The sources and effects of rental market underdevelopment in Central Europe. The results of a survey and DSGE model simulations

Abstract

A low share of the private rental market observed in most Central European countries, including Poland, might be considered as a serious structural weakness in housing markets that may affect the macroeconomy. This paper assesses two important questions. The first one relates to the reasons behind this rental market underdevelopment. The second question is what can be done to increase the size of the rental market. We conduct an original survey among a representative group of Poles and find that preferences are strongly tilted towards owning. Results of logit regressions, as well as the distribution of answers to selected questions, indicate that these preferences are strongly influenced by economic and psychological beliefs. Inefficient institutions and the lack of professional renting services also turned out to be important in the housing tenure choice. Then, using a macro DSGE model we propose a set of reforms that aim at improving the efficiency in rental markets: (i) removing the bad tenant effect on the level of rents, (ii) equalising fiscal incentives for different types of housing tenure, and (iii) improving the standard of rental services leading to a shift in housing tenure preferences. Our computations indicate that introducing these three reforms would shift the rental share from 6.8%to 15.0%, contributing as well to macroeconomic stability.