Housing in Ukraine after the war

Ravage and suffering from Putin’s war against Ukraine is still the daily reality. Nevertheless, it is time to think about life and reconstruction after the war. A recently published CEPR paper touches upon a number of economic policy areas. A Ukrainian interview digs much deeper into the lessons to be drawn from the technical aspects of the reconstruction period after the Chornobyl catastrophe for the current situation, as well as international experience. Here we would like to present some ideas related to the complex topic of housing. 

Housing will be crucial both in the short and the long run. For the short run, manpower will be needed to rebuild the country, but the most basic precondition for people to stay in or return to Ukraine is that their housing problem can be solved. For the long run economic geography teaches that the location where exactly an economic center (even small, not only a megapolis) will organically emerge is hardly predictable and subject to many quasi-random effects, but once the center has emerged it is close to impossible to move it. Hence, seldom there are moments when central planning at large scale might make sense. The end of this war will be one of these rare moments.

As millions will have pressing housing problems after the war, from the very first days the government, local authorities and other agencies will have to make decisions on a daily basis. Those decisions easily might have very long-lasting effects, so it is much better if they fit into a well thought through strategy as much as possible. On the last day of the war, it will be too late to start preparing that strategy. The authorities have to be prepared – like the scouts. At least the central authorities, given that the much more limited capacity of the affected local authorities is currently fully eaten up by the daily problems of the war.  Some elements of the strategy can be prepared already now, some only when the total damage and need is approximately known, and some only when the type and extent of international help is revealed. This article presents several pillars – financial, institutional, – on which the post-war reconstruction of Ukraine might rest.

Lessons from the past 

Needless to say, this war stands without comparable examples for many decades of the recent past. From a narrow-minded housing perspective (just as in many other aspects), practically nothing closer than the second World war can be used as an example. After WWII Germany showed an extremely fast recovery not just in manufacturing, but also in construction of houses and public buildings. „A total of 2.3 million dwelling units either were completely destroyed or rendered permanently uninhabitable during the war period of 1939 to 1945. An equal number suffered medium or lesser damages.” * The speed of construction “…exceeded that of previous good years three times and outdistanced corresponding rates of every other country”. If we apply these data directly for the current Ukrainian situation, the expected time needed to meet housing needs is the total need at the end of the war divided by the quantity that can be built in a year. Up to now 12 million people had to leave their houses. Many have left, though their houses are not affected, but many people did not leave their homes, though those are not suitable any longer for normal life. Hence the order of magnitude we use is dwelling for 12 million people. If 30 square meters is the average apartment size per person, then 360 million square meters have to be built. In the period 2018-2021 approximately 12 million square meter of residential houses were built per year. If Ukraine can do what the Germans did, namely to triple this tempo, then 36 million square meters can be built per year (certainly not in the first year, because some acceleration period is needed). This would give us a rough estimate of 10 years for the reconstruction program. 

Some other examples, like the Balkan war in the 1990s**, the civil war in Lebanon, or a few natural catastrophes hitting urban areas might be candidates, but more rigorous analysis is needed to assess to what extent they can be applied for the current case of Ukraine.

The problem is complex – who foots the bill?

Housing is a truly complex topic as it entails equally large-scale problems in technical, financial and social dimensions both at micro and macro level. Here we would like to mention just a few of them.

To start with one of the worst possible scenarios, if people in need of housing simply get some sizable social transfer from the government (financed from whatever source), but there is not enough livable apartment on the market to be bought, then either the price of the few available apartments will increase to astronomical levels (providing extra profit to the lucky ones), or the transfer will be spent on other goods and services pushing further up inflation (unless the transfer takes the form of some voucher), or converted into USD to keep its real value (as opposed to the UAH the fast devaluation of which will be further accelerated by such transactions). 

It is good to use all available houses and apartments in an efficient way, but this can only be a limited substitute for new construction. Construction requires a lot of material. Shortage and rampant prices weren’t unknown in the construction industry already before the war, but now, as transportation facilities have been severely damaged, problems will grow even bigger. Even the exclusion of Russia from the world market might aggravate the shortage. It is certainly not the best approach if such crucial, but limited resources are allocated by an imperfect market, where competition will be contaminated by (at least locally) monopolistic structures. Moreover, reconstruction of plants producing construction material (and training skilled labor) will have to be a priority irrespective of the financial situation of the owners of the plants possibly ruined during the war. Such a sequenced rebuilding of capacities definitely requires careful central planning and reinvigorated role of the feeble Anti-Monopoly Committee, just as it is the essence of the problem when an army has to be equipped. 

Depending on market conditions, it cannot be excluded that some central control has to be put in place to prevent well capitalized market participants (large construction companies, but even some rich people) buying up all the material at a price unaffordable for the poor, building houses and then letting them to the poor ones at a rate they couldn’t afford either, but in absence of any alternative they fall into a long-term trap. Habitat for Humanity, a US-born global network of NGOs is definitely among those to be asked for help both in theory (regulation) and in practice (to manage actual projects with the physical involvement of future inhabitants of the houses to be built). 

Countries differ very much in terms of the proportion of people owning vs renting the apartment they live in. In Germany, the majority of people rent their apartment from institutional investors and local authorities, while in the UK most people own their houses. This latter wasn’t always the case. Before the 1990s most British households rented as well, but introducing the deductibility of mortgage interest from the personal income tax base gave a strong enough incentive for many tenants to take a long-term (30-40 years) mortgage loan, buy the house and use for repayment the money previously devoted to the rent. No need to say that in the case of Ukraine such tax incentives should only be provided if the loan is used for gradually buying the house the debtor actually lives in, not for investment. 

Already before the war, social inequality in Ukraine was certainly too high (see Box 1).

We can’t know yet, but there is a chance that as a consequence of the war inequalities will increase further. On the top of this, well-off people, who don’t have to fight for their daily subsistence, will be more able to capture any opportunity in the early years after the war. Hence, social housing will have to be in the focus of government efforts. Capping rental rates (e.g. in Vienna), value based real estate tax on uninhabited apartments (e.g. in Paris, Vancouver or Melbourne), or local municipalities letting apartments below market rate to young people while they earn less (e.g. in the Netherlands) are all tools worth studying. None of them are without problems or preconditions. Capping the rental rate is only effective if contracts are transparent. They will only be transparent if the owner’s ability to enforce the contract is significantly enhanced by an efficient and independent judiciary – a notorious problem in Ukraine for decades before the war. This problem has to be solved now. Identification of uninhabited apartments can be based either on administrative data (registration system) or self-declaration with random control. Experience about eventual problems are already accumulated in the cities where these “vacancy taxes” have been introduced already 4-5 years ago.

Nevertheless, as international experience shows, construction of affordable houses cannot be fully replaced by market intervention either in the form of regulation or taxation. 

While in social housing the (central and local) government has to take the lead, it is not necessarily always for the government to pre-finance the construction of residential buildings. There are long lasting good examples from Europe for savings cooperatives (e.g. Raiffeisen in Austria, or Bausparkasse in Germany) – see Box 2. 

Window of opportunity

Looking at the problem from a more macroeconomic perspective, it is likely that after the war a prosperous period comes with high economic growth, but also with relatively high inflation. People, whose house or flat has been demolished will not have the liquidity to buy a new house, but this is not the problem. They have their rights for their previous flat. That should be enough for an apartment of the same value financed out of the reparations paid (more precisely lost in the form of assets frozen abroad) by Russia. If they would like to have something better, they should be given the opportunity to pay for it gradually, over many years. If economic growth is relatively fast, but household consumption does not keep up with the growth in household income, saving increases. Such a saving should also be channeled into the housing market either directly or indirectly. Directly – when people invest in housing-related assets, such as deposits with the above-mentioned savings cooperatives, indirectly – when people buy government bonds that finance a government deficit stemming from government spending on residential investment projects. 

Just as an example for further linkages of the housing market with other areas of economic policy, liberalization of the land market (e.g. to incentivize efficiency in agriculture) already started some years ago, but the process still wasn’t fully implemented before the war. Now it is important to coordinate this liberalization process with the eventual new urbanization trends, as well as with the new reality of relatively scarce domestic and more abundant foreign capital compared to the pre-war era. E.g., if Ukraine does not want to sell the land to foreigners (one can name a few good arguments for this), it still could let it for 50 or 99 years combined with the requirement that the tenant has to cultivate the land in a sustainable manner. This coordination is important to prevent a trend where (1) urban areas seriously damaged by the war are left abandoned, (2) previously agricultural land (possibly at a temporarily low price) is sold to investors, (3) subsequently relabeled as a construction site, providing the investor a huge profit and (4) the contaminated urban area is left for the state to clean it (at exorbitant costs) and try to use it, when it is not any longer needed for residential buildings.  

There are many possible problems to be avoided, only a few of them have been mentioned above, but there are also great opportunities offered in the new, after-war world.  

Far the fastest way to solve a part of the housing problems is to use the vacant apartments. According to broad consensus, before the war the rental market existed (in some places even “flourished”), but  worked predominantly in the shadow economy. After the war this has to change to a large extent. Only transparent contracts can be enforceable and transparency also means compliance with taxation rules. People who have an apartment to let (i.e. they have another to live in) will certainly belong to the financially lucky ones. No reason to avoid or evade taxation.

At a purely technical level, the new houses can be of a much higher quality than their predecessors.  They will meet contemporary and foreseeable future needs in terms of number and size of rooms, they will be much more efficient in energy consumption and will provide more reliable public utility services, including internet. Adequate regulation and strict control are of course prerequisites to avoid low quality real estates, but there are already good Ukrainian examples available from the past. (after the Chornobyl catastrophe).

At a municipal level infrastructure (not only public utility networks, but also schools, kindergartens, hospitals, etc.) capacity can be optimized again, taking into account not only prewar reality in terms of needs, but also organic or desirable trends***. 

Social cohesion is one of the very few positive consequences of the war. It is worth preserving as much as possible. Community level answers to the housing problem (e.g. people helping each other to rebuild or repair their houses) can be a tool for this.

Corruption as the danger to social cohesion 

Everywhere in the world, large investment projects are subject to high risk of corruption. Ukraine has a pretty bad track record in corruption, but now there is a chance to start something different.  Corporate integrity agreements with the anti-corruption agency or integrity pacts with an NGO to oversee the specific project from the beginning to the end at local level can become a precondition for any government subsidy to the project.

Real European integration can be tremendously accelerated by inviting financial institutions, government development agencies, construction companies, twin cities, think tanks or even NGOs to participate in the program. Their presence helps to import state of the art technologies, to mitigate corruption and to make other European economies directly interested in the success of Ukraine.

As it is hopefully clear from the above list of aspects, the housing problem is a topic overarching many areas of public policy. Different social groups and different locations might require different solutions. There is a plethora of ideas in the world. Some of them necessitate, some others may even exclude each other. Different phases of the investment process might require different roles to be played by the government, from a pure oversight of the free market, through financial involvement in the form of guarantees or direct money, till participation in the physical implementation. Investors, NGOs, municipalities – both domestic and foreign – and even non-institutionalized local initiatives can significantly contribute to the success, but the central role of the government in designing the strategy, allocating the roles and overseeing the implementation (probably in an adjusted institutional structure) is indispensable. It is time to start thinking and planning. 

Subsidiarity and its synergy with central planning

The first crucial point is the coordination problem. Why build houses in an area where there will be no working opportunity? Why rebuild a factory where nobody will live? Why invest into the sewage system of a street where nobody will build a house, and why build a house if the sewage system will only be finished in 8 years time? Why rebuild the road  between A and B now, if nobody wants to rebuild B, and why to start rebuilding B, if in the foreseeable future there will be no road (e.g. to transport the bricks)? Every participant is willing to put his/her money into the complex project of reconstruction only if he/she can be sure enough that the others will do the same.

Since housing has to be coordinated with the reconstruction of public infrastructure and the renovation of industrial and commercial buildings (both for the long run in terms of goals and for the short run in terms of process), one way to deal with the mutual dependency of the various dimensions is setting up regional development councils. By population size, Ukraine’s 25 oblasts are all in the range prescribed for so-called NUTS2 units of the EU (between 800 thousands and 3 million). In some cases it might make sense to put more than one oblast into one region, but this is not a crucial point. 

Regional development councils should comprise delegates from all stakeholders: central government, local governments, financial institutions, construction companies, big local employers (in some cases “oligarchs”), NGOs, foreign twin cities, and last but not least, experts. Regional Development Councils should adopt the short (1 year), medium (3 years) and long term (10 years) regional development plans. All these plans should result in contracts in which all the stakeholders sign up with their obligations in a transparent manner. Everybody  can monitor everybody else and enforce the promises. Since all the participants get something from the government (either in the form of direct subsidy or guaranty), the government would have the strongest enforcement tool, but even the government could be held accountable by the others at least by going public with the information if necessary. For such a decentralized (to the oblast level) process to be efficient, the central government should set first 

• a national development plan covering the goals that overarch the regions (e.g. the envisaged national road network)
• very high minimum standards for the content and quality of regional development plans
• national development goals that have to be met all over Ukraine by different deadlines (e.g. in 5 years from the starting point each region has to have at least 1 functioning hospital bed per 100 inhabitants)
• rules for the different segments of the housing market (construction material, rental, mortgage)
• approximate central subsidy attached to one unit of output to be achieved (e.g. 1000 UAH for each new functioning hospital bed up to the national goal)

Regional Development Councils (RDCs) shall hire domestic and foreign experts to propose development plans. The contracts can only be signed by the participants, when the central agency for quality control approved the plans. This central agency should not assess the content (let alone political desirability) of the plans. It only has to check whether the submitted proposal meets the preset requirements. It is the experts’ responsibility to formulate the requirements in a way that ensures that if a plan meets those requirements, the plan “by definition” will be good. 

RDCs form a network where they can learn from each other and possibly even exercise some peer pressure. It is of utmost importance that they don’t compete with each other for the quantity of resources. Quantitative allocation of the central resources (including all international donor money) has to be determined by the central government. There is no point in depriving a seriously devastated oblast of the necessary subsidies just because they could not hire the best experts to design the plans in the first round. Where RDCs still could compete, is the timing and attraction of mobile people. The sooner they can come up with the plans, the sooner they get access to the central money and can start the implementation. (Though in some cases the government might want to withhold a significant part of  the central subsidy until the project is finished and audited so as to keep the enforcement tool, like in the EU.) The sooner reconstruction takes place somewhere, the more likely the area will be able to attract people who don’t have a single clear preference where to settle. 

It is certainly not the most important aspect of the story, but such a scheme would also help Ukraine to prepare for the EU accession.

Recommendations

Shortcomings in the rule of law have been the most important problem in the Euro-Atlantic integration of Ukraine ever since its independence. If this is missing, practically no meaningful institutional system can work. Of course there is no country where 100 percent of economic transactions are in full compliance with the law. However, if too many transactions are in the gray or black zone, the market economy cannot function properly, and this hinders efficiency, leaving the country in a poverty trap. It is not the role of this paper to elaborate on possible instruments to upgrade the rule of law in Ukraine to an acceptable level, but this will be an assumed precondition for all the following proposals.. 

1. Organizing an international conference with the participation of all relevant domestic stakeholders, international institutions, and partner governments willing to help, can be a great first step towards allocating and assuming roles.
2. Based on the conference, groups of experts might start to work on the
   • regulation of the 
     1. market for construction material: e.g. once the plans for  specific projects are authorized, the construction company has the right to buy all necessary material (otherwise there should be some quantity limit on how much a single customer can buy out of the critical construction materials). Hoarding should be prevented.
     2. rental market: e.g. based on the updated registry system uninhabited houses and apartments (in specific areas) should be subject to a vacancy tax and the generated revenue should also be channeled into the residential construction program
     3. mortgage markets: e.g. new foreign actors should be invited to bring the necessary know how for cooperatives and mortgage loans. Strict rules should be introduced to limit the risk taking of financially vulnerable households. 
   • national development goals: these goals might be derived from internationally well known and used systems (e.g. Millennium Development Goals of the UN or the Sustainable Development Goals of the EU), but they should be more immediate, more operational so as to be meaningful when monitored on a quarterly basis. Special attention should be given to the recultivation and sustainable repopulation of devastated areas, the protection of arable land from green field investments (as substitutes for the more expensive brown field investments).
   • new regulations for the residential construction standards ****
   • design of the main national infrastructure networks
   • standards to be met by the future regional development plans.
3. Formation of NUTS2 type of regions. Identifying and convening the candidate members of the regional development councils makes sense well before the end of the war.
4. Up-to-date registers of people’s addresses and of residential buildings with their current technical status will be needed for several purposes. Assessment of the total damage will be the first round to set up the register (as much as possible old data should be integrated, but should not be taken at face value). Application for state subsidy will be the second round to correct any errors from the first round.