Does subsidizing mortgage loans installments from the state's public finance system increase the availability of housing for citizens?

Dariusz Prokopowicz @Dariusz-Prokopowicz

01 January 1970 3 2K Report

Is subsidizing mortgage loans installments by the state from the state's public finance system a good instrument for increasing the availability of housing for citizens?

By granting loans, commercial banks introduce credit money into the economy, which is significantly responsible for the level of liquidity and circulation of money between economic entities and, consequently, also in the economy as a whole. Consumer and installment loans granted to citizens significantly activate the scale of consumer purchases and thus increase the level of consumption. Increased levels of consumption by increasing consumer demand in the long term can generate an increase in the scale of investment demand. If the increase in the scale of consumer demand is more permanent and long-term in nature, i.e. it is not, for example, the effect of annual seasonality, e.g. in the pre-Christmas period, then it results in an increase in the level of scale of production or service offerings of products or services for which demand is increasing. In a situation where entrepreneurs find that the said upward trend is permanent then they increase the scale of investment to create additional plants, production lines, manufacturing parks, the use of additional durable production factors, etc., to increase the scale of production potential, so that they can produce more of a certain range of goods. On the other hand, when the availability of business loans, including working capital loans and overdrafts granted to businesses for short-term purposes, to cover liquidity gaps, pay current bills and facts arising from the continuation of business operations also increases, the scale of financial security of the business operations of companies and enterprises increases.

When the availability of economic investment loans also increases then the scale of investment in the manufacturing processes developed by business entities, improved logistics of production or generation of services, increasing production capacity, involvement of new technology in manufacturing processes, purchase of additional machinery and equipment as part of the expansion of production processes, improvement of the quality of product and service offerings, development of commodity-directed offerings, increasing the scale of diversification of product and service offerings, acquisition of new markets, etc., increases. When this process involves the credit offers of many commercial banks cooperating with many companies and enterprises, then the increase in the scale of lending translates into a significant level of increase in the activity of business entities operating in the economy and becomes one of the key factors in improving the economy's prosperity, accelerating the rate of economic growth, which is particularly important when the aforementioned level of economic activity of companies and enterprises is low and at the same time the prosperity of the economy as a whole is not optimal. Therefore, when the economy is in crisis, the level of consumption and investment is low then, in order to activate economic processes, the government, as part of its anti-crisis and/or pro-development economic policy under an informal agreement with the central bank, launches certain state interventionist measures, which should result in an increase in the activity of economic processes that are realized in companies and enterprises. The central bank can then lower interest rates, resulting in a decrease in the oproc. of various types of loans on offer by commercial banks. In addition, the drop in oproc. of bank deposits and treasury bonds also activates economic entities to invest their financial surpluses in speculative investment risk financial instruments, i.e. in stocks, corporate bonds and derivatives.

On the other hand, it is also a motivating factor for companies and enterprises to decide on further investment projects, to increase the scale of investments and reduce the level of reserves. Cheaper credit contributes to an increase in its availability, to an increase in the level of creditworthiness of citizens and business entities. In addition, in a situation where there is an improvement in the economic situation in many sectors and industries of the economy, commercial banks can also additionally relax their credit policy and increase the availability of credit, for example, by reducing the scale of procedural steps, the amount of documents and information required from the potential borrower necessary for the analysis of creditworthiness, etc. More readily available loans encourage borrowing by citizens and business entities. In this way, a kind of synergy of cheapening credit, increasing scale of liquidity between cooperating financial improvement, acceptance of higher levels of investment risk, revival of economic processes, improvement of prosperity simultaneously in many sectors and industries of the economy, easing of credit policies in commercial banks, improvement of repayment of bank loans, improvement of the quality of banks' loan portfolios, etc., works. In principle, as long as the aforementioned all factors of the aforementioned synergy work then the process of increasing commercial bank lending, activating the level of economic activity, improving economic prosperity in the economy, increasing employment, increasing income, investment, consumption, increasing liquidity and circulation of money in the economy, etc. can continue to work without leading to an increase in the scale of the risk of the appearance of reverse processes, a rapid downturn in the economy, an increase in the scale of insolvency of many companies and enterprises, a significant increase in the scale of bankruptcy of economic entities, the occurrence of a banking, financial and/or economic crisis. The aforementioned synergistic process, in which a high level of credit actions and good quality of granted loans is correlated with good economic prosperity, may act without generating crisis factors, without causing over-investment, over-credit levels of both consumption and investment, as long as the level of credit risk, which commercial banks accept when granting further bank loans, does not increase.

On the other hand, the aforementioned process of many interrelated factors typical of an upturn in the economy can also continue to work if commercial banks reliably carry out credit procedures, do not overly relax their credit policy, carry out creditworthiness analyses of potential borrowers in accordance with the guidelines of the methodology, carry out ongoing monitoring of loans granted, do not neglect credit risk management processes. Unfortunately, such situations when commercial banks applied credit policies too leniently and carried out credit risk management processes not fully reliably occurred in the past. In such situations, excessively increased levels of lending and credit for investment processes carried out by business entities acting as borrowers became important source factors for emerging financial and economic crises. This kind of situation occurred earlier at the beginning of the current 21st century on a large scale and led to the occurrence of a global financial crisis in 2007-2009, which in many countries also turned into an economic crisis and in some countries, such as the countries of Southern Europe, also to a crisis in the system of state finances due to a significant increase in the debt of the system of state public finances. However, before this kind of situation can occur and when the level of economic activity of companies and enterprises is low, the level of unemployment is high, the level of income of citizens and financial revenues to the state budget from payments made by many entities operating in the economy is low, then political pressure grows for the activation of anti-crisis and pro-development interventionist measures available under the government's economic policy.

The above-mentioned economic processes realized within the framework of the improving economy generated, among other things, by lowering interest rates and increasing the availability of bank loans, increasing lending, increasing the scale of investment generates an improvement in the functioning, state of finances, achievement of business objectives in companies and enterprises operating in various industries and sectors of the economy. The magnitude of such cyclical economic processes, for example, is particularly high in the cyclical sectors of the economy, i.e. those whose economic processes taking place are strongly correlated with analogous processes taking place in the economy as a whole. The conjunctural sectors include, among others, the construction sector, including the construction of housing estates. On the other hand, regardless of the conjuncture of the economy as a whole, what happens in the housing development construction sector can to a large extent be modeled by interventionist actions of the government as part of its housing policy. In a situation where the government deems it necessary to stimulate economic prosperity in this sector, which should also result in an increase in the scale of new housing directed for sale, the instrument of public financial assistance applied to stimulate a selected element of the process of either the construction of housing estates, the process of selling built houses and apartments, support for the process of lending for the purchase of real estate, including, for example, the application of subsidies to loan installments repaid, the bank's required own share in financing the purchase of real estate or other types of financial support may be applied. In a situation where, thanks to the application of public financial support, the scale of construction investments is increasing, more housing estates are being built then the demand for raw materials, components and construction materials, as well as housing interior decoration items, including furniture, sanitary equipment, household appliances, etc., is also increasing. As a result, the scale of production at the factories of the manufacturers of the aforementioned various types of building materials and interior furnishings increases, the scale of production at component suppliers, co-ops, etc. increases. Employment in many companies and enterprises operating in the environment of the construction sector is growing. The incomes of a significant part of the population, i.e. people employed in the aforementioned companies and enterprises, are rising. Consequently, the economy as a whole is also improving. Therefore, in a situation where the level of activity of economic processes was significantly declining, the level of prosperity in the economy was low, unemployment was high and tax revenues to the state budget were low, and at the same time there was a shortage of housing for some citizens, then the government, using active housing policy, tried to improve the aforementioned prosperity in the economy.

At the beginning of the current twenty-first century in the United States, the housing sector was also recognized as one that should be activated in order to improve the economy. However, the applied solutions of extreme relaxation of credit policies for granting mortgages to the public, including borrowers with no real creditworthiness, with other previous outstanding loans, credit cards, without steady employment, a regular source of income, etc., the use of specially created derivatives in the form of subprime bonds to raise additional funds to continue to carry out lending in a situation of steadily rising real estate prices, the insurance of most mortgages by a single insurance company, the maintenance of record low interest rates by the central bank..., in spite of rising real estate prices, deteriorating labor markets, the still growing highly overvalued valuations of securities on stock exchanges, some commercial and investment banks losing liquidity, worsening financial problems in many companies and enterprises operating in non-financial sectors, unethical practices by brokerage firms in the sale to investors of financial instruments linked to the issue of financing the ongoing credit actions, the issuance of factually incorrect recommendations by rating agencies, ratings for subprime bonds sold to other banks, etc. led to a situation where credit institutions accepted excessive levels of credit risk. In addition, banking procedures for credit risk management processes were also unreliably implemented. All of the above-mentioned factors generated a strong increase in credit risk levels and led to the global financial crisis of 2007-2009.

On more than one occasion, in order to activate the boom in the construction sector, the government, as part of its public financial assistance, used the support instrument of subsidizing mortgage loan installments paid by borrowers to banks. This type of solution has been applied since July 2023 in Poland. The program of subsidizing mortgage installments from the sources of the state's public finance system was organized in such a way that, under the so-called "2% safe loan" program, the state subsidized loan installments in such an amount that, for the borrower, the remaining part of the loan installment paid to the bank corresponds only to the interest rate of the loan at 2%. This program in such a solution is to operate in terms of mortgage loans launched under this program for 10 years. After 10 years, the borrower is to repay the remaining portion of the loan at the market oproc. level set by the lending bank. Over the following years, both inflation and interest rates should continue to fall from their current still-high levels. Therefore, in the following years, the scale of committed funds from the state's public finance system, which will be used for the aforementioned subsidizing of loan installments, should therefore gradually decrease in connection with the projected decline in interest rates determined by the Monetary Policy Council, which operates at the central bank in Poland, i.e. the National Bank of Poland. On the other hand, however, the scale of committed funds from the state's public finance system may be higher in the following year 2024 compared to 2023 if the program is extended and its scale is increased. However, as the scale of commercial banks' mortgage lending has increased strongly since mid-2023 in connection with the launch of the "2% Safe Loan" program, and has reached levels previously recorded only during periods of exceptionally good housing market conditions such as. just before the onset of the global financial crisis of 2007-2009, developers directed to the market the majority of the number of completed construction projects, a greater number of housing developments built, including apartments with areas complying with the specified guidelines of the aforementioned program, and market interest rates are several times higher than 2 percent, then both the level of lending increased strongly in the second half of 2023 and the number of housing purchase transactions also increased strongly. The aforementioned upward trends have generated a rapid level of growth in the price of new apartments sold by developers. As the level of citizens' interest in purchasing an apartment using the financial public assistance provided under the "2% Safe Credit" program exceeded the number of apartments completed by developers and targeted for sale, the result was a several percent increase in real estate prices in all major cities in Poland. The aforementioned increase in real estate prices was exceptionally fast, as the recorded increase in the average real estate price in Warsaw, for example, in the range of about 15 percent, took place in just four months from July to October 2023. Since the large increase in real estate prices and the high level of recovery in this market mainly benefited commercial banks selling mortgages and developers building housing developments, the housing policy implemented in this way is mainly to achieve medium-term goals of activating economic processes and not long-term social goals concerning the key issue which was to be increasing the availability of housing for citizens representing the middle class with an average income level. Due to the increase in real estate prices that took place over a period of several years, it was for citizens representing the middle class, mainly working young people, that the possibility of buying their own apartment became practically unattainable, because due to the level of income relative to real estate prices, the level of oproc. loans, the bank's required contribution to co-financing the purchase of real estate, etc., they were not creditworthy. They also couldn't get social housing since they work and earn income, and there are far too few rental apartments in the resources of local government units, and the PIS government's previously launched Mieszkanie Plus program has not been implemented, so middle-class citizens in recent years have become the social group that has been most excluded from the possibility of buying and owning their own apartment. In view of the above, in the context of the ongoing discussions about the possibility of extending the operation of the Safe Credit 2% program to 2024, a topical issue for consideration is the question of subsidizing mortgage installments by the state from the state's public finance system as an instrument for potentially increasing the availability of housing for citizens. Potentially, because in 2023, unfortunately, the key strategic social goals were not realized through the introduction of the program "Safe credit 2 percent."

In view of the above, I address the following question to the esteemed community of scientists and researchers:

Is subsidizing mortgage loans installments by the state from the state's public finance system a good instrument for increasing the availability of housing for citizens?