THE RETREAT OF THE STATE LIBERALISATION OF THE HOUSING MARKET IN UKRAINE
Course: The Urban Question – US620E Student: Iegor Vlasenko
* photo by Margo Didichenko
Abstract Urban density makes housing one of them most heated issues for discussion, since availability of this resource is often scarce and regulated by various actors or market mechanisms. Urban lifestyles also imply co-housing practices, since buildings are mostly designed for multiple occupation. The essence of housing is threefold, as it can be perceived as a basic human need (shelter), commodity (traded on real estate market) and investment good (haven for free financial capital and instrument for speculation). In the same time, a variety of occupation and ownership forms bind housing issues closely with co-existence of people in a limited space, rooted in human behaviour and psychology. State interventions have always been part of housing market, however their significance and scale varied greatly over time and from country to country. Transforming economies of Eastern Europe in 1980s-90s represent a radical paradigm shift in housing policy that resulted into emergence of one of the most vivid forms of neoliberal urban transformation. This paper critically explores the emergence of a market-led real estate market in Ukraine through housing privatization in 1990s to showcase the impact of state interventionism, as well as its absence, on housing conditions and real estate market.
Introduction Shelter has always been perceived as one of basic human needs that protects human beings from an unpredictable and even dangerous environment and empowers creation, safe interaction and leisure. The right to shelter, or more deliberately the right to an adequate housing has recently gained a central place within the international legal system. In particular, adequate housing was recognized as part of the right to an adequate standard of living in the Universal Declaration of Human Rights of 1948, and is currently protected by international law along with protection of one’s home and privacy. According to UN Habitat, the right to housing is relevant to all states since they all have ratified at least one international treaty referring to adequate housing and provided respective commitments, in some cases backed by their national constitutions. However, UN Habitat reports over billion people deprived from adequate housing globally. Likewise, local mechanisms of state protection of the right to housing often remain absent or unclear. As practice shows, attempts to include a certain urban order into national legislation appears to be too declarative in absence of supporting state-led projects and adequate law enforcement on a local level. For instance, a notorious inclusion of a complex notion of right to the city into federal legislation in Brazil by the City Statute in 2001 did not prevent further exclusion of vulnerable groups from urban development and management practices. Likewise, such policies and legislation often fail to include definitions and context that would support their enforcement. Regarding the right to housing, its contemporary meaning borrows a lot from works of European scholars of the XIX century who tried to assess aftershocks of the Industrial Revolution, which transformed and displaced traditional agrarian communities and formed a new kind of city, so called metropolis, that distorted traditional planning borders of fortified medieval cities. Overpopulation, diseases and severe shortage of needed sewage and sanitation systems marginalized the urban working class, making them an easy target for manipulation and repression. Improving of living conditions of new urban populations became a key objective for a number of contemporary thinkers from Engels to Howard and Le Corbusier. The suggested solutions ranging from peripheral garden cities to functionalist cities of high-rise towers in most cases called for a direct state intervention in terms of new regulations introduction and, in some cases, new state-backed construction projects. However, most of these ideas found their implementation (mostly indirectly) in a post WWII period when a post-war reconstruction of cities was followed by a number of massive housing projects implemented globally. This period is also associated with adoption of universal social welfare model, including pension system, in most countries, including those that previously opposed state paternalism, such as the US. The examples of new social housing construction initiated by the state include Miljonprogrammet in Sweden and massive housing projects started by Khrushchov in the Soviet Union. Although these programmes were mostly perceived as timely and necessary ones, the flaws of quick construction out of prefabricated materials made the housing projects known as less liveable and attractive, leading to quick depreciation of housing stock and social marginalization of their residents. Demolition of housing blocks that were once erected as part of public policy had become an evidence of state’s planning failure, from US-based Pruitt Igoe in 1970s to Red Road flats in Glasgow in 2015. Additionally, state-led housing policies often represented a part of a wider ideological platform such as Folkhemmet (People’s home) idea in social-democratic Sweden. In socialist states, most particularly in the Soviet Union, state control over housing stock had been heavily politicized and served as a tool for surveillance, ideological control and even displacement. Similar practices in regards to population mobility can be also observed in today’s China. All mentioned can lead to growing concern regarding state’s ability to effectively plan and manage housing projects. However, the state’s role in today’s housing and real estate markets
should not be overestimated. Since economic liberalization of 1980s and collapse of the Soviet Union, national governments are gradually handing over responsibility over housing stock to private actors, in accordance with neoliberal paradigm that takes a clear stance against public intervention in the markets (Sager, 2011). A conversion from publicly planned solutions to competitive and market oriented ones made state interventionism somehow obsolete as cities became involved in a global competition for attracting best minds and multinational businesses. As argued by Glaeser (2011), such traditional urban planning instruments as zoning codes might undermine city’s development and lead to inefficient sprawling, as had been the case with Mumbai. In the same time, global chase for creative class results into tremendous pressure on housing prices in such cities as New York and Boston (Florida, 2005), forcing out people from their communities and creating gentrification. As pointed out by Harvey (2012), cities utilize the collective symbolic capital attached to names and places to better ground their claims to uniqueness that yields monopoly rent. Undoubtedly, emerging city marketing creates additional distortions on local housing markets, but the strongest impact is produced by another aspect of globalizing economy – a growing need for reliable and long-term haven for capital investment. The role of US government-backed Fannie Mae and Freddie Mac in triggering a housing prices bubble and, subsequently, global financial crisis of 2008-09 has received extensive coverage which however failed to prevent similar externalities of global security trading and change the underlying structure of the society in general (Marcuse, 2009). The exposed potential of housing as an investment good showcases its heavy dependence on banking system and interest rates, as well as actions of professional market intermediaries e.g. real estate agents and valuators. Within such system, urban policies implemented by local and national authorities often appear to be in no control of increasing spatial segregation, gentrification and residualisation, as was the case during transition from public housing to market-driven housing allocation in inner city of Stockholm in 1990s (Andersson and Turner, 2014). With this in mind, this paper will provide critical assessment of necessity and possibility of state intervention in a liberalized economy, particularly focusing on radical housing ownership transition in Ukraine and other Eastern European countries observed in 1990s and 2000s. The paper is focused on management of existing housing stock, although many of the issues raised can be addressed to new housing construction projects likewise. Background for housing privatisation in post-socialist countries of Eastern Europe A tectonic change in housing policies of post-socialist countries of Europe and former USSR in 1990s had a direct impact on at least 35 percents of world’s population (Renaud, 1996), or 450 million people (Tsenkova & Turner, 2004) who used to live in centrally planned economic conditions. Moreover, the housing sector was aimed to play a key role in stabilizing fragile economic ecosystems and absorbing shocks of rapid economic and social change. According to Hungarian economist Janos Kornai, socialist economies were characterized by large proportions of state ownership, state financing, somehow atrophied financial system and numerous state monopolies over production and distribution of goods and services. Given a public monopoly on land and housing, privatization of the housing sector was viewed as a precondition for further market transformations, in particular emergence of market-based housing finance. In the same time, a need for change in housing policy was supported by some firm data that showed inability of centrally planned system to fully supply the needed housing, with average rate of housing stock never reaching the Western European ratio of about 440 units per 1000 people (Renaud, 1996). Quantitative shortage coexisted with complains about quality problems of mass-produced industrial housing estate that were energy inefficient, costly to maintain and
frequently loathed by their occupants (Renaud, 1996). Another problem was related to housing allocation based on general waiting list system, which resulted in housing shortage for young families in 1980s and general mismatch between unit size and actual household needs. Moreover, the housing shortage became very visible after gradually collapsing output of completed dwellings since 1988. Nevertheless, universal access to housing in socialist countries and its provision by the state at trivial prices was frequently used as an important point in favour of superiority of socialism over capitalism (Renaud, 1996). It is necessary to mention that massive housing construction in 196080s somehow justified this point, in a very contrasting manner to severe housing shortage in the first half of the XX century. Housing policy had been an important tool for building the desired egalitarian society and resulted in forming a very compact and homogeneous urban environment in contrast to the sprawling cities of North America and also the spreading cities of Western Europe (Kährik & Tammaru, 2010). However, such quite widespread image of socialist housing as fully egalitarian and uniform contains certain misconception that are to be further revealed. In particular, perceived low-income inequalities, which could be indeed observed in socialist states, do not automatically implied absence of socio-spatial segregation and discrimination. Urban housing inequalities in socialist countries should be viewed through the political monopoly of the Communist party and inherited housing policies of historical cities such as Prague and Łódź. As pointed out by Gentile (2015), the collusion of these factors created two major consequences: the priority of investment in heavy industry and overconsumption by industrial output by militarizing state, and the widespread implementation of town planning ideals consonant with party ideology, mostly depicted in high modernism. In order to fully grasp the actual inequalities encoded in the housing stock, it is important to outline a classification of housing in accordance to Soviet-period prioritization system. Firstly, the abovementioned housing stock of historical cities that remained from pre-socialist times was often neglected by the state and significantly deteriorated, due to focus on new construction and poor maintenance of older housing and infrastructure. Additionally, a nonsocialist housing was transformed into communal apartments in the early decades of the Soviet rule through forced nationalization, eviction and uplotneniye concept that implied introduction of fixed living space per person and demanded forceful moving in of additional tenants in case of ‘excessive unoccupied living space’ (1920 Decree on Allocation of Housing for Labour Population). It also should be mentioned that the stock of so-called pre-revolution housing was limited in industrial regions, such as cities of Eastern Ukraine, and was completely absent in smaller industrial towns that were founded to support newly constructed industrial facilities. In its turn, the new Soviet prefabricated panel housing introduced the ethnic dimension in residential differentiation, housing minority population, as had been the case with Russianspeaking minority in the Tallinn urban region (Kährik & Tammaru, 2010). Secondly, under central planning construction ministries were merely line agencies with limited responsibility for policy (Renaud, 1996), while the real construction planning was initiated by the industrial sector, with many factory directors assuming the responsibility for housing their workers (Gentile, 2015). As a result, quality, quantity and even speed of housing construction directly depended on industrial growth, reproducing priorities set on a state level. For instance, housing construction linked to heavy industry and military-industrial complex often appeared to be built faster and without strict budget limits, unlikely to enforced budget constraints experienced by less prioritized industries. Additionally, such planning often ignored city’s commercial and leisure functions, leaving centres of industrial towns empty and created housing inequalities based on socio-occupational status (Gentile, 2015). Thirdly, housing policies of the socialist age mostly avoided massive construction of singlefamily housing, in contrast to the housing ideal of suburban North America. Single-family houses still make less than 1.8% of the overall housing stock, which is a direct consequence of
former planning policies. Moreover, vast majority of single-family housing construction took place in rural regions and somehow marginalized parts of cities or used as summerhouses. Due to state monopoly on land and top-down planning practices, industrial enterprises were able to lay claim to large portions of urban land for future expansion, so investment in single-family housing was almost frozen because of demolition risks in the future (Gentile, 2015). Additionally, the quality of construction of single-family housing used to be overly amateur, and some houses lacked connection to urban sanitation and central heating facilities. Hence, while the social geography of urban regions under Soviet system used to be more even that under capitalism, it was based on a number of contradictory factors, quite far from the ideals of equality. In addition, the state responsibility for construction and maintenance of housing became too heavy to carry on, partially due to heavily subsidized and extremely low rent. It is also worth mentioning that housing allocation, politically biased and often forceful in Stalinist times, more or less stabilized since 1970s, forming a perceived sense of private property over publicly rented housing. However, the first legislative initiative concerning housing privatization appeared only in 1980s, with such decrees as 1988 Cabinet of Ministers of USSR Decree on selling apartments in publicly owned housing blocks. Despite announced low prices, privatization never became popular because of lack of incentives and absence of market-based real estate market. Without market capitalization of housing privatization concept mostly benefited only real estate agents who earned commission for arranging barter exchange of housing units. Still, a truly radical housing privatization eventually took place, however taking a very different route from the one suggested by such thinkers as Kornai. Housing privatisation and emergence of real estate market in Ukraine As mentioned above, housing privatization was one of the four privatizations in transition economies, together with privatization and restructuring of large state-owned enterprises, medium and small scale urban enterprises, and that of agriculture (Renaud, 1996). The initial idea of privatization was targeted at eliminating existing housing deficit and lifting rents to a more market-based level. The new differentiated rents would then be based on attractiveness of certain type of housing, partially classified above. Inspired by Kornai, many reformers of newly independent states of Eastern Europe relied on free market forces to effectively re-arrange housing allocation and create a basis for market capitalization of housing stock. However, the actual housing privatization that followed in early 1990s in all countries of post-socialist block took quite opposite direction, rather legalizing the existing housing order and handing over housing ownership to current dwellers, while the concept of subsidized rent was mostly preserved. In Ukraine, over 5.4 million apartments had been privatized since 1993, which accounts for 85.4% of publicly owned housing stock as of the launch of privatization. It is important to mention that while housing privatization in Ukraine peaked in 1993-94 and was nearly completed before 2000, the legal basis for it is still at place, so it can be said that privatization is on-going (Berezhna, 2009). Despite the efforts to provide a market-based valuation of apartments in early 1990s, the privatization was eventually carried out basing on governmentally established standards of living space per person. As a result, 85.9% of apartments were privatized free of charge, with 78% of their dwellers receiving a compensation for insufficient living space and another 14.1% charged for ‘extra space’ (Berezhna, 2009). In order to understand a contradictory nature of housing privatization, it is important to outline the challenges that decision makers had in front of them back then. For instance, a macroeconomist’s view of privatization was focused on its ability to overcome obstacles and shortcomings of centralized planning and to share responsibility for deteriorating housing stock with population through establishing market-based prices and rents. However, a dweller’s perspective was of course focused on preserving their family shelter in the turbulent time of
transition, which explains resistance to introduction of differentiated rent prices and marketbased privatization. Rather, early privatization managed to legalize an already existing property rights, creating a basis for standard operations with property, such as housing inheritance. In such countries as Estonia early privatization also became an opportunity to settle property conflicts caused by housing nationalization and to return real estate to pre-socialist owners through so called restitution. Such practice helped to restore the social justice in regards to old property owners, however created new injustices for Soviet-era tenants who had to either start to pay the market rent to the new owners or leave their home (Kährik & Tammaru, 2010). Restitution was quite widespread in the post-socialist Baltic states, however was never implemented in Ukraine. Privatization was also a complicated and unclear bureaucratic process, in particular related to registration and cadastre systems that had substantial flaws. Much of housing privatization was overfocused on apartment units, in the same time ignoring ownership and maintenance of public spaces that required a new delineation and registration of land boundaries (Renaud, 1996). Housing privatization also failed economically in terms of achieving full cost recovery for housing maintenance. As for the capital construction costs, those were typically ignored and treated as sunk costs (Renaud, 1996). On top of everything mentioned, the most intense period of housing privatization coincided with a significant decline in output, particularly in heavy industry, and a sharp increase of inflation that followed price liberalization. Unlikely to a similar apartment privatisation campaign in China that was launched back in 1979 in a few pilot cities and provinces (Chen, 2008), postSoviet privatisation was much less planned and followed by some last-minute decisions of the government. Moreover, several waves of hyperinflation, along with replacing Soviet rubles with new national currencies, almost eliminated personal savings of citizens and disrupted their trust in financial system in general. As mentioned in the World Bank report 1996, housing privatization was meant to become one of key preconditions to market-based housing finance. However, the same report suggests few more indicators for ‘developing a modern system of housing finance’ that were never fully met: low inflation, radical banking reforms and seriously reformed laws and institutions in the real estate sector. Lengthy, bureaucratic though uncontrolled and poorly planned privatization has formed a very specific market, where a clearly neoliberal ideology somehow contributed to preserving housing conditions and inequalities of the previous socialist era rather than to reforming it. In his research of housing inequalities in Stakhanov, a midsized industrial city in the Donbas, a region Eastern Ukraine, Michael Gentile (2015) found that declining economy of this urban region never provided enough liquidity and excessive capital to initiate new housing construction – only 0.5% of the dwellings were built between 1994 and 2009 (Gentile, 2015). After losing vast majority of jobs in coal mining in 1990s, its population became impoverished, yet preserving quite typical for Ukraine average monthly income of 2,778 hryvnya, equal to 260 EUR in 2012 and only 98 EUR in February 2015 following the recent dramatic fall of the national currency (Gentile 2015). Yet, as is the case elsewhere in Ukraine, the city’s housing stock is currently almost completely in private hands, with less than 6.5% belonging to the municipal rental sector. Partially as a result of discrepancy between average income and new market valuation of privatized apartments, nearly 70% of the population in 2009 lived in the same apartments as 20 years ago. It is also highly likely that the remaining 30% have moved in with a partner, who also had a stable place of residence in the long term (Gentile, 2015). While privatization has, though quite arguably, helped the population to preserve their dwellings, it had been apparently unsuccessful in improving their housing conditions. According to research carried out by Gentile (2015), staying in slowly deteriorating socialist housing has had a significant impact on residents’ feeling of depression and even their self-rated health. As we see from this brief overview of the housing privatization in Ukraine and other postsocialist states of Eastern Europe, massive and free privatization helped to preserve the status
quo on the emerging housing market and protect the basic right to shelter. In the same time, the privatization left the newly formed market without liquidity, almost freezing the reproduction of housing as a commodity though new construction in 1990s. On the national level, the housing privatization in Ukraine is almost complete, having reached a very advanced stage – almost 96% of the overall housing stock is currently in private hands. Privatization is however still on-going, and today’s housing market is still dealing with its externalities. Firstly, hyperinflation in the first years of independence and severe economic crises in 1998, 2009 and 2014 provoked a shift to calculating real estate prices in US dollars, which still has significant impact on behaviour of housing market actors. Secondly, despite government’s early initiatives to organize cooperative forms of ownership and private housing owners associations, free privatization of apartments with no commitment regarding common areas and public spaces created a gap in housing maintenance system. Finally, a liberalized housing market with a very limited presence of public ownership forms left the system vulnerable to externalities of global financial capital circulation, resulting in housing prices bubble in 2008-09. All these consequences of early housing privatization require a more detailed overview that is to follow in the next parts of this paper. Development of cooperative forms of housing ownership in Ukraine As described above, massive apartment privatisation in 1990s has drastically changed the ownership structure of housing stock in Ukraine. However, housing maintenance remained an issue, since the rent and household utilities pricing policies did not significantly change. In the same time, the housing system passed through a radical transformation from overly centralised into piecemeal and chaotic. In a situation when no property rights effectively define who can use the common-pool resources in multiple apartment dwellings and regulate this use, a commonpool resource is under an open-access regime (Chen, 2009), which often causes quicker deterioration and wasteful usage of this resource. While the profile housing ministry remained at place, along with the public property management industry, the housing system in Ukraine de-facto became deinstitutionalized. For instance, an obvious failure to regulate use of shared property and public spaces in apartment housing, which houses 80% of the country’s population, was caused by absence of legal and organizational mechanism of interaction between owners of private apartments and organisations that provide household services and supply public utilities. This function was temporarily and mostly unsuccessfully split between remains of public housing companies, public and private energy companies and local authorities. With this in mind, for more than a decade Ukrainian governments are making attempts to promote a condominium form of housing tenure as a system that would effectively solve the challenges of housing maintenance. A condominium form of housing ownership provides a mechanism of regulation of access to common facilities in a multiple unit dwelling, thus helping residents to agree on mutual management and exploitation of hallways, heating system, elevators and exterior areas under legal rights associated with the individual ownership. Unlikely to cooperative form where a resident purchases stock in the housing corporation that owns the apartment building, condominium is a less corporatized ownership form and is primarily associated with ownership of an individual parcel of real property. Each owner of an individual condominium owns an undivided interest in the common area and shares the common charges for its maintenance. Condominiums are quite widespread in many countries, from the US to China, which allows an attempt to generalise benefits and disadvantages of this ownership form beyond specific national legislation. On the positive side, condominiums do help to achieve sustainability of institution in commonpool resources. They provide institutional design principles helping to clearly define property boundaries, introduce tools for monitoring of common resources and conflict resolution. Also, condominiums allow making effective arrangements regarding energy supply and housing
maintenance services with external subcontractors. On the negative side, being an exclusively market-based ownership form does not allow condominiums to be treated as a universal solution, especially for more vulnerable population groups. It is known that European practices of managing publicly owned houses can be divided into predominantly North-West European public housing and predominantly Southern European social housing (Magnusson & Turner, 2008). Conversion of public rental housing into market forms (condominium or cooperative housing) in both regions in 1990s often resulted into gentrification of centrally located neighbourhoods, segregation of their population and establishment of various discriminatory practices regarding membership in condominium or cooperative housing. For instance, such conversion carried out in Stockholm in the early 1990s has speeded up and reinforced the gentrification process in the inner city, with individuals with higher disposable incomes and higher levels of education replacing individuals with fewer resources (Andersson & Turner, 2014). Hence, we can draw a conclusion that this ownership form, if implemented at a massive scale, triggers negative externalities of neoliberal transformation of cities and deepens social inequalities in a spatial dimension. On the other hand, attempts to preserve social benefits and subsidies for condominium owners do not allow creating an effective service market. For instance, government’s price-capping policy for housing maintenance in China, originally aimed at reducing the nominal cost of housing services, made the privatized housing estates stuck into poor services (Chen, 2009). Absence of competition made private companies reluctant to enter this market, so the maintenance mostly remained dependent on public housing management offices that used to manage this housing stock for decades. Finally, it should be mentioned that condominiums currently have quite modest share in comparison to other ownership forms in most countries. The share of condominium or cooperative housing stays around 7% in the US, less than 20% in the Nordic states and 4% and 17% in Western and Eastern parts of Germany respectively (Bukiashvili, 2009). It is however interesting to mention that regulations in post-socialist countries, such as Slovakia, Romania, Estonia, Belarus and Moldova, mostly leave adopting condominium or similar ownership forms to voluntary initiative of the residents of multiple units dwellings, while similar regulations are almost always legally binding in Western Europe (Serdiuk & Kravchuk, 2013). Returning to the Ukrainian case, it is important to highlight the fact that condominiums here are viewed not just as a way to organise external and internal regulation of housing maintenance, but also to preserve and renovate the housing stock, 80% of which is dependent on worn-out infrastructure that experienced no renovation since the collapse of the USSR. There is also a political factor in favour of promoting condominiums, related to energy security of the country in the light of unreliable gas supply from Russia used for households heating. Due to flaws of Soviet-period construction, the majority of housing stock of 1960-80s massive housing programmes is defined by very poor energy efficiency. Since optimizing energy consumption through installing insulation or renovating pipes requires joint efforts of dwellers, condominium makes a useful ownership form for arrangements between apartment owners and state initiatives in the field of energy efficiency. With everything mentioned in mind and taking a disproportionally high share of privatised apartments in the overall housing stock, it would be logical to expect the share of condominiums in Ukraine to be higher than European average. However, the actual numbers show that condominiums have not yet become a universal, or even popular. In particular, the State Programme on Reforming of Housing Utilities in 2009-2014 mentioned 45.5 thousands of condominiums as a target for 2014, while the actual number reached only 16.5 thousands, or less than 12% of overall number of multiple apartment dwellings. The reason for this failure dates back to housing privatization in the 1990s, while some behavioural challenges of condominium establishment should be viewed in relation to earlier socialist-era housing policy.
While the state legislation on housing privatisation came into force with the respective Law of Ukraine on Privatisation of Public Housing Stock of 1992, it remained unclear how to organise housing maintenance. While the regulations regarding privatisation itself were very liberal, with free of charge privatisation of the common-pool resources and public areas, the state law provided only a vague recommendation regarding establishment of ownership responsibilities. Meanwhile, public housing companies remained responsible for maintenance and even renovation of privatised housing stock and kept all the blueprints and technical documentation for building maintenance. This discrepancy between actual ownership and responsibility for maintenance created a fake illusion of state control over condition of privatised housing, thus freezing all needed renovation works for years. Eventually, condominiums became more popular due to a very vivid inability of public housing companies to provide needed services and their reluctance to dwellers’ complains. It also should be mentioned that peculiarities of functioning of public housing companies in the Soviet times created a very powerful connection with apartment housing. Apart from routine maintenance, housing companies (so called housing exploitation departments or ЖЕУ) were responsible for ideological work, cultural activities and leisure. Historically these entities were affiliated with the Ministry of Interior and also served as state registration focal points, issuing passports and residence registrations, even after this affiliation was cancelled. This vivid presence of the state made many dwellers willing to escape this surveillance, which resulted into reluctance of the majority during private housing associations establishment. Citizens of the Soviet Union stayed out of control of their housing throughout the XX century, excluding a brief period of cooperative housing movement within the New Economic Policy (NEP) in 1920s, so self-organisation within the privatized apartment system proved to be a challenging task for them. Additionally, the national legislation on condominiums and housing associations contained a number of flaws. Firstly, while in-house common areas and resources were easy to register, external public spaces proved to be an issue, due to bureaucratic registration process and, somehow, due to modernist town planning – Soviet microrayons with freestanding buildings and absence of clear streets and inner yards made delineation difficult both for legal matters and human perception. As a result, external public spaces and street furniture became quickly deteriorated, occupied by illegal construction and parking lots. Even those multi apartment dwellings where condominium ownership was established often lacked necessary documents for maintenance of external resources, with less than 2% of such areas staying under control of condominiums by the end of 2014. Also, the basic Law of Ukraine on Associations of Apartment Housing Owners contained a lot of regulations that made establishment of condominium tenure and decision-making very troublesome, since any decision could be easily blocked by the minority of reluctant dwellers. With amendments to this law adopted only in 2015, as well as adoption of additional Law of Ukraine on Peculiarities of Apartment Ownership in a Multiple Dwelling House of 2015, these barriers were partially removed. Most importantly, the new regulation helped to prevent exclusion of certain apartment owners from housing associations, in the same time allowing tenure form change with majority of votes. The recent legislation also made public housing companies responsible for passing all necessary legal and technical documents to newly created condominium owners associations, and introduced additional tools for decision-making. Also, with this legislation the state created gentle yet strong incentive for establishment of condominium tenure. For instance, those multiple dwelling houses whose residents fail to create an association will have to use services of providers picked by the local authorities. However, perhaps the most important incentive for development of condominium tenure is financial. In 2014 the government made a decision to substantially cut the subsidies that remained from a socialist low-rent policy. As mentioned above, introducing a market based utilities and other housing services helps to create a competitive market for these services, thus providing necessary maintenance and renovation. However, there is still a risk that on early stage
the market will still be dominated by existing public housing companies, as well as private companies affiliated with real estate development industry. Surprisingly, dwellers of newly constructed apartment houses often tend to be even less likely to adopt condominium tenure, relied on maintenance services provided by the developer. At the moment it remains unclear whether the government will be able and willing to prevent monopolization of utilities market. As mentioned, one of central issues related to private housing in Ukraine is related to renovation and improving energy efficiency. While other Eastern European countries such as Poland, Czech Republic and Hungary have proved to be successful in terms of creation of specialized financial services for housing renovation matters, this industry is almost non-existent in Ukraine. The success of Polish PKO Bank Polski SA, which managed to provide over 30 thousands loans to Polish condominium owners associations between 2005 and 2011, fully relied on macroeconomic factors and market interest rates. As described above, Ukraine is experiencing one of the toughest economic crises in its modern history, so there is little hope that a paralyzed banking industry will be able to come up with necessary services at affordable cost. In such circumstances, role of the government might become crucial in arranging such financial conditions with international institutions, such as IFC, World Bank and EBRD. Additionally, direct governmental funding of such projects might prove to be much more efficient than cost of subsidizing of housing maintenance and renovation, which results into financial losses of public housing companies equal to 6.3% of country’s GDP. According to IFC and EBRD experts, the overall cost of housing renovation and thermo modernization in Ukraine exceeds 5 bn Ukrainian hryvnyas (190 mln EUR), while annual state contribution is ten times lower. In the roadmap proposed by IFC and EBRD, a number of important regulations changes are recommended to allow international institutions to provide low interest loans in Ukrainian national currency to local banks. Also, a recent Cabinet of Ministers’ decree secures up to 30% percents of state contribution for loans related to thermo modernization of housing. Introduction of non-profit revolving funds able to raise funding for housing renovation and modernization projects remains another possible option that is yet to be explored. Yet, all mentioned funding schemes become possible only given an initiative coming from the apartment owners. According to survey conducted by civil network OPORA, more than 60% of Ukrainian private apartment owners are ready to invest their personal funds into renovation of their houses. However, this hopeful statistics is being overthrown by inflation, rapid decrease of real wages and removal of utilities subsidies. While some investments related to improving energy efficiency might eventually pay off through reduced energy bills, some other costly renovation, such as roof repairs, solely lay on the dwellers. Finally, as mentioned previously condominiums represent a market based solution and serve as no replacement for social housing. While the official share of publicly owned social housing in Ukraine is quite low, there is a substantial slice of privatised apartments inhabited by vulnerable population groups, particularly elderly people. Vast majority of building constructed in 1960s and 1970s (over 72 mln of square meters) require urgent renovation. As of 2012, 118.6 thousands people lived in houses that required complete renovation or even demolition and were in hazardous condition (Pinchak, 2013). Establishment of condominium owners associations in such houses would make inhabitants solely responsible for improving their living condition, which is of course impossible. Meanwhile, the state social housing construction is still based on ineffective Soviet queue principle – there were more than 1.022 families on the waiting list for the social housing in 2012, while the actual annual construction capacity stayed at 7-11 thousands apartments in 2009-2012 (Pinchak, 2013), and was almost completely frozen in 2014. It is worth mentioning that constructing a rental housing, both public and private, carries substantial financial risks that, if applied to rents, would make rental housing less affordable than rent prices on the black market, based on sunk construction costs of privatised apartments (Bukiashvili 2009). With this in mind, market based housing renovation projects, for example
purchasing of privatised apartments from dwellers followed by their demolition and construction of rental housing might create negative externalities related to so called renoviction effect. As shown by Baeten and Listerborn (2015) in the case of Swedish Landskrona, major renovation works can be slowly turned into attempts to evict existing inhabitants in order to attract the ‘right kind of people’. Neoliberal market forces have already worsen condition of deteriorating housing stock due to gradual outmigration of dwellers with higher incomes to newly constructed housing. Following witty idea of Ebenezer Howard who promoted his Garden City project as a way to escape poor living conditions and growing municipal debt of London, absence of state’s vision of dealing with hazardously outworn housing stock provokes further marginalization of their inhabitants. As we see, the emergence of housing market with a dominant share of privatised housing no longer allows centralised state planning, limiting its influence to regulation and allocation of subsidies and benefits. In presence of a substantial share of deteriorating housing stock the state policy of promoting self-organisation of their dwellers simply contradicts the economic logic and makes dwellers vote with their feet. In order to see possibilities and limitations of state intervention in a free market condition, the last part of this paper is devoted to analysis of the housing market in Ukraine. Ukrainian housing market – a state-created neoliberalism? With entrance of global finance to housing market through mortgages and their securitization, housing has become a backbone of many national economies, as well as an integral element of the global financial system. Sustained price appreciation for almost a decade in 1990s – early 2000s turned housing into a major source of wealth (Smith & Searle, 2008), with excessive wealth generated through mortgage equity withdrawal (MEW) channelling into consumption (Ong et al., 2013). Surely, the growing role of housing market was directly connected with retreat of state and its social welfare model from housing in many countries in 1980s, in line with the overall market liberalization, most often associated globally with Reaganism and Thatcherism and the associated rise of the then ‘New Right’ (Smith, 2014). In this respect, housing privatisation in Ukraine should be rightfully linked to this global movement that affected economic and social policy of the Soviet Union during perestroika reforms and triggered market liberalization, which continued in independent states of post-USSR. However, as pointed out by Sager (2011), privatisation and commodification of housing are essentially different things, although are obviously interconnected. In order to reap the market benefits from privatisation, passing the housing stock to private owners appears to be not enough (Sager, 2011), as proved by Stakhanov case mentioned earlier. Typically, establishment of a liquid housing market requires new credit institutions aimed to serve and regulate the new housing markets, where a role of state is no longer as prominent as in social welfare system. As vividly shown by pre-2008 global financial crisis period, further financial liberalization affecting operation of credit institutions related to housing that followed overall market growth created a ‘perfect storm’ of owner occupation purchases (Smith, 2011), when housing markets were liquid, mortgages flexible, credit cheap and in good supply and regulatory regimes relaxed (Ong et al., 2013). It is important to highlight the nature of these new housing markets. Unlikely to traditional neoclassical approaches that helped to explain home price dynamics in the past, the new markets seem to lack the ‘rational economic person’ as a key actor (Smith, 2011), opening such basic terms as supply, demand, competition, price and value to scrutiny (Smith, Munro & Christie, 2005). Instead, almost full commodification and marketization of urban housing is believed to be governed by the rules of neoliberal market system (Sager, 2011), often ironically (and sometimes
seriously) mentioned in literature as ‘the villain of the XXI century’ (Smith, 2014). The externalities of this system exposed by the global financial crisis in 2008 proved that markets are no longer abstract economic concepts, since they are linked to value-laden human activities, moralities and sensibilities (Smith, 2014). This affects values on these markets, making them deeply institutionalized rather than set by an open market competition. This creates various distortions, which are to be showcased in this paper later on. There are several important externalities created by neoliberal markets, important to social research. Basing on extensive literature review put together by Sager (2011), it is possible to briefly highlight those particularly important for the subject of research of this paper. Firstly, neoliberal ideology ten to prioritise the economic aspects of housing over the social aspects, which puts social housing under pressure, along with the model of European welfare state. This also includes transfer of decision-making on housing maintenance and rehabilitation to the private sector, which implies allocation of resources to these tasks in accordance with market criteria. Secondly, neoliberal transformation of cities triggers gentrification, most broadly defined by Sager as ‘a process involving a change in the population of land-users such that new users are of a higher socio-economic status that the previous users’, but most commonly known as the new colonization of cities by the middle classes, who often represent global elite group of professionals described by Florida (2005) as ‘the creative class’. Particularly, gentrification is linked to neoliberal urban regeneration, for example revitalization of downtowns of North American cities, once abandoned by the middle class. A single most important externality of gentrification is displacement of tenured residents and whole local communities through rent increases and inability to secure another dwelling in a certain neighbourhood. Thirdly, neoliberal city re-creates quite obsolete spatial dimension of social stratification through putting physical barriers separating residents within a certain neighbourhood. The rise of gated communities, inhabited by a homogeneous social group, embrace segregation and create false sense of security, in reality provoking much faster marginalization and stigmatisation of neighbourhoods located ‘on the wrong side of the fence’. It is important that these practices of social exclusion are often not recognized as such (Sager, 2011), since public opinion is concentrated rather on lifestyle advantages of such communities, than on their design that prevents social contacts. Finally, this type of community results in privatisation of public space, somehow dismantling positive effects of liveable streets and neighbourhoods described by Jane Jacobs. While liberalization implication in housing policy concerning privatisation in Ukraine is quite obvious, it is important to further study dynamics of the local housing market in 2000s before, during and after the global financial crisis, which certainly had a significant impact on economic situation in Ukraine. After severe economic crisis and several waves of hryvnya devaluation in 1990s, macroeconomic situation more or less stabilized, allowing economic growth and increased consumption thanks to slow yet steady income increase. This period of economic recovery and rapid growth of consumer goods and services industry was also noticed by international banking institutions, many of which made a decision to enter the Ukrainian market, offering various financial services, including mortgage finance. Additionally, economic recovery allowed overcoming apathy of real estate markets and starting commercial housing construction in key cities, such as Kyiv, Odesa, Dnipropetrovsk and Kharkiv. These new construction forms and private developers successfully abandoned dependence on state-funded housing projects and quickly learnt how to work with individual
investors and financial institutions, offering various housing projects, which seemed much superior to Soviet-era construction. This emerged industry recognized a need that existed both in qualitative and quantitative dimension. As mentioned, after decades of socialist modernist housing construction many citizens became tired of monotonous gray concrete panel housing based on very modest regulations on living standards. On the other hand, an already existing in 1990s housing shortage became very visible by early 2000s. In 2003 the average number for apartment space per person in Ukraine was 21.6 sq. meters, compared to 40.5 sq. meters in Germany (Giucci et al., 2007). Hence, purchase of new housing through mortgage finance scheme became quite common and popular, while interest rates remained relatively low. The re-emergence of the housing market effectively capitalized the privatized housing stock, proving it to be extremely good investment, especially in big cities. While large-scale public and private rental market never came to existence, a vast black market for apartment rental emerged quite swiftly, enjoying absence of regulations or simply ignoring them. Renting an apartment without a contract, insurance and, subsequently, paying taxes became a common practice, make rental housing a seller’s market and putting tenants into extremely vulnerable position. However, sunk costs of initial socialist housing construction and free privatization allowed to put rents in an environment extremely close to textbook supply and demand economy, using a preference of location as a key criterion for market competition. It is also necessary to mention that rental market used to be part of a shadow, unofficial economy back in the Soviet times, which left a behavioural pattern that is extremely hard to overcome. The emergence of an obviously profitable housing market triggered another important development, which is still a key feature of Ukrainian economy – housing had become the most popular haven for excessive financial capital investment. While bank deposits rates stayed at a low level, especially in comparison to loan interest (Giucci et al., 2007), internal stock market remained too fragile and unpredictable and investment into foreign property and securities remained under heavy fiscal regulation, housing proved to be a reliable way to reinvest profits. Given the fact that Ukrainian society is a private ownership society, like the UK or Australia, the essence of such investment is rooted into effective risk-hedging mechanism. In particular, in times of economic growth housing becomes a liquid investment good, while during recessions and stagnation the housing market freezes, as had been the case in Stakhanov, prioritizing shelter function of housing over commodity and investment ones. All mentioned combined with the global financial systems externalities that became very relevant for Ukraine since 2000s, resulted into rapid overheating of the housing market. During the period between 2001 and 2007 the average apartment price in Kyiv increased 8 times in USD equivalent, encouraging a similar increase in other cities. Ever increasing housing prices ensured an additional speculative demand for housing (Giucci, Kirchner & Voznyak, 2008). The existence of price bulb on the housing market in 2007-2008 can be indirectly proved by a number of indicators, ranging from distortion of ratio between rent and purchase price of housing to low correlation between housing prices and average income increase (Giucci et al., 2007). Also, while older houses normally had up to 2.34% of empty apartments, this indicator for the new housing peaked at 8-11%, which proves that the new housing became a flagship in housing prices speculation. Another indicators is related to mortgage finance and shows that a no less than 40% of mortgages were used for speculative purposes in 2004, while the same figure for 2006 is around 60% (Giucci et al., 2007). Rapid increase in housing prices was also supported by some minor factors, such as forming an oligopoly market in construction industry, with 7 companies dominating in Kyiv in 2005 (Giucci et al., 2007).
Rents and apartment prices dynamics in Kyiv in comparison to average income increase
Source: Giucci et al., 2007
Such developments on the housing markets should also be viewed in relation to established network of professionals and institutions which mediates market transactions. As described by Smith, Munro & Christie (2005), normally there are three key types of market intermediaries: those who lubricate the flow of information between buyers and sellers (for example, real estate agents and property developers), those who attach a market value to property (surveyors) and those who deal with the legalities of property exchange (solicitors). While all mentioned professional types are still quite young in Ukraine, they served a certain role in market overheating and particularly helped to form market price for apartments built in socialist times. Observations of intermediary professionals in Edinburgh conducted by Smith et al. (2005) can be used for explaining the role of estate agents in Ukraine in interpreting economic and cultural capital. For instance, the market itself is also often described as ‘an acting subject with its own will’, while everyone is just ‘following the market’ or ‘responds to market conditions’. The professional network also prevented cases of underpricing, encouraging the owners to bring prices to ‘normal’ market level, even in cases when the apartments were located in deteriorating multi dwelling buildings. The effect of uncertainty around volatile rising prices also benefited the intermediary’s commission in most cases. Finally, one of the key features helpful for understanding Ukraine’s contemporary housing market is its reliance on USD as a key currency for property valuation and, in some cases, value transaction. After the burst of the housing price bubble in 2008, an economic downturn resulted in devaluation of hryvnya, lowering the effect of decreased housing prices. In most cases elasticity between correction of USD valuation and change in incomes or capital access condition in hryvnya is quite low, or at least slow. Following economic downturn in 2008-2009 and weak recession in early 2010s, Ukrainian economy experienced one of the severest fiscal and economic crises in its modern history in 2014-2015. In absence of housing pricing bubble experienced in 2000s, the reaction of housing prices to hryvnya devaluation and rapid real incomes decrease has been quite weak so far, due to a number of reasons. We can see several factors behind this observation, one of them being low trust in financial markets, disappearance
of mortgage finance, low deposit rates in comparison to inflation rates etc. Also, we see a poverty effect, similar to one described in Eastern Ukrainian towns, where housing markets are stripped off liquidity. There are also some external factors at place, such as inflow of (IDPs) displaced persons to main cities and uncertainty caused by warfare in Eastern Ukraine and occupation of Crimea.
Average income in hryvnya (UAH) compared to income in USD, 1995-2015
Source: ukrstat.gov.ua
One of the most important externalities of dollarization of the housing sector is decreasing affordability of housing. This effect is most vivid if observed over time. For instance, a typical 50-meter apartment in a modernist housing on the left bank of Kyiv would costs around 10-15 thousands dollars in 1990s, which equalled 7-8 annual average incomes. In 2003 this apartment would cost around 25 thousands dollars, which would make a 12-year income equivalent based on 5 to 1 ratio between hryvnya and dollar. On the peak of pricing bubble in 2007 the price would be overheated to 120-150 thousands dollars and would be occasionally offered with a 170 thousands price tag on the market. Upon the burst of pricing bubble the market price would drop by 60%, with the new hryvnya-dollar ratio of 8 to 1. Today, such apartment would cost 50-60 thousands dollars, following slow decrease in dollar valuation over 2014 and 2015. With 25 hryvnyas exchanged for 1 USD, this means a price equivalent to 25 annual incomes. Hence, with other financial instruments temporarily out of function, dollarization makes the strongest tie of the local housing market to the global financial system, and arguably least helpful one. While housing market dynamics in 2000s surely fits into the neoliberal paradigm observed globally, as well as the tendency towards handing responsibility over housing maintenance to private actors, other signs of neoliberal transformation in the housing market described by Sager (2011) are also emerging or yet to come. In particular, gated community has become a new market offer on the new housing market in Kyiv, providing a ‘safe exit’ for the middle class, which is experiencing increased crime rates, problems with car parking and changed demographics of the city due to inflow of IDPs. In its turn, gentrification has not yet become a buzzword in the Ukrainian context and is yet less visible in its hypsterification form, well narrated in the West. Gentrification externalities are also limited by prevalence of privatised housing in Ukrainian cities, which are less vulnerable than rentals. However, gentrifying efforts
might soon become visible in cities like Kyiv, Lviv and Odesa, particularly in their historical inner towns, neglected in the Soviet times. Gentrifying efforts are also noticeable in urban renewal, yet occasional, and are less visible in a spatial dimension due to dispersed and ‘egalitarian’ nature of post-socialist cities. Given visible similarities between housing markets in countries with liberalized economies, it is well worth expecting these global trends eventually coming to Ukraine with the next wave of economic recovery.
Conclusions
Housing privatization in Ukraine represents one of the most massive and dramatic known cases of liberalization of housing markets. Situation with the housing in 1980s, which triggered privatization efforts in the USSR, vividly revealed the shortcomings of a centrally planned housing policy. Despite its egalitarian image, centralized housing allocation contained numerous discriminatory policies, based on social and occupational status and state control over citizens’ mobility through restricted and bureaucratic state residence registration procedure. Housing construction also heavily relied on state policy and favoured the demands of handful of industries, providing the others with tight budgets. These budget allocation discrepancies, along with overall poor management of resources, often resulted in a quite low quality of housing construction. In a quantitative dimension, the Soviet construction industry failed to keep the necessary pace of production, revealing the growing housing shortage, while individual efforts of citizens to construct single-family houses were reduced by land use regulations, nationalised land property and risks of demolition. Hence, the centrally planned public housing system failed to provide its main commitment – deliver a high quality apartment to every family, although there are also many reasons to salute the efforts made in 1960s-1980s. Meanwhile, housing privatisation has, though arguably, helped the population to legalise their property rights and preserve their dwellings (Gentile, 2015), while being not particularly helpful for improving the housing conditions. Moreover, early years of privatisation cut the supply of housing until the new housing market and construction industry were established in early 2000s. Surprisingly, despite 96% share of private apartments and a very limited presence of public housing, housing maintenance system is currently suffering from the lack of market. Collapse of subsidized housing maintenance and household energy supply systems, which were one of important underlying motives for housing privatization in the USSR and China, was postponed for more than a decade due to economic and political risks of transition. Subsequently, government-backed plan to promote housing associations and condominium form of housing ownership failed to attract interest of the majority of privatized apartments owners. However, recent legislative and economic developments make the emergence of market based communal utilities and energy services quite probable. This might indeed result into higher enthusiasm regarding private apartments owners’ association establishment and help to implement effective housing maintenance and make necessary renovation, provided the favourable conditions will be created by the government. In the same time, market-based ownership form, such as condominium, makes no option for social housing, which is badly needed. This creates a necessity to reconsider the current, quite obsolete system of social housing construction and allocation that is slowly dying out in numbers from year to year, replacing it with a more proactive policy that serves the local need, not general indicators. However, the current share of housing stock controlled by the state does not allow any room for manoeuvre even given that a more proactive policy is adopted. With time, it will also become more and
more challenging to deny existence of essentially social housing within the privatised housing stock inhabited by vulnerable social groups. It is quite obvious that market based solutions for maintenance and housing renovation make no affordable option in such cases, while commercial urban regeneration projects carry risks of displacement. Housing privatisation and liberalization of the housing market in Ukraine also make a textbook case for studying the functioning of a newly emerged neoliberal housing market, due to rapid retreat of the state from a position of market actor and limiting its influence to fiscal and regulatory mechanisms. The latter proved to be very modestly efficient for tackling externalities of neoliberal transformation, such as the housing price bulb in 2007-2008. According to Smith (2011), home prices make a transmission mechanism of monetary policy, since they are directly linked to consumption, underpin lending, tie financial assets to home values and affect the resilience to economic shocks. Dollarisation of the housing market, along with a missing link between rent and purchase prices produce market conditions that make housing less and less affordable for Ukrainians. Recent regulatory pressure and restrictions on foreign currency exchange, however not directly targeted at housing market, proved resistance for preserving established market practices despite absurdist contradictions between housing price dynamics and average income increase. Following the paradigm of irreversibility of market transformations, starting from the initial housing privatisation, it might seem that in the Ukrainian context little can be done by the state to counterweight impact of neoliberal transformation on inclusion, diversity, equality and welfare in cities. Nevertheless, combined regulation and targeted state investment into public social housing might have a significant effect, particularly on the rental market, consequences of which are yet to be discovered. The experience of Germany and Northern European countries show that while the state can be moderately successful in the rental sector, controlling the rents or managing its own rental housing stock, house prices too often rely on interest rates, which are kept low to support the economic recovery and bail-out plans. Lastly, it is worth mentioning that social research on housing often avoids talking about private apartments and the market for homes in general, mainly focusing on social renting and the ways for state intervention in markets to promote welfare (Smith & Munro, 2008). Another gap in the housing research lies in discovering links between economics and psychology, particularly through anthropology, cultural studies, geography and sociology perspectives, in order to go beyond economic observations that too often take market imperfections and externalities for granted.
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