Addressing housing market challenges in the Slovak Republic

By Federica De Pace

As in many OECD countries, housing affordability deteriorated in Slovakia before the energy crisis. Between 2015 and 2022, house prices rose at a much faster pace than households’ income (Figure 1). Since 2022, the cost-of-living crisis has been squeezing real incomes, dampening housing demand and resulting in declining house prices. However, with interest rates and mortgage costs surging, housing affordability remains a challenge today. Moreover, Slovak households have been particularly exposed to the surge in energy prices, as nearly 10% of their budget accounts for electricity and gas expenditures – the highest share among OECD countries. The poor thermal performance of the housing stock, mostly comprising buildings that were constructed during the communist era, contributes to explaining such high costs for electricity and heat. Last, many low-income households, especially in the Roma community, live in low-quality and overcrowded housing, and homelessness has reached an alarming dimension over the past years.

Figure 1. House prices have increased faster than incomes until 2022

Price to income ratio, index 2015 = 100

Source: OECD Analytical House Prices database.

To address these housing market challenges, Slovakia needs to find ways to boost efficiency, promote affordability and inclusiveness, and accelerate environmental sustainability of housing. To do so, the 2024 OECD Economic Survey of the Slovak Republic suggests reforms in five broad areas:

1.Streamlining housing construction. Administrative inefficiencies in the building permits procedures contribute to slow the responsiveness of housing supply to demand pressures. The process for obtaining building permits is very slow: in 2019 it took on average 300 days versus 152 days in the average OECD country (World Bank, 2019). Expediting the adoption of digitalisation in building permits would accelerate procedures and enhance housing supply responsiveness, alleviating pressures on housing prices. Furthermore, land use policy is highly decentralised. This leads to inefficiencies in the management of resources, challenges in hiring qualified staff for construction-related tasks and an increased risk of policy capture by local stakeholders, resulting in blockages of construction projects at local level. Giving more responsibilities to higher levels of government in land use policy and construction-related activities would help to facilitate construction projects.

2. Expanding the private formal rental market. As a consequence of the privatisation of state-owned housing during the transition to a market economy in the early 1990s, most households own their home, and the formal private rental market is thin. Developing the private rental market can spur residential (Figure 2) and labour mobility. This can help to reduce skill shortages and improve matching between employers and employees, with positive effects on productivity. It requires inter alia striking a better balance between the interests of landlords and tenants, for example by making provisions for a rental contract that ensures enough flexibility and security for both parties.

Figure 2. Homeownership is negatively correlated with residential mobility

Source: OECD Affordable Housing database; and OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en

3. Reforming housing taxation. Revenues from recurrent taxes on immovable property are low in international comparison. A comprehensive reform package shifting the burden from labour to property taxation has the potential to reduce distortions to economic growth.  Moreover, basing property taxes on regularly updated property values would help stabilise fluctuations in housing prices and improve equity. Gradually phasing-in the taxes and introducing tax deferrals, for example by paying the tax only when a house is sold or bequeathed, can increase acceptance and protect vulnerable homeowners.

4. Increasing housing inclusiveness. Many low-income households live in poor housing conditions and are overburdened by housing costs. These issues are particularly pronounced among the Roma, where the overcrowding rate reaches 80% and almost a third of the community lives in dwellings without access to tap water (European Agency for Fundamental Rights, 2022). Accelerating the formalisation of property rights in Roma settlements would help to provide access to basic infrastructure, such as tap water and sanitary facilities, improving life conditions and promoting social integration. Higher investment in social housing, especially in areas connected to job centres and transports, and expanding targeted housing allowances would help to raise affordability and reduce social exclusion.

5. Strengthening incentives to accelerate housing renovation. Higher carbon prices in the building sector, as planned at the European level from 2027, would provide strong incentives for renovating housing and shifting to lower-emission heating systems. In addition, implementing stricter regulation, including by extending coverage of high-quality energy performance certificates and relaxing voting rules for renovation works in multi-apartment buildings, together with targeted financial assistance to low-income households living in the most energy inefficient dwellings would help to further incentivise housing renovations, reduce energy poverty and advance environmental objectives. 

Reference

OECD (2024), OECD Economic Surveys: Slovak Republic 2024, OECD Publishing, Paris, https://doi.org/10.1787/397ca086-en.