a system of hypothecate credit. There is one more way of increasing the effectiveness of expenses on construction, which we have not mastered perfectly yet. The value of the buildings strongly depends on the surrounded environment and the way the building encloses into the transport and other infrastructures of the city. For example: in one European city there was rather large built up site, the houses in which were hardly on sale, though the prices were very low. As soon as a metro station appeared nearby, the prices have jumped up more than twice and the sites were of great demand. You will never favorably sell a shop building if there is no housing or other place of a constant accumulation of the people nearby.

In other words, the complex projection of the development of territories providing the raise of life convenience and effectiveness of usage of finance spent on acquiring of buildings, providing the taking into account of national mentality, allows to receive additional cost only at the expense of intellectual labor, practically without material investments. And that is the necessary growth of GRP that requires not so much financial, but many intellectual resources. And this resource is easier to get in Russia, than money.

All enumerated is compulsory condition of ensuring the growth of the hypothecate crediting. Let's remind, that weve discussed such problems. On the basis of Moscow experience it is possible already to give many practical examples of effectiveness of this approach in different cases: from parkings up to elite residential and office buildings.

The reform of the incomes of population. If to tell briefly, it is necessary to make people earn more and spend more. It is not a populist slogan at all. It is already known how it can be accomplished.

First of all it is necessary to leave housing money in the bins of the population and to launch standard capitalist inducements both natural self-restraint of housing need, and lowering of the price and the growth of construction quality. The transmission of housing money to the population and transit to complete repayment of housing by the citizens will not correct the financial state of the country. The offered way of transition to complete repayment of housing need by the citizens will adequately moderate the income of the state treasury. It will not even affect those citizens who have standard housing security. But those who have no worthy housing will get their own finance for the solution of the housing problem. Also competitive inducements of lowering the price and raising the quality will start working.

The second component of the reform should become the transmission of the incomes of the population to the hands of the citizens of so-called national dividend, received at the expense of resource, property and land rent. This problem is well developed by many experts: especially deep by the department of economy RAS. The ways of transmission of national dividend to the citizens are established but I have no possibility to speak in details about them here.

The reform of financial instruments of ensuring with housing will give necessary results. The steps that are made in area of hypothecate crediting do not satisfy us at all. The hypothecation brings more favor to those who organize it, than encourages engaging of the finance of the population for the increase of housing construction. The scales of the hypothecation are more than modest. However, it can be good. If we shall begin to invest much money into the out-of-date technology and shall not take care of the creation of such conditions for the loaners, when they can earn for the return of the debt, we shall generate irresistible difficulties in the future.

Here there is one more problem: the banks submitting long-term cheap credits, are being now in worse conditions, than those which are occupied with short-term speculative operations. This problem is usually solved by introduction of the law that provides for such investment banks simultaneously both limitations on the ways of placing the finance (only of the investment in the real sector), and tax credits.

The falling of price of the credits will promote the increase of the finance involved for the housing construction with the help of the hypothecation; but nevertheless mostly important is to achieve, that the involving of finance of the population with the help of low-percent long-term hypothecate crediting was necessarily accompanied by simultaneous creation of the possibility to earn the finance for the return of the debt. These should be the highly paid vacancies, which can be found only in the field of innovation technologies. In this context it is possible to think over the ways of using the hypothecate crediting not only for the direct housing construction, but also indirectly: for financing of launching of new booming technologies in construction, production of building material and radical lowering of power consumption.

The development of hypothecate of crediting is considered as one of priority directions of housing policy of the city. We rely on step-by-step, but steady growth of the scales of application of this instrument, but we understand, that fairly not all categories of the citizens can use it. It means, that at first main efforts shall be concentrated on the solution of housing problems of the townspeople who have stable incomes and wish to improve the housing conditions by themselves without the financial help from the city. For definite categories of the townspeople we are going to render address financial support with the purpose of ensuring the start conditions for receiving the credit.

At the same time, the city will hold the function of providing with housing on conditions of social or commercial hiring for those citizens, whose incomes do not allow to gain housing by themselves even with the help of the long-term credit.

The development of a system of long-term housing hypothecate crediting should result in the creation of the functionally complete set of supplementing each other market mechanisms of the solution of housing problems and mechanisms of social support of the citizens in the city. Let's look particularly how the hypothecation was developed in Moscow.

The realization of the mechanism of long-term housing hypothecate crediting in city began in 1998 by adoption of the Order of Moscow Government "On the concept of development of housing hypothecate crediting in Moscow".

The realization of measures, scheduled by the Conception, has allowed the city to pass the period of making the system of hypothecate crediting. As the principal positive totals of this phase it is possible to call:

  • Creation of legislative bases for accomplishment of operations in the sphere of hypothecate crediting;
  • Making organizational bases of operation of the long-term housing hypothecate crediting system, which major creation is considered to be the hypothecate Moscow agency;
  • Improvement of the schemes of the housing hypothecate crediting adapted for modern state of the legal base and current socioeconomic situation;
  • The modification of psychology of an appreciable part of the townspeople in the direction of that the solution of housing problem should be done by themselves, by achievement of such levels of their own incomes that permit to receive and further to cancel the housing hypothecate credit;
  • Appearance of interest in the credit-financial organizations and the building complex in realization of their own hypothecate programs and the orientation on them, as on a perspective of long-term strategic development.

At the same time, it is necessary to accept the fact of impairment of previous Moscow hypothecate program oriented on the creation of only one type of the system of hypothecate crediting. For the past years, long-term housing hypothecate crediting in the city has not received mass approval. It is provided by the following reasons:

  • By the inadequate economic circumstances (which have changed after August, 1998), in which the Moscow hypothecate program was received in the beginning of 1998;
  • By primal orientation of the program mainly on foreign sources of financing;
  • By directness of the program on fast transition of the hypothecate system on the level of the organization, general for highly developed, stable state economy;
  • By lack of domestic institutional investors (pension funds, insurance companies etc.), interested in high-reliable, long-term investments of financial resources;
  • By adoption by Moscow of crediting conditions under the interest rate, equal to 10 % annual interest, which was subsidized by the city and did not correspond to the market conditions of crediting;
  • By the political and economic situation in the country, in particular:
  • By high level of inflation;
  • By inadequate level and instability of the solvency of the population;
  • By imperfection of a system of the taxation;
  • By the high cost price of housing construction;
  • By high prices of financial resources;
  • By imperfection of normative and legal base and lack of practice of its application in conflict situations, inevitable during the operation of the system of housing hypothecate crediting;
  • By low level of confidence of the population, creditors and potential investors to the declared intents and operations of the authorities;
  • By inadequate activity of credit and financial organizations in preparation and realization of hypothecate drafts.

With the purpose of further development of the system of housing hypothecate crediting, filling the system with financial resources, ensuring of real availability of the credits for different groups of population and making the housing crediting a mass process, the city decided to process the former concept of Moscow hypothecate program. The draft of the New concept is designed and now is being considered. It is based on the following main principles:

  • Stimulation and equal support of the different schemes of housing hypothecate crediting by the city with step-by-step concentration on those forms, which will be adequate in the social and economic circumstances of the country, and in the greatest measure will correspond the interests of development of the city;
  • The refusal from sponsorship of the interest rate of the credit and transition to the market conditions of crediting for main part of the loaners, who have sufficient incomes with the simultaneous amplification of address social support of privileged categories of the citizens (next in turn), tending to improve housing conditions with the use of hypothecate crediting;
  • Orientation on those categories of the population, which require small hypothecate credit. It will allow within the restricted credit resources to provide maximum amount of the loaners;
  • Possibility of repayment of a part of new housing at the expense of the sale of the available property;
  • City support of the citizens requiring and wishing the improvement of housing conditions, but not having the sufficient incomes for receiving hypothecate credits on standard bank conditions (next in turn), through the system of grants on the construction or acquiring of housing for repayment of the primal contribution at receiving hypothecate credit;
  • Giving the citizens a possibility of accomplishment of primal accruing for receiving hypothecate credit, on the current stage in the form of acquiring of the bonds of the Moscow state housing bonded loan, and further by creation of the lend-savings banks;
  • The creation and the content of the emergency fund for the temporary residence of the citizens who have not coped with the cancellation of the hypothecate credit, during the period of penalty and realization of housing;
  • Allotting of the budgetary finance (municipal asset) with the purposes of granting the warranties (guarantees) under the financial credit instruments of Moscow hypothecate agency for engaging long-term money resources of the investors on the housing market;
  • Perfecting of normative and legal base of the city with the purposes of elimination of encumbrances to developing the system of housing hypothecate crediting and ensuring of active interaction with federal departments for contributing into the development of the hypothecation in the part of normative and legal base of the federal level.

The realization of these principles of development of the system of housing hypothecate crediting will be directed not only on the support of all participants of the market of hypothecate crediting, but also on the creation of the "own" social segment of this market, which will be aimed on granting hypothecate credits to the people, who have the right of social support of the city.

At the present deficiency of finance and impossibility of fast providing to the people, whose turn it is of municipal living space, the problem of giving those with stable incomes, the possibility to receive hypothecate credit on favorable terms for acquiring of housing by themselves becomes actual.

In this context, the Moscow Government offers to order the Department of municipal housing and housing policy to realize its own scheme of housing hypothecate crediting founded on the giving the possibility to the people, whose turn it is:

  • To realize primal accruing on acquiring of housing, having warranties of their safety and target usage from the Moscow Government. The main form of such accruing we shall offer the acquiring the bonds of the Moscow state housing bonded loan;
  • To apply the scheme of offset of the housing, available in the property, as a primal or main contribution at acquiring new;
  • To combine privileges and housing bounties with the scheme of housing crediting of the citizens;
  • To apply the scheme of sale of housing by installments with the simultaneous deposit (hypothecation);
  • To use favorable terms of housing crediting on the conditions defined by the decision of the Moscow Government.

These are the main directions of Moscow Government of the development of a system of hypothecate crediting. I want to underline, that in the strategic plan main attention shall be concentrated on making the hypothecation a mass process. The special role in development of the hypothecation will be played by the urban departments, which are given so-called "social hypothecation", covering those levels of the population, which are ready to earn on housing, however which incomes are not sufficient for receiving the credit on the standard market conditions.

The final product of the development of the hypothecation in the city should become a functionally complete set of supplementing market mechanisms of the solution of housing problems and mechanisms of social support of the population, which will allow to realize the constitutional law of the citizens on improving of housing conditions.

I thank for your attention!