# **1. INTRODUCTION**

# **Background and Setting**

After the Soviet economic system breakdown during 1989–91, rapid privatization of housing to sitting tenants became a pillar of fledgling housing reforms, intended to establish the vested interests of the majority of population against possible reversals of the overall processes of economic reform and democracy building. Decentralization of most social policy competencies to regional and local governments supported the thrust to build an ownership society immune to communist ideology.

However, the broad expectations that housing sector “micro” privatization would lead to higher investment and asset management efficiency was not realized in respect to multi-family (M-F) buildings that continue to dominate the housing stock. _First_ , after governments withdrew from direct provision of housing through new construction, housing production figures plummeted throughout the ECA region. The major turnaround came only recently, 10–12 years after the inception of the reforms, and the region still lags behind others with comparable housing needs and income levels. _Second_ , a thorough modernization of the M-F building stock—already a major issue in the early 1990s - became ineffective under the new privatized ownership structures, which left common property components of this stock without incentives for responsible decision makers for building management and hence, investors. _Third_ , formally turning tenants into owners did not change the inherited social and cultural mentality that housing is a merit good. Perception was grounded continued that the jointly owned common areas of M-F buildings and surrounding grounds were in fact “extensions of the street”, and thus should be maintained and repaired by municipalities, so that apartment owners and tenants should continue making low nominal payments on top of their own utility bills.

The high nominal homeownership rates achieved through mass privatization of the above type had profound implications for housing demand. The marginalized rental sector severely constrained the development of competitive, market-based tenure choice options that could be exercised by economically diverse households according to their income profiles, family and job situations, and personal preferences. Small-scale, often informal, yet spontaneous private rental activities began soon after and some new public rental housing was built on a very limited scale. But the rental sector as a whole - a strategically important sub-sector catering to important household groups - has become an overlooked residual of the privatization driven reforms.<sup>3</sup> Soon after the “give-away” privatization of apartments was mostly completed an increasing number of experts and policy makers in transition economies began to realized that reforms based on privatization only were grossly unfinished and incomplete, lagging other sectors and inspiring the saying “neither Marx nor market” (World Bank 2001). Presently, many governments in the region are attempting to pull diverse housing-related reforms into more

> 3 The UN Habitat (2003) rental housing report states bluntly that “Few governments have taken rental housing seriously over the past thirty years” and discusses the reasons for this neglect. Furthermore it states: “Unfortunately, little has actually happened, and recognition of the important role played by the rental sector still constitutes perhaps the greatest hole in most national housing policies.”

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