Site Analysis

NATIONAL STRATEGY FOR SUSTAINABLE HOUSING
WORKING PAPER FOR

THE NATIONAL COORDINATION COMMITTEE
MINISTRY OF ENVIRONMENT
VILNIUS, DECEMBER 2002
Table of Contents
1. DEVELOPING NATIONAL HOUSING STRATEGY FOR LITHUANIA ........................................................... 3
1.1 BRAINSTORMING WITH HOUSING STAKEHOLDERS .................................................................................................... 4
1.2 DIAGNOSTIC AND PROGRAMMATIC STUDIES ............................................................................................................. 4
1.3 FURTHER ACTIVITIES TOWARDS NATIONAL HOUSING STRATEGY ............................................................................. 6
2. BASIC HOUSING STRATEGIC CONCEPTS AND DEFINITIONS .................................................................... 7
2.1 HOUSING STRATEGY AS A LONG–TERM VISION ........................................................................................................ 8
2.2 HOUSING STRATEGY AS A PROCESS .......................................................................................................................... 8
2.3 CONTAINING THE SCOPE OF NATIONAL HOUSING STRATEGY ................................................................................. 10
3. HOUSING STRATEGIC PRINCIPLES, PREFERENCES AND GOALS .......................................................... 12
3.1 HOUSING STRATEGIC PRINCIPLES AND PREFERENCES ............................................................................................. 13
3.1.1 The Overarching Principle of Sustainability ................................................................................................... 13
3.1.2 The Principle of Subsidiarity ........................................................................................................................... 16
3.1.3 The Principle of Integrated Governance ......................................................................................................... 16
3.1.4 The Principle of Broad Partnership................................................................................................................. 17
3.1.5 The Principle of Social Equity ......................................................................................................................... 17
3.1.6 The Principle of Economic Efficiency.............................................................................................................. 17
3.2 DEFINING THE HOUSING PROBLEM .......................................................................................................................... 17
3.3 ARTICULATING THE SHARED VISION ....................................................................................................................... 18
3.3.1 Emphasizing the Life Cycle Model .................................................................................................................. 19
3.3.2 Recognizing the Disturbed Model in Lithuania ............................................................................................... 20
3.4 SETTING THE STRATEGIC GOALS ............................................................................................................................. 23
3.4.1 Strategic Goal I – Sustainable Housing Choice .............................................................................................. 24
3.4.2 Strategic Goal II - Sustainable Use of Existing Housing................................................................................. 24
3.4.3 Strategic Goal III – Sustainable Provision of New Housing ........................................................................... 24
3.5 EVALUATING ATTAINMENT OF HOUSING STRATEGIC GOALS .................................................................................. 24
3.5.1 Goal I: Severely Restricted Housing Choice ................................................................................................... 24
3.5.2 Goal II: Unsustainable Management of the Existing Housing ........................................................................ 29
3.5.3 Goal III: Unsustainable Level of Low Housing Production ............................................................................ 31
4. MAKING HOUSING POLICIES AND DESIGNING PROGRAMS.................................................................... 34
4.1 CHOOSING POLICY FOCUS ....................................................................................................................................... 35
4.2 POLICY “A” ON SUSTAINABLE HOUSING MANAGEMENT ........................................................................................ 35
4.2.1 The Objective of Policy “A” ............................................................................................................................ 36
4.2.2 Program “A1” on Regulatory Framework for Renovation Financing............................................................ 36
4.2.3 Program “A2” on Regulatory Framework for Property Management ........................................................... 38
4.2.4 Program “A3” on Renovation Financing........................................................................................................ 42
4.2.5 Program “A4” on Sustainable Housing Values .............................................................................................. 44
4.3 POLICY “B” ON SUSTAINABLE HOUSING CHOICE .................................................................................................... 48
4.3.1 The Objective of Policy “B” ............................................................................................................................ 48
4.3.2 Program “B1” on Housing Allowances .......................................................................................................... 49
4.3.3 Program “B2” on Mortgage Financing .......................................................................................................... 52
4.3.4 Program “B3” on Market Rental Housing...................................................................................................... 58
4.3.5 Program “B4” on Non-Profit Housing ........................................................................................................... 61
4.4 POLICY “C” ON SOCIAL COHESION IN HOUSING ...................................................................................................... 62
4.4.1 The Objective of Policy “C”............................................................................................................................ 63
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4.4.2 Program “C1” on Social Housing .................................................................................................................. 63
4.4.3 Program “C2” on Retention of Social Mix ..................................................................................................... 65
4.4.4 Program “C3” on Local Area Initiatives ....................................................................................................... 67
4.5 POLICY “D” ON SUSTAINABLE HOUSING PRODUCTION ........................................................................................... 68
4.5.1 The Objective of Policy “D”............................................................................................................................ 69
4.5.2 Advocacy Program “D1” on Land and Infrastructure.................................................................................... 69
4.5.3 Advocacy Program “D2” on Planning and Permitting................................................................................... 70
4.5.4 Program “D3” on Stimulating Market Activity............................................................................................... 71
5. IMPLEMENTING HOUSING STRATEGY IN LITHUANIA.............................................................................. 75
5.1 THE CONSTRAINTS OF EXISTING SUBSIDIES ............................................................................................................ 77
5.1.1 Interest Rate Subsidy (Soft Loans)................................................................................................................... 78
5.1.2 Mortgage Interest Deduction (MID)............................................................................................................... 78
5.1.3 Mortgage Insurance Premium (MIP) Subsidy ................................................................................................. 80
5.1.4 Credit Buy-down Grants of 10-20% ................................................................................................................ 81
5.1.5 Energy Efficiency Housing Pilot Program (EEHPP) ...................................................................................... 82
5.1.6 VAT Exemption on the EEHPP Loans ............................................................................................................. 83
5.1.7 Utility Compensation (Energy Subsidy)........................................................................................................... 84
5.1.8 Social Housing Acquisition Grants to Municipalities...................................................................................... 85
5.1.9 Low Rents in Social Housing ........................................................................................................................... 86
5.1.10 Privatized Buildings Managed by Municipalities .......................................................................................... 87
5.2 IMPERATIVE OF IMPROVED TARGETING .................................................................................................................. 89
5.2.1 Targeting of the Present Subsidy Mix .............................................................................................................. 89
5.2.2 Targeting Improvements in the Proposed Strategy.......................................................................................... 90
5.2.3 Pivotal Importance of Improved Waiting Lists ............................................................................................... 91
5.3 THE IMPERATIVE OF BUDGETARY CONSTRAINTS ................................................................................................... 93
5.3.1 Budgetary Implications of the Present Subsidy Mix ........................................................................................ 94
5.3.2 Budgetary Implications of the Proposed Subsidy Mix ..................................................................................... 96
5.4 THE IMPERATIVE OF HORIZONTAL AND VERTICAL INTEGRATION .......................................................................... 97
5.4.1 Horizontal Integration: Stronger Coordination across Ministries .................................................................. 98
5.4.2 Vertical Integration: Expanded Role of Municipalities ................................................................................. 100
5.5 PRIORITIZING PROGRAMS, PROJECTS AND DELIVERY MECHANISMS .................................................................... 101
5.5.1 General Programming Principle .................................................................................................................. 101
5.5.2 Selecting Subsidy Mix ................................................................................................................................... 102
5.5.3 Selecting Projects and Delivery Mechanisms ................................................................................................ 104
5.6 TOWARDS ADOPTION OF HOUSING STRATEGY AND WORK PLAN......................................................................... 105
5.6.1 Active Roles for Coordinating Committee and Strategy Team ...................................................................... 106
5.6.2 Proposed Calibration of the Sustainable Housing Choice Goal .................................................................. 106
5.6.3 Proposed Calibration of the Sustainable Housing Management Goal.......................................................... 109
5.6.4 Proposed Calibration of the Sustainable Housing Production Goal............................................................. 111
APPENDIX A: Estimated Cost Impact of Housing Allowances in Social Rental Housing ............................... 115
APPENDIX B: Concept of Internet Based Housing Information System at the Ministry of Environment........ 119
APPENDIX C: Maintaining and Renovating Common Areas in Multi-unit Apartment Buildings................... 125
APPENDIX D: Estimate of Indirect / Implicit Housing Subsidies in Lithuania ............................................... 131
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CHAPTER 1
1. Developing National Housing Strategy for Lithuania
1.1 Brainstorming with Housing Stakeholders
1.2 Diagnostic and Programmatic Studies
1.3 Further Activities towards Housing Strategy
3
Government of Lithuania has committed itself to formulate and develop a National Housing
Strategy in order to provide a transparent and binding policy framework and platform for designing
and implementing its various programs in support of housing in Lithuania. For coordination of this
work a Coordination Committee was appointed under the chairmanship of E. Gustainis of the
Ministry of Environment (MOE). The process of strategy formulation has to go through a number
of successive stages in a certain order: (a) brainstorming with housing stakeholders; (b) diagnostic
and programmatic studies; (c) formulation of strategic goals and policy objectives; and (d)
development of programs and implementation instruments.
1.1 Brainstorming with Housing Stakeholders

An inception event – the Brainstorming Session – was held in February 2002 with the Coordination
Committee with the purpose of articulating current perceptions about housing problems, as well as
mobilizing relevant stakeholders around the identified strategic goals and policy objectives. The
session confirmed strong support for further elaboration and development of the earlier Government
Housing Concept (adopted in September 2000) and for developing a strategic framework of explicit
housing strategic goals and policy objectives, and government housing programs with cost effective
implementation instruments.
Pursuant to the conclusions of the Brainstorming Session, the Coordinating Committee adopted the
Basic Framework for development work of the housing strategy in the Spring of 2002. The
Framework spelled out tentatively three strategic goals and six strategic policy objectives
recognizing the politically articulated principles and preferences of social equity and economic
efficiency consistent with the Government Program for 2001-2004 emphasizing the need for
targeted assistance to selected household groups, while concurrently enhancing the development of
competitive market mechanisms.
The Basic Framework stipulated that the six tentative strategic policy objectives should address
identifiable housing problems described and measured in terms of “gaps” in attainment of the three
strategic goals, with the intention to minimize these attainment gaps through a realistically possible
housing strategy. The Framework stipulated also that government housing programs should be
targeted to achieve strategic policy objectives within recognized legal, institutional, technical,
market and financial constraints as well as opportunities. Finally, the housing program
implementation instruments should be selected and designed on the basis of their cost-benefit
implications on program objectives and targets.
1.2 Diagnostic and Programmatic Studies
The Coordinating Committee promptly realized that the process of housing strategy formulation and
development was seriously impaired by the lack of sufficient information, data and analyses
required for transparent and rational evaluation and choices to be made. In order to better inform all
the stakeholders involved in the housing strategy process, three diagnostic studies were
commissioned to quantify and assess the housing problem in Lithuania in various perspectives:
Household study by incomes, attitudes, preferences and social status;
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Housing choice in terms of housing market demand and supply;
Level of attainment of housing strategic goals (housing problem);
The diagnostic studies were then followed by another three studies focusing on evaluation,
modification and development of government housing programs in order to respond strategically
and comprehensively to the identified housing problems and strategic objectives for alleviating
them. These programmatic studies were:
Evaluation and modification of contemplated housing programs;

Evaluation and (re)development of existing housing programs;
Development of a broad program for sustainable existing housing.
The studies were executed by different foreign and domestic consultants and produced several
hundred pages of reports. The foreign consultants came from such countries as United Kingdom,
United States, Canada and the Netherlands. Several studies did not deliver acceptable reports on
time and in fact the last final reports were received by the Project Team on December 10 – long
after the deadlines and a week before the Strategy Seminar. Domestic consultants were involved
either through collaboration with foreign consultants, of through involvement in the Strategy
Project Team as research consultants. The purpose of maximum possible participation of domestic
consultants was to expose them to analytical methodologies used in international policy research, as
well as to acquaint them with housing information and data framework available in Lithuania. This
participation of local consultants underscores the need to provide expert support to housing policy
makers in Lithuania.
Each of the six reports was presented at a closing seminar with stakeholders invited and hosted by
the Ministry of Environment. All materials available to study teams in English were posted at the
special World Bank web site devoted to the Housing Strategy project, so that anyone could access
this rich body of materials. All the final reports on these studies are posted on this website as well.
All of them, except one, have been translated into Lithuanian and posted on the Housing
Information web page at the Ministry of Environment (www.am.lt).
Another study, related to the National Housing Strategy Project, was conducted by an international
team inspired by the World Bank and funded by the Nordic Council, which dealt with an issue of
legal impediments to mortgage financing of common areas in multi-family buildings. The final
report of that study was presented at a concluding seminar hosted by the World Bank and the
Ministry of Environment. Altogether, 7 seminars were held with the housing stakeholders during
the execution period of the diagnostic and programmatic studies. An important purpose of the
seminars was not only to acquaint the stakeholders with the findings, or to solicit their views and
comments, but also to create an opportunity for them to meet and discuss together various housing
issues relevant to housing strategy with pertinent policies and programs. The importance of the
meetings underscored the virtual non-existence of policy discussion forum on housing and the lack
of ongoing policy research in this area – something, which is addressed later in the Strategy.
5
During the time of performing diagnostic and programmatic studies, the Government of Lithuania
moved ahead and amended most of the existing housing programs, as well as proposed new ones1.
This provided a strong signal for the Strategy work, that certain preferences and priorities have
already been resolved and should thus be included (by default) in the Strategy. Diagnostic and
programmatic studies brought a wealth of findings and recommendations, some of which simply
reiterated the popularly held opinions during the Brainstorming Session, while others revealed
issues and statistics not well known or even contrary to popular perception. The studies have raised
a number of unresolved issues that will need to be addressed by further strategy work.
1.3 Further Activities towards National Housing Strategy
The current Housing Strategy working paper submitted to the Coordinating Committee for
consideration is based on the Basic Framework, on the findings of the studies, on the conclusions
from the Government’s recent regulatory initiatives, and on Housing Project Team’s internal
conclusions and proposals. This material constitutes the point of departure for ensuing housing
strategy debate to be undertaken by the Coordinating Committee itself and within a wider circle of
housing stakeholders needed to be consulted in the process. Its formal adoption by the Coordinating
Committee will need to be followed by inter-ministerial consultations, before being submitted to the
Government Strategic Committee and finally for adoption by the Council of Ministers. If the
Government chooses, it may also propose to the Parliament to adopt the principal parts of the
Strategy to be presented for some kind of “approval”.
Even though the decision to go ahead with housing strategy work has already been taken, some
words of encouragement to preserver with this work are due here. Housing strategy is an openly
shared vision that requires transparency and courage to stand for it publicly and show leadership in
implementation. It requires that all housing stakeholders are identified and do not hide their
particular interests and pursued agendas in the housing sector. All too often housing policies in
transition countries have fallen prey to populist and mercantilist pressures by some politicians
seeking easy votes and shrewd business operators looking for easy public money2.
Formulation and adoption of housing strategy helps to: (a) articulate cohesive goals and objectives;
(b) focus limited resources on cost effective measures; (c) divide work horizontally and vertically
within the public sector; (d) harmonize diverse interests of stakeholders; (e) facilitate design of
compatible housing programs; (f) evaluate successes and failures; (g) defend public policy against
populist and mercantilist rhetoric; and (h) neutralize undue influence of special interest groups. And
finally, not without regret, Lithuania is infested like other transition countries with growing problem
of corruption. There are no reasons to believe that the housing sector has been spared of this
increasingly troublesome phenomenon. A transparent housing strategy providing solid foundations
for housing policies, programs and instruments should be helpful in combating or even preventing
corruptive practices in the housing sector.
1
These were: (a) State Support Law; (b) Mortgage Insurance decree; (c) Tax Code; (d) Utility Payment Compensation;
and (e) new mortgage bond law.
2
See for example: Raymond J. Struyk (ed): “Homeownership and Housing Finance Policy in the Former Soviet Bloc –
Costly Populism”, The Urban Institute, October 2000.
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CHAPTER 2
2. Basic Housing Strategic Concepts and Definitions
2.1 Housing Strategy as a Long-Term Vision
2.2 Housing Strategy as a Process
2.3 Containing the Scope of National Housing Strategy
7
There is an apparent need for clarification of some concepts and definitions before going further.
Frequently, there is a perception that housing strategy provides immediately executable operational
programs and instruments. There is also a perception that one may begin developing a strategy by
agreeing on “practical” activities to be undertaken. Both perceptions require substantial
qualification.
2.1 Housing Strategy as a Long–Term Vision
Housing Strategy assumes, by definition, a long-term perspective of 10-20 years from now. By
doing this, it establishes a broad set of guideposts for more detailed activities (housing programs)
that will be taking place during that time horizon. Consequently, it is not just a program for a
current government or parliament, but has a more permanent status, similar to basic laws and
institutions, which provide an anchor for various other activities of tactical (medium term) and
operational (short term) nature. Many factors, which affect development of the housing sector,
including government intervention, will have changed during such a long-term period of time. This
requires that the strategy is an vision shared by majority of housing stakeholders and that it acts as
an anchor for future governments in developing, executing and modifying housing programs.
Consequently, the strategy is a set of long range goals that the society wants to attain in the area of
housing, so that the shared vision becomes a reality.
The period of even 20 years is not too long for a strategy. The process of socio-economic catching
up with the European Union will take a similar period of time, as has been publicized widely during
the accession debate. For many policy makers the fruits of the strategy they develop, will be reaped
only by their children. So in housing, it will also take some 20 years of catching up with the
European Union “housing standards” and equally long to rectify the most serious structural gaps in
housing like addressing the problems of the current stock of multi-family buildings, which needs
massive renovation through and upgrading through a long-term government program.
The Housing Strategy focuses on selected key issues, which need long-term attention and defines
more qualitative goals of Sustainable Housing. Once the strategic goals are adopted they become
subject of tactical policy objectives with quantifiable targets and priorities. Each policy will then
use its operational housing programs and implementation instruments to achieve its objectives. This
way the Strategy gets articulated in everyday activities and has an influence on short-term results
visible by the contemporary population.
2.2 Housing Strategy as a Process
The Housing Strategy contains both the strategic goals and policy objectives. As the environment
changes with time the policies need to respond and thus a process of monitoring and adjustment is
taking place sending signals to the implementation phase to adjust programs and implementation
instruments. The Strategy is thus a process, not a fixed product. The basic concept of this process is
illustrated in Figure 1 below:
8
The first three steps in Strategy development are diagnostic in nature and require that sufficient
knowledge and evaluation be gathered before formulating the strategy with its policies, programs
and instruments. The current situation, confirmed during the Brainstorming Session, is that there is
insufficient knowledge about the households, the housing stock, and the market environment. The
Strategy process requires its own information support in order to be well informed, including
strategic analyses, prior to shifting to formulation and implementation stages. The diagnostic studies
brought more information and its analysis, but revealed also an acute lack of some categories of
information and data, which needs to be addressed in the Strategy.
Figure 1 Housing Strategic Process
I.
In v e n to ry
h o u s e h o ld s
a n d h o u s in g s to c k
II.
M o n it o r
m a rk e t
e n v ir o n m e n t
III.
E v a lu a te h o u s e h o ld s
a n d
h o u s tin g s to c k
IV .
S e t s t r a t e g ic g o a ls
a n d p o lic y o b je c tiv e s
V .
D e v e lo p p r o g r a m s a n d a p p ly
im p le m e n t a t io n in s t r u m e n t s
Information about households and housing stock (Phase I) together with information from the
Market Environment in housing, land, construction, and lending (Phase II) are brought together for
evaluation in terms of pre-established strategic goals (we discuss them in the next section).
Conclusions are drawn about the level of attainment of these goals and reasons for gaps in
attainment (Phase III). This becomes an articulation of housing problems, which need to be
addressed by the Strategy. The formulation of Housing Strategy (Phase IV) focuses on overarching
strategic goals, policy objectives (to attain these goals), principles, preferences and priorities to be
observed in policy formulation and realization during the implementation stage (Phase V) with its
programs and implementation instruments.
Both these phases, formulation and implementation have a lot of mutual feedback – the Strategy
cannot be unrealistic (impossible to implement), while the implementation programs and
instruments cannot be inconsistent with the Strategy. This interaction between policy and programs
9
is very important and yet difficult, since there is often a strong pressure from various interest groups
to push for programs (benefiting their operations) designed without explicit reference to the
Strategy. This happens, when Strategy is not explicitly articulated and formalized, which leads to
mixing instruments with objectives and creating policy chaos. We will follow, to the extent
possible, the phased approach described in the above diagram.
2.3 Containing the Scope of National Housing Strategy
Housing is a multi-faceted phenomenon cutting through various sectors and aspects, so the overall
scope of issues of interest to housing strategy may be quite long. Such a list of relevant issue may
look like below3:
Housing production: building, rebuilding

forecasting human needs and demands
land-use planning
land development and construction process
provision of infrastructure
building and renovation industry
building materials industry
ownership patterns and land development costs
forms of housing tenure and housing choice
Housing Finance: loans, subsidies, taxes:

sources of funds and credit instruments
counteracting differences in affordability
providing general subsidies
providing tax deductions and other tax breaks
providing supply-side subsidies
providing need-based subsidies
providing demand-side subsidies
lowering housing costs without subsidies
Housing Allocation: market, non-market:

market based allocation institutions mechanisms
non-market based allocation mechanisms
obstacles to “rational” distribution of housing
alternative policies for allocation of housing
creating market enabling environment
stimulating housing market activity and mobility
Rental housing: social (public), private (market):

landlord and tenant regulations
3
Modified from the United Nations Economic Commission for Europe: Housing Policy Guidelines, published in 1995.
10
rent policies towards social and private rental stock
tenant participation in the use of premises and buildings
promoting social rental housing
promoting market rental housing
tenure change through privatization and de-privatization
non-profit activities in rental housing
Housing Management: maintenance, renovations:

operating and maintenance expenses
public and private management organizations
management by homeowner organizations
strategic asset management perspective
public interest in management of housing stock
public interventions into housing management process
Division of Housing Responsibilities and Competencies:

role of governments: central, regional, county, municipal
role of the business sector: domestic, foreign
role of the third sector: NGOs, non-profits, co-operatives
Housing Policy Implementation: programs, instruments
Policy Evaluation and Monitoring: strategic goals, policy objectives
The list may be developed further and further until all typological approaches have been exhausted.
The point we are proposing to adopt by the Coordination Committee is that while housing strategy
should recognize this multi-disciplinary and cross-sectoral nature of housing issues, it cannot
pretend to address all the problems, which can be handled by other disciplines and sectors.
Consequently, a considerable attention should be given to delineating the boundary of what we call
endogenous and exogenous housing issues. We are proposing to treat as exogenous, albeit still
important and relevant, the issues of: (a) land use planning, (b) construction and building materials
industry; (c) banking and finance; (d) land and real estate market institutions and mechanisms; (e)
provision of infrastructure; (f) land and property development industry. Nevertheless, there will be
references and postulates formulated by the Housing Strategy towards those sectors.
***
The Housing Strategy needs to impose a substantial “discipline” into structuring the planned
activities. There are many ways of organizing thinking about what is and what needs to be done in
housing through various forms of public intervention. One has to choose certain, albeit not unique,
framework for use in further work and this working paper proposes such a framework with the
caveat, that there are other ways of organizing thinking about the strategy. What follows in the next
section is the presentation of such a framework together with the basic proposed goals, principles
and preferences for the ensuing housing strategy debate.
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CHAPTER 3
3. Housing Strategic Principles, Preferences and Goals
3.1 Housing Strategic Principles and Preferences

3.1.1 The Overarching Principle of Sustainability
3.1.2 The Principle of Subsidiarity
3.1.3 The Principle of Integrated Governance
3.1.4 The Principle of Broad Partnership
3.1.5 The Principle of Social Equity
3.1.6 The Principle of Economic Efficiency
3.2 Defining the Housing Problems
3.3 Articulating the Shared Vision

3.3.1 Emphasizing the Life Cycle Model
3.3.2 Recognizing Disturbed Model in Lithuania
3.4 Setting the Strategic Goals

3.4.1 Goal I: Sustainable Housing Choice
3.4.2 Goal II: Sustainable Housing Stock
3.4.3 Goal III: Sustainable Housing Production
3.5 Evaluating Attainment of Housing Strategic Goals

3.5.1 Goal I: Severely Restricted Housing Choice
3.5.2 Goal II: Unsustainable Management of Existing Housing
3.5.3 Goal III: Unsustainable Level of Little Housing Production
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This section begins the work on housing strategy with resolving the fundamental issues of basic
principles, preferences and, based on them, strategic goals to be embodied in the Housing Strategy.
Once adopted, these principles, preferences and goals will provide a stable anchor for development
of policies, programs and implementation instruments. The process of formulating the strategy and
its implementation is presented on Figure 2, which will be used illustratively as we move between
these elements.
3.1 Housing Strategic Principles and Preferences
Lithuania is on the good way towards joining the European Union. The process of adjustment will
take years and housing field will be an integral part of it, although the housing sector is not
explicitly subject of common policy4. However, housing is an integral part of sustainable urban
development framework, which is to be governed by the principles of subsidiarity, integration,
partnership, environmental sustainability, and market efficiency5. These principles are all of
interest, but the guiding one is of the overall sustainability: economic, environmental and social, as
will be developed in this document.
3.1.1 The Overarching Principle of Sustainability
This strategy puts more emphasis on the principle of sustainability, to the degree that it is embodied
in its name. While the main report elaborates various issues regarding that name and concepts of
sustainability, the shortcut version of the sustainability principle adopted for housing and articulated
here through the Basic Principle is that of:
Efficient and equitable use of resources by

present and future generations
Each word in this principle carries a lot of weight and meaning. The efficient use of resources is
linked to the requirement of market based efficiency embodied in the principle of economic
sustainability. The equitable use of resources is linked to the requirement of socially justified
access to resources embodied in the principle of social sustainability. The use of resources by
present and future generations is linked to the requirement of ecologically necessitated equilibrium
embodied in the principle of environmental sustainability.
4
However, EU housing ministers meet once a year to discuss common issues.
5
See Sustainable Urban Development in the European Union: A Framework for Action, European Commission, 1998.
13
Figure 2: Formulation of Housing Strategy and Its Implementation
H O U S IN G C H O IC E
U S E O F H O U S IN G H O U S IN G P R O D U C TIO N
H O U S IN G P R O B LE M S
P R IN C IP LE S A N D P R E FE R E N C E S :
E fficient and equitable us of resources for present and future generations
P rinciple of econom ic sustanability
P rinciple of social sustainability
P rinciple of environm ental sustainability
P rinciple of subsidiarity
P rinciple of integrated governance
P rinciple of partnerhip
P rinciple of social equity
P rinciple of econom ic efficiency
N ATIO N AL S TR ATE G Y FO R S U S TAIN AB LE H O U S IN G
G O A L I:
H ousing C hoice
G O A L II: G O A L III:
E xisting H ousing N ew H ousing
P O LIC IE S
PROGRAMS
P R O JE C TS
This overarching principle is compatible with general policy objectives of the Lithuanian
Government to develop a socially sensitive market economy based on both efficiency and equity, as
well as to create preconditions for the principles of integrating sustainable development and
14
environmental protection into other sectoral policies6. This is also compatible with the aims of the
National Commission on Sustainable Development, which is due to report in the year of 2003. And
finally, this is very much compatible with the mission of the Ministry of Environment, which has
been charged with coordinating the development of the Housing Strategy.
Economic Sustainability
In further elaboration of components of the overarching sustainability principle we adopt three

economic sustainability principles as follows:
First principle of economic sustainability: costs affordable in

the long run to central and local governments including
implementation agencies.
Government subsidy programs need to be scrutinized with the principle in mind taking into account
direct, indirect and implicit flows of public funds to the housing sector. A housing subsidy program,
which may grow beyond control in the future, and which cannot be curtailed because of guaranteed
vested interest of beneficiaries, will be an example of unsustainable program. For example, a
program of Public Education in Housing will not be sustainable unless an implementing agency,
such as the Housing Advisory Agency, becomes financially sustainable.
Second principle of economic sustainability: cost affordable to

each individual household on a month-by-month basis.
Housing has another dimension than pure shelter and its operations and maintenance. It is also a
single largest capital asset owned by most of households in Lithuania. The value of this asset may
go up or down with the market changes, but also because of its internal condition including the state
of its immediate surroundings include common areas and land around it. Economic value of
housing should be of interest to both owners themselves and to the municipality and the State. We
define the third principle of economic sustainability with respect to the optimization of this value:
Third principle of economic sustainability: program for

existing housing optimizes value of the existing housing stock.
Environmental sustainability
Housing uses a lot of natural resources and should thus be considered in terms of its impact on
environmental sustainability. We adopt one principle here:
The principle of environmental sustainability: rational use of

natural resources by minimizing harmful emissions, the use of
non-renewable resources, especially energy.
Social
sustainability
6
Program of the Government for the years 2001-2004.
15
Housing has a very strong impact on an human individual and on his/her interaction with others.
Consequently we recognize two principles of social sustainability: (a) human sustainability; and (b)
cultural sustainability.
Principle of human sustainability: minimized impact on health

and safety, with emphasis on housing as a home (psychological,
social), and special attention to vulnerable groups.
The other aspect of social sustainability is cultural: the relationships and institutions that shape the
quality of a people’s social interactions. It is strongly related to the problem of social exclusion
which is high on the EU agenda under the name of social cohesion. Hence the cultural principle of
the social sustainability reads as follows:
Principle of cultural sustainability: reinforcement of social cohesion

through social justice and inclusion, reduction of violence and fostering
social links and local decision-making.
3.1.2 The Principle of Subsidiarity
The subsidiarity principle of subsidiarity provides for decision-making at the lowest appropriate
level of government. Higher level government should take action in housing arena if it cannot be
taken at a lower level with the same effectiveness and cost. In general, central government should
create strategic framework, such as goals and objectives, and develop tools which can be used by
local authorities to their own benefit. Participation, accountability and local capacity are necessary
conditions to make subsidiarity effective. This housing strategy is proposing to emphasize this
direction as well and recommends that various ways be sought for empowering and enabling local
authorities to show more initiative in the housing arena. Consequently, the principle of subsidiarity
will be very important in designing and prioritizing institutional and organizational implementation
of housing programs, with preference given to more active role of municipalities.
3.1.3 The Principle of Integrated Governance
Many of the characteristic problems in housing are multi-dimensional and cross-sectorial, which
stems for the lack of integrated governance and administration within the public sector activities,
both vertically - between different levels of administration, and horizontally - between various
policy sectors. This results in the current Lithuanian housing initiatives split among various
ministries, as well as among levels of territorial administration. Housing strategy and its
coordinating role should be a catalyst for better streamlining of activities between ministries and
agencies concerned with housing related issues at city, sub-regional and regional levels. Better
access of local authorities to the formulation and implementation of housing policies and programs
is also important consideration. This principle suggests that stronger coordinating function be
established in the housing area to assure both vertical and horizontal integration.
16
3.1.4 The Principle of Broad Partnership
Housing problems are often very complex and addressing them requires no only horizontal and
vertical integration within the public sector, but also involvement of housing stakeholders from the
business sector, as well as from the third sector containing various non-governmental organizations
(NGOs) and non-profit institutions. At the local level, it is important to involve citizens and the
private and community sectors, thereby ensuring that: the aspirations of all the main stakeholders
are taken on board, that the needs of targeted local beneficiaries are met, that all possible resources
are mobilized and that ‘ownership’ and commitment are enhanced thus increasing policy legitimacy
and effectiveness.
3.1.5 The Principle of Social Equity
The Social Equity Principle calls for public intervention increasing housing choice of poorer and
vulnerable households in the society. This leads to the essential principle for intervention into the
housing sector, which articulates the preference that public funds be expended on selected
households rather than generally on all households or on producers and financiers. This yields the
Targeted Assistance Preference. Furthermore, this targeted assistance should focus on households
entering the homeownership market for the first time and those who are in the market, but who are
spending disproportionately high part of their incomes on housing expenses.
3.1.6 The Principle of Economic Efficiency
The Economic Efficiency Principle calls for the maximum reliance on market mechanisms, but
under the condition of competition and level playing field. Public intervention should thus focus on
enabling and fostering and regulating market provision of housing, and thus minimize public
involvement in direct housing provision. Intervention is often required because of market failures
including the adverse distribution consequences or inefficient pricing. This yields the Market
Provision Preference. Furthermore, market provision of housing should be characterized by
competition assured by the existence of level playing field and prevention of opportunities for
producers and financiers to capitalize on some of the publicly funded subsidies through higher
prices and fees.
3.2 Defining the Housing Problem
The Strategy is to provide a long-term vision of solving those housing problems, which are
“structural” rather than “cyclical”. The long-term perspective imposes the discipline for
distinguishing between these two types of problems. Cyclical problems will be gone over a longer
term period, so they can best be addressed by current, operational aspects of policy making,
typically by adjusting existing housing programs or by introducing other temporary interventions
like new programs or just new instruments.
Referring back to Figure 1, we can see that strategy formulation stage (Phase IV) begins after the
diagnostic and evaluation work has been performed. The Housing Strategy Project Team
17
commissioned one study, called the Household Study7, to focus on the inventorying stage (Phase I)
and thus provide rich material for further analysis, as well as to provide a possible model for
recurrent strategy work in the future. The Strategy Team commissioned also another study, called
the Housing Choice Study8, to focus on the market monitoring stage (Phase II) and thus provide
background material on housing choice available presently in the housing market. These two studies
provided materials for another study commissioned by the Strategy Team, which was concerned
with analyzing the level of attainment of pre-defined housing strategic goals embodied in the Basic
Framework (Phase III). This evaluating study was called Goals Attainment Study and provided
conclusions about the extent of structural long-term housing problems, which should be addressed
by the strategy9. Evaluation of goals attainment had to use pre-defined strategic goals based on the
shared long-term vision of the stakeholders who participated at the Brainstorming Seminar.
The results generally confirmed the adequacy of these goal definitions and found all three of the
strategic goals experiencing profound gaps in attainment levels. One important finding was that
housing problems are well down on the list of problems perceived by households in the present
socio-economic reality. Another important finding was, that so little is known about the actual share
of spending for housing (effort ratio) by households, with the usual figures indicating a low share,
and the other indicating high share. As this is a crucial information, the lack of agreement on this
particular indicator underscores the need to develop an appropriate and reliable information system
in housing.
Housing Choice was found to be severely restricted not only for the economically weaker
households, but also for above average income households who can afford a broader choice, but do
not find sufficiently diversified market supply as to type of dwelling, standard, location and tenure
type. Similarly, the Existing Housing use was found to be inefficient, inequitable and unsustainable
in terms of continuing decapitalization. The level and composition of New Housing construction
was also found highly unsatisfactory with in-built cost inefficiencies and little diversity. These
findings will be discussed in more detail in a later section.
3.3 Articulating the Shared Vision
The diagnostic studies provided not only the answer to the questions about goals attainment and
various recommendations. They provided quantified indicator measures of various phenomena in
housing and compared them to the European levels. They also provided, with varying degree of
success, a methodological know how transfer to domestic consultants. Through the almost 500
pages of text one could also get an idea of what is the mature European housing about. The
ambition to catch up with the European Union, which is almost universal imperative in Lithuanian
7
The Final Report (in Lithuanian) from the Household Study is available at the Housing Information internet page on
the website of the Ministry of Environment. The main report contains 83 pages, and several hundred pages are
contained in 8 annexes.
8
The Final Report (in Lithuanian) from the Housing Choice Study will be available, at some later date, at the Housing
Information internet page on the website of the Ministry of Environment. The main report contains 59 pages, and 45
pages are contained in 5 appendices.
9
The Final Report (in Lithuanian) from the Goals Attainment Study is available at the Housing Information internet
page on the website of the Ministry of Environment. The main report contains 87 pages, and 3 pages in one annex.
18
socio-economic policy, allows us to draft such a vision, by simply referring to the characteristics of
the European households and housing stock as a model to strive towards. With a bit of imagination
one may cross the Atlantic to get the vision of transatlantic housing model. The main text develops
a more thorough housing vision in this respect, while we briefly summarize it below.
We continue thinking about the vision for households and for the housing stock. The main emphasis
is put on the Sustainable Housing Choice of households as they move through their housing careers
and through their own choice of housing consumption they maximize their housing utility. To make
a long story short people typically move through their housing careers in stages. One can generally
distinguish four stages beginning with the first move out of the family home, typically in an urban
setting which dominates highly developed economies.
3.3.1 Emphasizing the Life Cycle Model
The first stage, we may call it starter housing, begins with young adults leaving their family homes
to live elsewhere. Usually, given that the young people do not have saved up capital (equity) and
high incomes, the natural choice is relatively cheap small rental housing, often shared with room
mates. Preferential location for such small rental apartments is in central parts of a city. People in
the age group of say 20-30 form small households with housing needs pointing to 1-2 room rental
apartments. An important requirement is that one lives in “institutionalized” rental apartments
catering mostly to other tenants and providing specialized services to just tenants. A growing
population age group in this category signals growing demand to accommodate this particular type
of housing demand10.
The second stage, we may call it first homebuyer stage, sets in when young adults decide to start
family life and have children, which usually happens between 25/30 and 35/40. These people will
have already made some savings, their incomes have risen reflecting growing productivity. With
some equity at hand and better income they are ready to enter the homeownership market, which is
of interest to them for two reasons: (a) getting larger space for a larger household (3 + persons); and
(b) making an investment in housing asset with prospects of competitive economic return. These
young families can afford a smaller and not very expensive housing, which is often a semi-detached
town house or raw house in average locations, which may be quite far from the center. Having
small children does not require as much space as grown up children. A growing population group of
this age will signal growing demand for smaller and cheaper low density ownership housing.
The third stage, we may call it trading up stage, sets in when the family enters a mature age
between 40/45 and 55/60. These people are at the height of their occupational careers and have
relatively good earnings, which enables them to become net savers in the society. They may have
more children, and the children are growing up and require separate rooms. Their need for space
comfort and prestigious location has grown and they have accumulated considerable equity in their
10
For example, the post World War demographic “baby” boom of 1950s exerted a massive influence on European
housing markets in late 1960s and early 1970s inspiring many apartment construction programs.
19
homes11. They can afford to sell their first home and purchase larger, more expensive home in the
area they want to live in. A growing population group of this age will signal growing demand for
larger and more expensive housing.
The fourth stage, me may call it an empty nester stage, sets in when children have left the family
“nest” leaving their parents on their own at ages 55/60 +. These people are facing smaller shelter
space needs and at the same are getting smaller earnings and need often to dis-invest in housing.
They often prefer living in smaller apartments in good central location, usually rented. They need
more services associated with apartment living and can afford both ownership and rental. The
growing population of this age will signal the need for this type of housing.
The EU housing classical model has variations, but the important thing is that life-cycle forces push
all of us into certain predictable changing housing needs and this is reflected in housing market
sooner or later, weaker or stronger, but usually in a quite definite direction. Consequently, looking
at longer-term demographic trends provides very powerful cues about the future housing needs.
Such a vision is something to strive for in terms of the housing choice for the households. Looking
at the European housing stock, what is quite clear is that the housing market offers a highly
diversifies supply of housing types, locations, standards, and tenure forms. The housing stock is
well maintained and often changes hands as people move through the housing stock in order to
adjust their housing shelter and investment needs. Each move is supposed to improve the matching
of the housing product to the needs of households with changing needs and preferences. If there are
more dwelling units than households the mobility produces vacant dwellings which are “filtered
out” by the system as unwanted either because of their condition, type, standard or location. Their
owners then make a decision if they want to demolish, renovate or upgrade it. There is sufficiently
large production of new housing to keep the mobility and housing adjustments and constantly
improve the overall housing quality, which seems to be a goal in itself with many governments
which believe that individual housing market decisions need to be additionally stimulated to
provide more housing than the market would provide without intervention12.
The overall picture of a mature housing sector is that of large diversity of possibilities and housing
choice of housing stock which is well maintained and well utilized by households moving easily
within it, while seeking maximization of their housing utility. This may well be a somewhat
“idyllic” and “sustainable” vision of future housing in Lithuania. No quantitative measures are
provided as yet, since strategic directions are usually of qualitative nature, while policy objectives
will be more quantified.
3.3.2 Recognizing the Disturbed Model in Lithuania
11
When they bought their first home they paid some equity savings. Later they were repaying a mortgage loan, which
increased their equity, and after so many years the value of their home should have increased.
12
There are several “macro-economic” arguments for stimulating higher housing consumption, which are discussed in
the main report.
20
This housing career process, strongly influenced by life cycle phases, was disturbed in Lithuania for
a long period after the Second World War. Housing careers did not follow the “classical” path and
at the outset of the transition process, the country had highly one-sided housing stock and
diversified household structure, which did not fit well with the housing stock according to the life
cycle theory. It will take still quite a number of years till the process starts resembling the European
pattern in this respect. The inception of the transition process saw a massive privatization of
housing, which in a sense deepened the disturbance by petrifying contemporary users in their
dwellings. Making a low income household into a homeowner who cannot afford to even maintain
his/her dwelling, let alone move in the housing market, locks him in his privatized dwelling
regardless of the growing misfit between changing housing needs and dwelling characteristics.
Forcing young people into homeownership, by liquidating effectively private rental stock and non-
profit co-operative alternative, created staggering capital financing problems due to lacking equity
of the young people who have not saved enough and who did not get benefits of privatization.
Even though the housing stock and its use are so different from market developed patters, the
population demographic structure is not that different as can be seen in Figure 3 below with so
called age pyramid from the year 2001.
This is one of the most important bases for strategic planning in housing, since it shows future
trends in housing needs and therefore housing demand with implications on market choice. One can
see clearly that we longer can talk about the age pyramid with the base of children going down
substantially13. The 2001 population distribution shows potential high support for housing demand.
In fact, the age group of 20 to 29 has a good proportion at 12% of the population. They could be
considered as first time buyers or renters: their first experience to buy or rent a dwelling. The next
important group is the 30 to 39 category, composed of half a million persons, who could drive the
housing market activity by improving their housing conditions by acquiring a larger dwelling.
Aging of the population is not new to most European countries, 13% of the population is 65 years
old and over. However, most of the people 65 and over are women, and they are mostly single. In
the future, these factors could have an impact on housing needs for older people both living alone or
living with their children. In brief, in the short and medium term, housing demand is supported by
quite an important group of people between 20 and 39 years old. In the long term (2011), the
housing demand will decrease due to the succession by a smaller cohort of young people. The
demographic analysis is very important for strategic housing vision, and for quantitative projections
in both housing programs and market analyses.
13
Only between 2000 and 2001 the age group 0-14 has decreased by 7%.
21
Figure 3: Population of Lithuania by age group, January 1, 2001
95+
90-94
86-89 Female Male
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
155 145 135 125 115 105 95 85 75 65 55 45 35 25 15 5 5 15 25 35 45 55 65 75 85 95 105 115 125 135 145 155
Source: Statistics Lithuania; Statistical Yearbook of Lithuania 2001 Thousands
Even more important are projections of household formation out of the population base. Household
formation is usually calculated based on census data, but in Lithuania updated census data will be
available only in the Spring of 2003. Meanwhile, number of marriages could be used as an
approximate indicator to measure the potential formation of households; specifically, the number of
people who wish to leave their parents and their family house to have their own dwelling14. In fact,
the level has been decreasing since 1990 as in most countries. Although it is difficult to base the
household information entirely on this indicator, it gives a minimum threshold for estimating
household formation. Some additional housing demand can come from families that break up after a
divorce15. Using these data the Housing Choice Study reports an estimation of potential housing
demand at approximately 25,000 dwellings per year. Those households could access housing
through the new and resale market. The life cycle will continue affecting household needs and thus
housing demand and housing choice.
Presently, one can distinguish three household groups in the housing sector:
Starter households who will start (pent-up) their housing career, have insufficient income to
pay for a dwelling and did not benefit from privatisation. Equity transfer from parents to
children is coming only in 10 to 20 years. Inheritance could however increase the asset
worth of starters, although the total impact of these transfers will also be limited and spread
out over large time-frames;
Households who live in a dwelling but who want to improve their housing situation, because
of the size of their dwelling, the housing type they are living in, the wish for more luxury
etc., this is an adjustment through moving;
14
According to Statistics Lithuania, 16 906 marriages were registered in 2001, fewer than in 2000, with the average age
of marriage at 23.6 years.
15
Some 11,000 divorces were recorded in 2000 according to Department of Statistics.
22
The existing generation of elderly people (60+) with modest income and who will move to
another dwelling (trading down) for a variety of reasons: health considerations, too much sq.
m. living space, high energy-costs, the absence of an elevator. They can move to another
homeownership segment (cheaper), since they can trade their equity in current home. They
can also afford to move to convenient rental alternative, especially when housing allowances
are available to supplement their incomes.
It is these groups and their successors that the housing strategy has to be ready to address, both in
urban and rural settings. Housing starters will increasingly be looking for rental alternative, the
“improvers” will be looking for opportunities to trade up in the market and will need more active
market with rental vacancies and more housing production. And the third group of elderly will be
looking for possibilities to “monetize” their assets by selling and trading down the market or
moving to organized rental environment with tenant services. Addressing the housing needs of these
groups is best done through strategic planning for securing sufficiently broad housing choice
available to all the three groups, which is why we propose to make Sustainable Housing Choice the
overarching strategic goal.
3.4 Setting the Strategic Goals

This “mature” model of housing careers and the housing stock facilitating these, was radically
disturbed in the Soviet socio-economic system, but we are not going to discuss its characteristics
and logic. The result is that in Lithuania at the beginning of new Millenium, we have a highly
polarized households with severely restricted housing choice and mobility, with much of existing
housing stock dilapidating due to insufficient spending on maintenance and renovation, and with
way too low production of new housing stock despite heavy subsidies. Consequently, as was
confirmed by the diagnostic studies, the country is structurally still far away from attainment of the
strategic goals, which gives reason to set these goals into the emerging housing strategy.
The finding of the three diagnostic studies suggests minor modifications to the strategic goals pre-
defined in the Basic Framework. Firstly, we strengthen the sustainability aspect by adding it to all
the names. Secondly, the Sustainable Housing Choice (Goal I) is overarching for the other two goals
of Sustainable Existing Housing (Goal II) and of Sustainable New Housing (Goal III). The reason
for this is that ultimately, the main “clients” of the housing strategy are households facing their
housing choice related to existing and new housing stock. Nevertheless, existing and new housing
stock goals are still retained as strategic goals, since the society in general has some interest vested
in the existing stock and housing production for additional societal reasons not necessarily
recognized by individual households16. The housing problem from the strategic point of view is
understood as the level of goals attainment – or alternatively the gap in goals attainment – in
regards to housing choice ambitions of households (maximum choice availability), as well as
society’s ambitions regarding the use of existing housing stock and the production of new housing
stock in the country.
16
These general public benefits of housing production and maintenance are discussed in the main report.
23
Consequently, the Strategic Goals are formulated as follows, and are consistent with definitions
used and discussed in the Basic Framework:
3.4.1 Strategic Goal I – Sustainable Housing Choice
Sustainable housing choice for as many household categories and social groups
as possible regarding dwelling type, standard, location and tenure form
3.4.2 Strategic Goal II - Sustainable Use of Existing Housing
Sustainable use of existing housing through enhancement of market mechanisms

and focusing public assistance to assure optimum housing choice
3.4.3 Strategic Goal III – Sustainable Provision of New Housing
Sustainable provision of sufficient new housing through stimulation of market

efficiency and competition with public assistance to those cannot afford it
3.5 Evaluating Attainment of Housing Strategic Goals

Monitoring of housing strategy is concerned at the highest level with examining whether the
strategic goals are being attained, or at least whether housing sector performance is getting closer to
the attainment of these goals. Such monitoring requires sufficiently organized housing information
system, which does not have to be expensive and yet provides information to all housing
stakeholders. It was realized during the Brainstorming Session that such information system does
not yet exist in Lithuania and serious gaps in information and data will need to be rectified as part
of “enabling framework program”. One could have taken a cautious approach and decided to first
develop such a system and then begin working on strategy development17. It was decided that in
Lithuania the strategy project will be launched given the existing housing information system, and
the diagnostic studies will examine the deficiencies and propose enhancement of this system. Two
studies would be undertaken with this goal in mind: (a) Housing Study; and (b) Housing Choice
Study, as was discussed earlier in this report.
3.5.1 Goal I: Severely Restricted Housing Choice
This goal has been defined as:
Sustainable housing choice for as many household categories and

social groups as possible regarding dwelling type, standard, location
and tenure form
17
Such an approach has, for example, been chosen by Latvia, which prepared a concept of a comprehensive housing
information system together with Canadian experts in the Fall of 2002.
24
The Housing Choice Study looked into housing choice available to Lithuanian households18.
Several perspectives were adopted: (a) choice of “housing products” on the market; (b) choice
conditioned by financial resources of households (affordability); and (c) mismatch between
households and housing stock.
Choice of Housing Products
Choice of housing products available to households is a matter of both the composition of the
existing stock and new construction, and market activity in offering these products. On both counts
the choice of housing products is severely restricted in Lithuania. The range of housing products is
strongly polarized in that urban areas are dominated by small dwellings in multi-family apartment
buildings, and rural areas are dominated by larger dwellings in single family homes. Range of
dwelling standard is also quite narrow and one-sided through concentration on lower standard. A
highly conspicuous feature is that of virtual lack of institutionalized private rental apartment
buildings, and informal renting of flats is also a marginal phenomenon19. This is particularly
difficult to young people who are looking for this type of housing. Consequently, they are “locked”
into homeownership problem, while older households are “locked” into larger privatized
apartments, with which they fail to qualify for utility compensation assistance. An overwhelming
majority of households live in housing, which was “chosen for them” during the Soviet economic
period.
New housing construction, which is at a very low level20, produces also polarized products of either
high rise multi-family buildings or detached single family homes. Range of choices in new
construction is also restricted by location. The new housing products cater almost exclusively to the
highest deciles of income distribution and yet offer little variety, including the lack of high service
quality rentals. Resale market is very anemic and focused mostly in large cities, which restricts
housing choice further by curtailing residential mobility21. Consequently, households are not
adjusting (optimizing) their housing consumption and are thus foregoing an opportunity for higher
housing utility and satisfaction. But expectations are low, so that majority respondents in the
Household Study did not complain about their housing situation except for heating inefficiency22
Affordability of Housing Choice
Housing choice has also a “demand side”, which is connected to the problem of affordability. This
in turn is dependent on household incomes, wealth, as well as costs and prices of housing. The most
18
The report will be shortly available at the Housing Information home page at the Ministry of Environment website:
www.am.lt
19
Data on this is not available and was indirectly collected in the Household Study. The indirect estimates point out to
5% of households being renter of individual apartments. There is higher incidence of such renting in Vilnius,
Kaunas and Klaipeda.
20
It has been estimated in the Goals Attainment Study, that annual housing production accounts for only 0,3% of the
housing stock, which is half of what is found in many transition countries, which is still way below European
standards of 1,0 – 1,5 % of annual production.
21
It has been estimated in the Goals Attainment Study, that market turnover in Lithuania amounts to 2,7% of he
housing stock, while European experience points out to some 8% for in ownership and 12% in rental markets.
22
However, some 20% complained about layout and space.
25
important factor here is income as this qualifies for financing, for renting and for getting state
subsidy23. Little is known about household incomes in Lithuania, because available statistics do not
provide reliable information in this respect, but recommendations have been made in the Household
Study on rectifying this deficiency, as well as other problems found with household surveys24.
Generally, however the following picture of household income distribution can be obtained from
Figure 5.
The figure indicates that the tenth decile25 has outstanding income levels, but the ninth decile also
has high incomes. Deciles VI, VII and VIII are still well above average of 1,000 LTL per month.
Deciles III, IV and V are slightly below average, and deciles I and II are really low income, actually
under the poverty line26.
The Housing Choice Study examined affordability issue and concluded that given the existing
housing prices and rental rates (unofficial), the poverty deciles I and II can only afford to live in
social (municipal) rental housing. The next two deciles III and IV can afford some private rental, if
available, but cannot afford to buy an apartment. It is at the average decile that homeownership
become possible given the state support programs with the average decile V being able to afford a
dwelling costing little over 60,000 LTL. The rest of deciles also can afford both private rental and
home purchase – in ever higher price and rent ranges. The market is not active enough to offer these
households housing products and / or consumer preferences are still oriented towards motor
vehicles, home electronics and foreign travel. And if have a dwelling without loan repayments and
receive utility payments compensation there is little interest in changing the status quo.
Figure 4: Household monetary net income in deciles I-X

Lt.
10000
9000
Over 3000
8000
7000
6000
5000
4000
3000
3000
1500 1750 2000

2000
900 1000
600 800
1000
400
0
I II III IV V VI VII VIII IX X
23
If the subsidy is targeted at lower income people, which is often not the case in Lithuania.
24
See Chapter 8 in the Household Study.
25
The group of 10% of the highest income households in the country.
26
A recent World Bank study indicates that 25% of people in Lithuania live under poverty line.
26
But affordability varies not only with household income, but also by location. Expensive areas
decrease affordability opening access only to those with highest incomes. As one moves to less
attractive areas in the same city, affordability increases and encompasses more decile groups in of
the income distribution. And it is similar for renting a private apartment. Affordability varies also
by family type, and here it is households without children who seem to be able to afford expensive
flats. Finally, age group does matter for affordability as well, with a clear trend for younger
households to have better incomes and thus being able to afford more/better housing. Almost 20%
of Lithuanian population is over 60 years of age with majority being single widowed women, most
of whom live in own privatized apartments being asset rich, but income poor and often failing
qualification tests for subsidy programs. Naturally, they cannot even qualify for a loan either, and so
they are locked in their apartments, because there is no rental alternative on the market or it is very
expensive and insecure27
Young households who are “income rich” usually lack the equity necessary for a downpayment.
This would limit access to some of the younger households even thought they may have to come up
with 5 per cent down payment. On the other hand mature households are in majority privatized
homeowners, which means they are “asset rich” even though they might be “income poor”. If the
“asset rich” households were able to sell their house and use the proceeds to buy a better dwelling,
they would have a lower loan to value ratio, i.e. not requiring 95 per cent debt financing.
Considering these possibilities the affordability scenario may change significantly. The issue will
shift from the buyer of the apartment sold by the trading up mature household. In future there may
be massive adjustments of this type as people will discover that moving in the market can produce
higher housing utility at the same time as it produces prospects of good investment return,
especially if subsidized by the state (i.e. other taxpayers).
As is apparent from the above the ability to pay for housing (i.e. affordability) is not the same as
willingness to pay (preferences). Housing has been competing with non-housing consumer goods
and services, and so far the non-housing goods have been attracting much of consumer attention and
affection. This is the pattern observed in other transition countries and is construed by many
analysts as a reaction to pent-up demand for consumerism, which was held back during the Soviet
times. Compared to other market economic countries of the world, with similar level of income per
capita, the transition countries – including Lithuania – witnessed during the Soviet time more
investment into housing relative to other goods. So, were it not for the Soviet economics, consumer
choice would have created a different consumption pattern with less housing (quantity) and more
non-housing goods and services. Given that such consumer preferences have now been allowed to
work in the liberalized economy, household decisions are “making” correction through partial
decapitalization of the housing stock to the level similar to the poorer market economy countries.
This strategically interesting observation can, however, be supplemented with the earlier made
argument about necessity of maintaining and upgrading the housing stock for the sake of societal
27
Non-institutionalised private rental of individual flats does not confer sufficient security of tenure that older people
would normally require.
27
benefits not necessarily recognized by private households themselves. An important component of
it, especially crucial to the Strategy for Sustainable Housing, is that decapitalization of housing
stock in a country will compromise future generation of housing consumers, which is a similar
argument made about current energy consumers and the environment. Therefore, we propose to
adopt a proactive stand in this respect and promote the goals of sustainable housing choice left to
future generations of house users. This is the link between the goal of housing choice and the use of
existing housing stock.
Mismatch Between Household and Dwelling Characteristics
The third aspect of housing choice is related to the level of fit between household and dwelling
characteristics. As was pointed out in the strategic vision for housing careers, household are in
constant need to adjust their housing consumption by moving to dwellings, which meet their needs
and thus produce housing utility. For example, if a young household grows through bearing
children, its housing space needs grow as well, and they start looking for a larger dwelling, whether
rental or owned. And vise versa, “empty nester” households of elderly, will want to adjust their
housing consumption by moving to a smaller dwelling, which allows them also to dis-invest their
capital from housing and use the proceeds to supplement their diminishing employment income.
Closer examination of the mismatch problem, to the extent there was pertinent information28
revealed a significant misfit between the size of dwellings and household’s needs (stemming from
the household size). Current housing choice (as to dwelling size) is particularly restricted for larger
households (over 3 persons), since there is simply not enough dwellings which are large enough to
accommodate this group29. At the same time there is a misfit of another type, which was mentioned
before – smaller households (one generation) occupying larger dwellings. Both these mismatches
are well illustrated in the table below. There is also a locational mismatch in Lithuania. Smaller
apartments dominate the existing housing stock in cities, while larger single family homes dominate
the rural areas. At the same time, lower income households, often elderly empty nesters, tend to live
in rural areas, while households with better incomes and children live in cities, where small
apartments dominate. This exacerbates the mismatch and reduces the housing choice further.
Figure 5: Housing Situation by Number of Rooms and Household

Type
Rooms 1 generation 2 generations 3 generations Total

1 room 9% 11% 1% 20%
2 rooms 13% 17% 1% 31%
3 rooms 9% 15% 3% 28%
4 rooms 5% 7% 3% 14%
5 or more 2% 3% 2% 7%
Total 37% 53% 10% 100%
28
The issues was examined in both the Housing Choice Study and in the Goals Attainment Study.
29
Only 16% of dwellings have 4 rooms compared to 26% of households who have 4 and more persons.
28
3.5.2 Goal II: Unsustainable Management of the Existing Housing
Sustainable use of existing housing through enhancement of

market mechanisms and focusing public assistance to assure
optimum housing choice
As was discussed in section 3.1.1 there are three categories of sustainability principles, which we
will apply in housing strategy’s policies and programs: economic, environmental and social. There
are three economic sustainability principles, two social sustainability principles and one
environmental sustainability principle. We bring here the main conclusions on sustainability of the
existing housing stock, but more detail can be found in the Sustainable Housing Program
Development Study30.
Low Economic Sustainability of the Existing Housing
Housing privatization has solved the problem of capital acquisition costs for the privatized
households, who did not have financial means for acquiring home ownership. It constituted the
largest capital transfer in Lithuania’s history, but it did not solve the problem of maintaining this
capital in terms of operating and maintenance expenditures. Since many households cannot afford
to maintain the value of this capital, they are under spending on housing maintenance, which leads
to capital depreciation (decapitalization). This violates the principle of sustainability by
compromising the interest of future generations.
Although there are conflicting estimates of the proportion of income households pay for their
housing in Lithuania (effort ratio), one estimate is that households on average already pay 30
percent of their income on housing related expenditures31. A considerable proportion pays much
more than this. However, if one takes into account the substantial under-reporting of income by
Lithuanian households, usually cited at about 30%, the effective effort ratio is closer to 25%.
International experience suggests that households can afford to pay up to a third of their income on
housing (effort ratio of 33%). Even the present, subsidized, burden may be unsustainable for a
significant minority of households32. To a large extent, this is a legacy of the system of housing
allocation, design and pricing practiced during the Soviet period, which created unsustainable high
quantities of housing consumption.
30
Available at the MOE’s website: www.am.lt
31
This estimate comes from the Households Study, available at the MOE’s Housing Information website www.am.lt.
32
Subsidization refers to utility payment compensation.
29
The apparent weaknesses in the structural condition of multi-family housing are caused by a
combination of poor construction (design and/or materials used) and negligent maintenance:
current, preventive and period33. The typical problems are leaking roofs, defective windows (within
apartments and on staircases), poor joints between panels in panel buildings (which result in water
permeating to the interior), insecure entrance doors, and dangerous balconies and entrance roof
slabs—the ‘common areas’ of multi-family housing. If certain repairs are not carried out, the life
span of many building will be substantially reduced. Yet others have adverse effects on the health
of the residents, for instance damp seeping into homes causes dampness and mold and, ultimately,
respiratory problems. Most buildings also require non-structural improvements, such as the
painting of internal common areas, or the replacement of entrance doors. The continued deferred
maintenance further decreases the value of housing stock. This process of decapitalization
compromises the vested interest of future generations and hence is unsustainable.
The problem of deferred maintenance is not only the affordability (ability to pay), but also weak
willingness to pay (preferences), because many homeowners who received privatized dwellings in
the early 1990s do not understand that they have an asset that may be sold, mortgaged or
bequeathed to others; that they have an asset that can increase or decrease in value; and that
ownership carries obligations as well as rights. Property values are also affected by uncertainties
about ownership of, and responsibility for, the land immediately surrounding apartment buildings.
Low Environmental Sustainability of the Existing Housing Stock
There are considerable inefficiencies in the space heating of residential buildings in Lithuania.
Residential space heating is, for example, 50 percent less efficient than in Denmark. This results in
excessive CO2 emissions, high fuel imports, high costs to consumers, the need for high subsidies,
and inadequate home heating. These issues were tackled by the World Bank-funded Energy
Efficiency Housing Pilot Project (EEHPP), which was highly successful as a demonstration and
pilot project. The project was not, however, sustainable, in the sense that it relied on public finance
(ultimately, the government budget) as the source of the loans, and on unsustainably high levels of
subsidy: a 30 percent grant for all beneficiaries, VAT exemptions for most components, and grants
to poor families to compensate for the cost of loan repayment.
Low Social Sustainability of the Existing Housing Stock
A recent study carried out by the World Health Organization found there to be a high incidence of
respiratory problems in panel-built housing in Vilnius, likely to be associated with poor housing
conditions. The health of residents of multi-family housing may also be adversely affected by
dwelling size and layout34; internal air quality; temperature; infestation with pests; and exposure to
noise.
33
Current maintenance responds to repair needs as they arise. Preventive maintenance is undertaken before damage or
malfunction occurs (discovered through inspections). Periodic maintenance takes place at time intervals determined in
advance (like repainting).
34
This is discussed in 3.5.1 as the problem of mismatch between household and dwelling characteristics.
30
Combating social exclusion is a central theme of Government policy, as well as being on the agenda
of the EU and of other international development institutions such as the World Bank and OECD.
Precedent from central and western Europe suggests that there is likely to be increasing
marginalization of weaker groups as a result of changes in the housing market. There are many
manifestations of social exclusion. Those primarily associated with housing are (i) the processes of
creation of marginal communities (the creation of ‘social ghettoes’), and correspondingly, (ii) the
social isolation of weaker members of the community in marginal housing.
3.5.3 Goal III: Unsustainable Level of Low Housing Production
Sustainable provision of sufficient new housing through stimulation of market

efficiency and competition with public assistance to those cannot afford it
Housing stock needs to be expanded for several reasons. The first reason is the existence of
“statistical deficit” related to the excess of the number of households over the number of dwelling35.
The second reason for more new construction is the mismatch of household and dwelling
characteristics, which is discussed in the housing choice section36. The third reason is the social and
cultural trend towards smaller household size stemming from changing lifestyles including more
divorces37. The fourth reason for new more new construction is the need to replace obsolete and
deteriorated stock, which is not economically viable to be repaired and renovated. The fifth reason
is shifting household preferences for much more diversified housing choice regarding dwelling
type, standard and location.
Finally, the sixth reason is more general and important to strategic goals than to the market itself.
There is a socio-economic strategic need to stimulate more mobility and liquidity in the housing
markets, so that household can adjust their housing consumption by moving to new stock and thus
releasing the dwellings they vacate to others, who in turn release their dwellings and so on.
Consequently, each newly produced dwelling unit stimulates a series of adjustment moves.
Assuming that each move facilitates better adjustment of housing consumption and housing utility
of households, there are multiplier effects stemming from construction of a new dwelling.
Eventually, if the housing market is efficient enough, at the end of this chain of moves one finds
unwanted dwellings units, because of their condition, type, standard and location. Their owners
make decision about redevelopment or abandonment. This process is called filtering or trickle down
process and its beneficial multiplier effects depend heavily on the efficiency of the housing market
35
It is not necessary to have one dwelling for each household due to some multi-generation households, especially in
rural areas. In Europe such “natural deficit” is assumed in the Goals Attainment Study to be at the level of 2%. In
Lithuania total deficit is 3.7%, which yields a “net deficit” of 1.7%.
36
Some 13% of all households are larger households (usually younger) who occupy insufficiently small dwellings.
Some 10% of all households are smaller households (usually older) who occupy excessively larger dwellings.
37
Sometimes it is referred to as atomization of the society. The Goals Attainment Study assumes that the current
household size of 2.7 persons will be gradually reduced to 2.3 persons.
31
mechanism. This means that the policy of supporting new construction needs to be supplemented by
policy of enhancing the housing market efficiency. Diagnostic studies have made estimates of
potential housing demand.
Estimates point out to potential demand for producing about 20,000

dwellings per year with the split of 80% ownership and 20% rental.
Instead the actual figure is dramatically different. Housing production has gone down substantially
in Lithuania, since the beginning of the transition period, see Figure 6 below. Over the span of
twelve years, the number of new dwellings completed has dropped from 22,100 dwelling units in
1990 to 3,785 dwelling units in 2001. Most of the decrease in residential construction activity is due
to a drop in multi-family construction. In 2001, residential construction activity fell by 13.3 per
cent, both single-family construction and multi-family construction recorded drops in activity, by
6.8 per cent and 18.5 per cent respectively when compared to 2000.
An indicator that helps describe the rate of new home construction over time is the number of new
dwellings completed per thousand inhabitants. In 2001, there were 3,785 new dwellings completed
giving a rate of 1.09 new dwellings completed per 1000 inhabitants. Since 1990, the rate of new
construction has progressively fallen from 5.96 new dwellings completed per thousand inhabitants
to its lowest level of 1.09 in 2001. This decrease in residential construction is attributed to a drop in
state-sponsored construction, while the private sector construction has not compensated for this
sharp drop. When examining the value of construction loans that are destined for both residential
and commercial purposes, a gradual recovery has been recorded since 1998, which is due to
building larger and higher standard dwellings. Furthermore, the figures on new construction are
under-estimated as some households forfeit to report the newly completed and occupied. In general,
however, one concludes that housing construction is at a very low level, and we believe it is
unsustainably too low. This rate of production corresponds to 0.3% replacement rate38, which is half
of what exists in many transition countries and which is a far cry from the European standards of 1-
1.5% replacement rate.
38
Ratio of new construction volume to total existing housing stock.
32
Figure 6: Housing Construction Completions in Lithuania, 1990-2001
2 5 ,0 0 0
1 -2 d w e llin g b u ild in g s
Num b er o f d w ellings com pleted
2 0 ,0 0 0 3 + d w e llin g b u ild in g s
T o ta l
1 5 ,0 0 0
1 0 ,0 0 0
5 ,0 0 0
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
S o u r c e : S ta tis tic s L ith u a n ia ; S ta tis tic a l Y e a rb o o k o f L ith u a n ia 2 0 0 1
One important caveat has to be made here. Estimations of potential housing demand are based on
assumptions that households want to improve their housing situation as soon as they achieve ability
to pay for housing. Changing consumer preferences, however, point out to much more interest in
other non-housing goods and services such as cars, home electronics or foreign travel.
Consequently, the ability to pay (affordability) is not the same as willingness to pay (preferences).
Households interested in non-housing goods and services will dedicate a lower effort ratio to
housing consumption and will thus continue to under-spend on the existing housing stock and on
acquiring new housing. Many experts believe, however, that the “fascination” with non-housing
goods and services will gradually decrease and households will shift their interests towards housing.
This shift may be enhanced by government policy of making households aware, that they have to
eventually pay for maintaining their dwellings at such a level as to sustain economic values of the
biggest assets of their lifetime.
33
CHAPTER 4
4. Making Housing Policies and Designing Programs
4.1 Choosing Policy Focus
4.2 Policy “A” on Sustainable Housing Management

4.2.1 The Objective of Policy “A”
4.2.2 Program A1 on Regulatory Framework for Renovation Financing
4.2.3 Program A2 on Regulatory Framework for Property Management
4.2.4 Program A3 on State Sponsored Renovation Insurance
4.2.5 Program A4 on Sustainable Housing Values
4.3 Policy “B” on Sustainable Housing Choice

4.3.1 The Objective of Policy “B”
4.3.2 Program “B1” on Housing Allowances
4.3.3 Program “B2” on Mortgage Financing
4.3.4 Program “B3” on Market Rental Housing
4.3.5 Program “B4” on Non-Profit Housing
4.4 Policy “C” on Social Cohesion in Housing

4.4.1 The Objective of Policy “C”
4.4.2 Program “C1” on Social Housing
4.4.3 Program “C2” on Retention of Social Mix
4.4.4 Program “C3” on Local Area Initiatives
4.5 Policy “D” on Sustainable Housing Production

4.5.1 The Objective of Policy “D”
4.5.2 Advocacy Program “D1” on Land and Infrastructure
4.5.3 Advocacy Program “D2” on Planning and Permitting
4.5.4 Program “D3” on Stimulating Market Activity
34
The setting and evaluating of strategic goals is ideologically and analytically oriented part of the
strategy process. Once it has been done, the next step is to respond to conclusions regarding level of
attainment of strategic goals, i.e. the intensity of housing problems to be solved in the long run. This
part of the strategy development process is preparing directions for responding to the problems
through policies and their articulated objectives. Policies together constitute the actionable ways of
pursuing the strategy. They can be grouped and mixed in variety of ways, and it is up to strategic
planners to decide how to compose the policy mix.
4.1 Choosing Policy Focus

Policies require setting of target objectives in more quantifiable terms than the strategic goals,
which are most often expressed in qualitative forms. It is the need for attainment of the housing
strategic goals that gives rise to housing policies. The policies will often be articulated through
enabling legislative and regulatory acts, but not always. The policies can intervene into the existing
housing sector in a variety of ways, not just through publicly funded subsidies. The choice of
policies is guided, or restricted, by existence of the earlier adopted principles, preferences and
priorities. Policies can be created for achieving particular strategic goal or all together. The
important principle in developing polity mix is to check whether they are cohesive and not mutually
counteractive.
In reference to the Basic Framework developed on the basis of the Brainstorming Session, the
strategic policy objectives have been modified after the analysis of the findings generated in the
three diagnostic studies, which brought a wealth of information, data and analyses. The policies
create frame of reference for designing programs, which or may not be executable immediately. The
important thing is that policies create directions for finding solutions, through various programs
with various instruments.
4.2 Policy “A” on Sustainable Housing Management
The management system of the existing housing stock has been found as unsustainable, especially
in reference to the multi-family apartment dwellings, which are facing energy inefficiency
problems, structural problems and deferred maintenance problems, social exclusion and human
health problems, as well as value decapitalization problems. They have been described in detail in
the Sustainable Housing Program Development Study, but the brief reminder is listed in point form
below:
Weak structural condition: roofs, windows, joists, doors, balconies,

High energy consumption, unhealthy emissions, inadequate heating,
Health problems stemming from dampness and mold,
Aesthetic pollution from unsightly common areas and grounds,
Decapitalizing economic values,
Affordability problems with maintenance and operating expenses,
Affordability problems with financing energy improvements,
Excessively costly subsidies for utility payment compensation,
35
Low ability to move within the housing stock,
Little social interaction of residents regarding common areas,
Increasing violence including suicides.
4.2.1 The Objective of Policy “A”
The problems of unsustainable management of the existing housing stock compromise the
attainment of the strategic goal of sustainable housing management. These problems stem from
insufficient economic maintenance, repair and upgrading of existing housing through deferred
maintenance and lack of capital improvements. So while the general policy objective is:
Policy “A” Objective:

Increased Maintenance, Repair and Upgrading of Multi-Family Housing
the targets of the policy will be the causes that impede the achievement of this objective. Targeting
of the policy will need to be compatible with principles, preferences and priorities surrounding the
strategy as proposed earlier. Policy targets will give rise to development of specific programs to
achieve these targets.
4.2.2 Program “A1” on Regulatory Framework for Renovation Financing
The problem of unsustainable housing management is being traced to deficient legal / institutional
framework, which makes it excessively risky for the banks to lend to HOAs for common area
maintenance, renovation and upgrading, including energy efficiency installations. The problems
stem from the legal nature of HOAs, their incomplete membership and their inability to execute
payments from members for possible loan repayments. A special study has been completed for
diagnosing these problems and suggesting rectifying activities to be undertaken by the
government39.
Program A1 Target:
Enabled Market Financing of Common Area Renovations
The program for rectifying these impediments would need to consider a number of
recommendations proposed in that study. Each of them could become an instrument in the form of a
specific project. Without going to the details here, some profound changes to the legal and
institutional infrastructure would need to undertaken by the government: Civil Code, Code of Civil
Procedures, and the Law on the Associations of Multi Family Apartment Building Owners (HOAs).
Independently of law amendments, which are always difficult and time consuming, a contract based
mortgaging system could be introduced with development of model contracts prepared by banks
39
The report: Apartment Ownership and Mortgage Finance in Lithuania, published in the Fall of 2002, is available at
the MOE’s Housing Information website: www.am.lt.
36
and organizations40. Alternatively to these changes aimed at improving the legal environment, the
State could in the meantime consider “compensating” for the deficient legal infrastructure by
introducing an alternative risk reducing instrument in the form of credit insurance or guarantee,
wherein the State would share risks with the banks.
The recommendations of the Study point out to the need to continue the regulatory work of the
Ministry of Environment aimed at reducing the risk of disputes concerning to what extent each
owner has a duty to pay for maintenance and operation of the property. The efforts already laid
down in defining the content of necessary maintenance and operation of the building are endorsed
by the working group. Recommendations go further by suggesting that a state or municipal agency
be authorized to make advance decisions on whether or not particular plans of maintenance
measures are within the powers of an administrator, a housing association or the majority of
owners41. An issue is also raised about the need to take insurance for parts of the property that are
not covered by individual insurance. The above changes will need to be embodied in amended STR
issued by the MOE42.
Another issue raised by the Study is that of the need to develop model agreements for joint
activities by apartment owners. This may substitute for the absence of HOA or of appointed
administrator. Finally, another legal recommendation regarding those homeowners who cannot
afford the repayment of renovation loans, focuses on the concept of developing an instrument of
reverse mortgage by the virtue of which, homeowners could gradually release their equity in the
apartment in exchange for the bank forgiving the due repayments on the renovation loan.
Projects to Develop and Implement:

Consequently, one could identify the following “instrumental” projects:
Project A1a:
Legal Institute of Mortgage Lien
Project A1b:
Priority Collateral as Alternative to Lien
Project A1c:
Contract Based System of Mortgages
40
Package solutions with banks including owners’ agreement, new mortgage, refinancing of existing mortgage loans.
41
An advance decision should be presumed correct until it is established without doubt that the decision of the agency
be wrong.
42
STR. 1.12.05:2002 Compulsory Requirements for the Use and Maintenance of Residential Houses and the Procedure
of their Implementation.
37
Project A1d:
Clear Owner Responsibilities in HOAs
Project A1d:
Model Agreements of Owners’ Joint Activities
A separate project on credit insurance for renovation purposes is discussed in 4.2.4. While these
projects separately or jointly will contribute to reduction of certain barriers to mortgage lending for
common area renovations, there are still other problems in need of resolution to promote such
lending promotion of organizations of apartment owners, producing and distributing information on
the technical, organizational and legal aspects of apartment ownership, etc. These are taken up in
other programs.
4.2.3 Program “A2” on Regulatory Framework for Property Management
Sustainable management of the existing housing stock requires certain level of necessary
expenditures for operations and management. And it is quite obvious that in the long run these
expenses must be borne by home owners with the exception of those households who absolutely
cannot afford and yet qualify to stay in their housing according to state support criteria. Small part
of the housing stock is rented as social municipal housing to households who are presumably poor,
but anecdotal evidence indicates that this is not always true. Municipal maintenance companies
(MMCs), who manage this stock, are spending more on operations and maintenance, than they are
getting in rents43. They are also not collecting much of rent arrears. Consequently, the social
housing stock is not maintained properly and is decapitalizing, because rents are very low, on the
one hand, and on the other hand property management is likely to be suboptimal, since there is no
competitive pressure on MMCs to increase their efficiency. Notions of asset and value management
on behalf of the (municipal) owner is not known, let alone practiced. The concept of management
plan prepared for each property in medium-term horizon is not being utilized.
This pattern is also found with regard to the private multi-family dwellings and their buildings.
Despite nearly universal privatization of municipal apartments, maintenance of buildings – i.e.
common areas – is overwhelmingly provided by the same MMCs, which cater to the social housing
stock44. Consequently, the process of privatization failed to private management of assets
transferred to private owners. It also failed to transfer land ownership, and thus failed to define
housing as real estate meant to be land and buildings together.
43
These companies estimate their monthly costs at 0.80 lt/m2, while they are charging 0.25 lt/m2 (data from year 2000).
44
In some municipalities MMCs were privatized, but there was no assurance that “new companies” would be more
efficient, without much competition, education and training.
38
The fee they are charging to private owners (former tenants) is again much below their costs45,
which amount to a substantial implicit subsidy, which is calculated elsewhere. On the other hand,
the owners get also insufficient service, which leads to deferred current, preventive and periodic
maintenance and in consequence to decapitalization of common areas including grounds and yards
surrounding the buildings. The situation is exacerbated by owners’ lack of awareness that common
property contributes to the value of their dwelling assets, because many do not even perceive they
have an asset, which has value, which can be monetized in various ways to their advantage46. They
are also unwilling to share expenses with others, since there is no clear and enforceable way for
payment solidarity47.
The way out is to stimulate repairs and maintenance to arrest the decapitalization of the stock and
bring it back to the sustainable level, which is described elsewhere48. But most of the stock will not
be subject to renovation, which urgently requires competitive property management to rationalize
expenses and manage dwellings as assets of the owners. Also, after renovation there will be an
urgent need to manage the building efficiently to help owners in repayment of the loans and realize
benefits of renovation, through reasonable management fees.
In order to rationalize expenses, one needs to look at their structure and identify those items, which
account for the biggest share so that most of the effort is to focused on this. Without recalling the
figures, it is well known that energy expenses constitute lion’s share of operating and maintenance
expenses, both because of the very inefficient installations and distribution networks of utilities, and
because households do not carry capital expenses having obtained essentially free capital transfer
from the state. Additional factor contributing to excessively high energy consumption is the system
of calculating payments and their compensation through the state program49, and this will need to be
changed as well under another proposed program50.
45
A ball park figure of maintenance fees being 1/3 of MMC’s costs is being used.
46
Dwellings may be mortgaged, sold or rented out to generate money, hence the term “monetization”.
47
This has been dealt with in the Program on Legal / Institutional Framework for Renovation Finance.
48
See the Program on State Sponsored Renovation Insurance.
49
The program on social assistance contains the scheme we call here Utility payment compensation program, which is
analyzed in the Program on Housing Allowances in the Policy for Sustainable Choice.
50
The proposed housing allowance program is described in the Policy for Sustainable Housing Choice.
39
In this program we aim at increasing efficiency of property management services in Lithuania,
regardless to whom they are rendered: public or private owners.
Program “A2” Target:

Increased Efficiency of Property Management Services
Efficient property management services require competition, education and training, as well as
business ethics and integrity of those who render services. Increasing competition pressure requires
that MMCs be no longer automatically linked to municipal budgets, but they will be subjected to
the corporate law, by becoming joint stock companies owned by municipalities. This process of
corporatization is usually the first step toward successive privatization through sale of the company
by the municipality. There is also another way to follow, since most of the owners are free to
choose property managers, if they can only agree on who to select and how to assure sharing of
costs. For most of the owners, who continue to call themselves tenants, it is rather convenient to
receive a bill for maintenance from “municipality”, rather than go through the exercise of getting
together and deciding on who to hire, how to negotiate and enforce a management contract. The
government has created a legal framework for encouraging owners to make this selection, but few
municipalities have initiated this process, and if they initiate this – as in Vilnius – owners tend to
fall back on “administrators” to be appointed by municipality, since they feel this is a model closest
to the “status quo”. Consequently, there seems to be a need for encouraging municipalities to
proceed with privatization of MMC’s, which can then render services even to appointed
administrators.
State Licensing of Property Managers
Regardless of what path privatization follows, the assurance of professional competence can happen
through licensing of individuals to perform the function of property manager with the understanding
that what is required is not just building administration, but management of a real property asset.
The Ministry of Environment has collaborated with Vilnius municipality on sort of certification
issued to companies who wanted to be registered by the municipality as potential administrators.
Some training has been taking place, but certificates were issued to companies and not individuals.
A new system for licensing of property managers should be developed as a special project under
this program. The experience of the above mentioned training should be utilized, together with
excellent academic knowledge available in the country in this subject51. Practical experience setting
up expense accounting and technical maintenance, including special software, has been
accumulated in the Housing Advisory Agency, which can be an institutional location of such
activities.
One can also call on experience of similar countries like Poland, where the licensing system has
been in operation since 1998 and has produced 14 000 of licensed property managers working for
variety of owners: municipalities, public enterprises, cooperatives, HOAs, and rental apartment
owners. Training of property managers requires a course of some 150 hours of instruction,
51
Vilnius Technical University has been conducting courses in this area since several years.
40
preparation of two actual property management plans, and participation in workshops on practical
aspects of property management. Practitioners with long term experience are granted some
exemptions from these requirements. A final state licensing exam has to be passed in writing and
orally. Property managers have to participate in 30 hours of continuous professional development
per year. There are several national associations of property managers.
It is proposed that the Government undertakes an assessment of professional needs in the sector and
considers state licensing in response to the findings of the assessment. One will need to investigate
which ministry should be appropriate to develop such a licensing system52. Depending on the
outcome the Ministry of Environment may be “just” advocating this solution.
Improving Regulations on Building Maintenance
Earlier this year, the Ministry of Environment approved the legal instrument for the regulation of
minimum requirements for building maintenance53. This regulation does not yet have the full status
of a legal instrument, for which it is first necessary to have an enabling law, either a new law or an
amendment of existing legislation. At the time of writing, the legal instrument was under active
preparation within the Ministry of Environment. These issues are covered under the Program A1 on
Legal / Institutional Framework for Housing Renovation. EU Directives on the energy certification
of existing buildings need to be legislated in Lithuania. We understand that legislation is currently
in course of preparation54.
As was already mentioned The Civil Code requires that a building administrator be appointed for
multi-family buildings that do not have a homeowner association or the equivalent. However, the
duties and responsibilities of the administrator are not clearly defined vis-à-vis recovery of
expenses. These issues are covered under the Program A1.
Another initiative under preparation is that of building certification, which would increase
awareness of the need for maintenance, repairs and renovation. These efforts should be endorsed,
provided that the costs of such a massive undertaking be taken into account relatively early55.
Since regulatory issues are undertaken by other programs and projects, it is proposed that one
project be considered under this Program:
Project A2a:
State Licensing of Property Managers
52
Ministry of Economy might be interested in regulating the development of a real estate sector and thus feel better
suited to promote this process.
53
STR 1.12.05:2002
54
See the Program on Building Quality Registration and Certification.
55
Housing and Urban Development Foundation and Housing Advisory Agency have been developing this concept
together with Danish experts.
41
Project A2b:
Building Quality Registration and Certification
The project should have a one year horizon for reporting the findings. The cost of the licensing
system should be negligible, since licensing costs will be borne by license holders. A special
regulation will be required to introduce licensing.
4.2.4 Program “A3” on Renovation Financing
The effort to encourage renovation and upgrading of the existing housing stock has to be based on
market financing of renovation loans. So far, banks have not been able or interested to lend for
common area investments, because of various legal impediments56, lack of professional property
management services, inability and/or unwillingness to pay on the part of homeowners, stemming
partly from lack of awareness of asset value consequence and partly from excessive utility payment
compensation discouraging energy savings initiatives.
In order to entice the banks to consider lending for common area improvements, one has to provide
sufficient comfort in credit risk management. Removal of deficiencies in legal and institutional
framework would be the first best solution for governmental policy57. This may take still some time,
and the second best solution for the coming years should be compensation of institutional
deficiency with state sponsored credit enhancements to private banks, so that they are willing to
focus their emerging interest in consumer finance on providing funding for maintaining and
upgrading the existing housing stock.

Credit Insurance to Lenders for Qualified Renovation Loans
The program is linked to in the package with other indispensable programs:
Program A2 on Regulatory Framework for Property Management

Program A1 on Regulatory Framework for Renovation Financing
Program B1 on Housing Allowances (Project B1b on Renovation Allowances)
Commercial banks in Lithuania already provide mortgage lending and it represents a growing
portion of their portfolios. A large part of such lending is covered by partial insurance of principal
and interest from the government-backed Lithuanian Mortgage Insurance Company (LMIC). Banks
have expressed interest in expanding their current lending to uncollateralized consumer finance, but
as of yet have done little such lending and are unlikely to do so without insurance of part of the risk
56
See section 4.2.2 for discussion and references.
57
In accordance with the preference for regulatory non-subsidized policy intervention.
42
stemming from deficient legal framework. The government program to improve housing
maintenance could build on the results of prior programs for energy efficiency and mortgage
insurance–e.g. zero defaults on energy efficiency loans – and require significant private risk sharing
when providing insurance for loans for upgrading and maintenance of common areas of residential
housing. By linking access to insurance to improvements in the co-ownership structures (i.e.,
establishment of Home Owners Associations “HOA”s), the insurance program would increase the
likelihood that in the future renovated buildings will be adequately maintained which will increase
their collateral value and the potential for further bank financing. If, in addition, the legal
framework for co-ownership is improved as indicated above, the banks’ willingness to share the
risk will increase. Thus the coverage of government-backed insurance program could be sharply
reduced compared to the current energy efficiency program, and phased out over the medium term
The insurance program would have to be structured to minimize the public share of the cost and risk
and at the same time provide enough incentives to private banks to start lending for this purpose,
which so far they have not done. . The main factors to be considered in relation to the insurance are
a) risks to be covered, b) the portion of loans to be covered by the insurance, c) the sharing of losses
between the insurer and the banks, d) preconditions for payment of the insured amount, and e) how
much capital should be required in relation to outstanding and committed insurance amounts.
In terms of risks to be covered there is the credit risk and the ‘political risk’, the latter being mainly
the risk of deficiencies in the legal framework and practices. A guarantee of only the political risk
would most likely not be sufficient to get the banks interested. The preliminary cost estimate below
assumes that the insurance would be for a maximum of 50% of the loans. This and other details
needs to be discussed with the banks. The insurance currently being extended to banks for loans to
homeowners is first loss insurance , that is the insurance pays all losses of principal up to 25% of
the outstanding loan. The insurance to HOAs is assumed to be pro rata, that is losses are shared
equally between the insurer and the bank. One important question is also at what stage the
insurance amount is paid. Will the insurer pay upon demand or does the bank first have to take legal
action and force a sale of the apartment building? This also has to be investigated further.
LMIC could be the implementing agency for the insurance facility. LMIC has more than two years
experience in mortgage insurance. It insures (guarantees) up to 25% (previously 100%) of loans by
Lithuanian banks to homeowners for the purchase or renovation of flats and houses against a
mortgage. This enables homeowners to buy homes with as little as a 5% down payment. LMIC’s
credit record can be judged as good and for a number of incidental reasons its current portfolio is
undoubtedly strong. Since the first insurance was made in June of 2000 and up to October 2002,
LMIC has approved guarantees for a total of LTL 244 million for about 5,800 loans. So far there
have been only three defaults corresponding to an insignificant share of outstanding insurance
amounts.
The insurance supervisor has not established any capital requirements or other criteria limiting the
total amount of outstanding insurance for LMIC. The Ministry of Finance has made clear that the
existing public subscription is the limit of public capital. For banks the minimum capital
requirement established by Bank of Lithuania is 10%. On this basis LMIC’s current capital ratio is
43
estimated to be 11-12%, which would give little room for increasing the amount of outstanding
insurance without an increase in capital. Due to the relatively higher risk of insurance of unsecured
loans to HOAs, the capital coverage should be higher. As a basis for the cost estimate, the minimum
capital coverage has been assumed to be 20%. (In case of the Bank’s loan to Latvia, the capital
coverage was initially set at 50%).
Project to Develop and Implement:
Project A3a:
Credit Insurance of Renovation Loans for Common Areas
4.2.5 Program “A4” on Sustainable Housing Values
Economic value of multi-family housing stock has been depreciating at a significant rate as
evidenced by deferred maintenance: current, preventive and periodic. Management of common
space and grounds has been consistently neglected by the owners unaware or unwilling to accept
that this is not an “extension of the street”, to be maintained by municipalities. These common areas
of multi-family buildings are not just commonly used by them – they are also commonly owned by
them, except for the surrounding land, which still has not been privatized together with the building.
The owners are most often not aware that their privatized dwellings are not only shelter, but they
also constitute the biggest asset of their lifetime. They also do not realize that the condition of
common areas and surrounding land, influence the value of their assets and therefore their personal
wealth. Consequently, asset and value management concepts are not known to them. However, it is
very important to the policy of sustainable housing management. Therefore, the target of this
program is expressed as:

Retained and Enhanced Value of Multi-Family Housing
It is important for the State policy on Sustainable Housing Management that the value of the
housing stock is retained for “present and future generations”. This is closely related to better
management of common areas and surrounding land.
Encouragement of Homeowners Associations (HOAs)
International experience on condominium ownership of multi-family housing shows that the most
efficient way to manage these areas for value retention and enhancement is through condominium
associations, which correspond to the concept of HOAs, except that membership in HOAs is not
obligatory. Although other forms of joint management of common areas are proposed in Lithuania,
their efficiency has not been tested internationally and even domestically they are treated as “second
best” solutions responding to the difficulties in creation of HOAs. An increased rate of formation of
44
HOAs is integral part of this program and this includes intensive training for HOA members in
property management skills.
A 1998 municipal survey found there to be 4,300 homeowners associations then in existence,
representing about 15 percent of the 29,600 multi-family housing blocks in the country. It has not
been possible to obtain figures that are more recent, although it is likely the number has doubled
since then58. Nevertheless, it remains true that HOAs do not represent about two-thirds of multi-
family housing blocks. And those who are not members of HOAs tend to be older people, living in
poorer households outside the main urban areas, and to be more dissatisfied with their present
housing conditions. They also tend to call themselves tenants, rather than owners, which is
indicative of their mindset, which will be difficult to change, if at all59.
Reasons that membership of associations remains unpopular may include a lack of understanding of
the benefits that an association can confer on the homeowners, and the practical difficulties in
establishing and administering an association. Correspondingly, it has been found that
householders are not well informed about the implications and practical, financial and
administrative techniques of common area improvements.
The EEHPP has demonstrated that these constraints may be overcome by the active outreach
program of the Housing Advisory Centers (HACs) operated by the Housing Advisory Agency
(HAA) who have had intensive experience in working with this issue. The program will therefore
require the continued participation of HAA in encouraging the formation and effective management
of homeowners associations. The HAA may, for example, prepare documentation for the
establishment of a HOA; organize workshops at which the homeowners are provided with
information about the association, and activities of existing homeowner associations. They also
give assistance with the preparation of the founding documents and organizational meetings. Such a
project will not be very expensive to the State and municipal budgets, if HAA are given an
opportunity to generate earnings from publishing, education and training in this area, provided to
HOAs after they have been created (continuous professional development). At the same time HAA
should be obliged to maintain a non-profit status so that operating surplus is invested in providing
the “statutory services” in HOA development.
Purchasing Vacancies into Social Housing
Given continued growth of market based activities and the filtering (trickle down) process of
mobility chains, one may expect to see a pattern of increasing vacancies, especially in less market-
desirable properties.60 This will occur if—broadly—the supply of new housing exceeds the net rate
58
Estimated and discussed at more length in the Sustainable Housing Program Development Study, available on the
Housing Information page of the MOE’s website: www.am.lt.
59
See the Sustainable Housing Program Development Study (Annex 1), for some characteristics of households that live
in multi-family buildings but are not members of homeowners associations. The study can be accessed at:
www.am.lt.
60
There are, for example, vacancy rates of 30 percent in older buildings in east Germany. Source: Andreas Blum and
others. The Futurity of Older Inner-City Apartments.
45
of household formation in any particular market segment (e.g. for a specific type of housing,
perhaps in a specific location), or if there is a net decline in the number of households in any market
segment. These trends are natural in a market system and are already starting to appear in some
locations, as households are unwilling to maintain their homes and are, presumably, unable or
unwilling to rent or sell the accommodation61, although of them might not be aware that they have
the right to sell. It is also likely that, except in a few prime locations in the larger cities, it would not
be an economic proposition for real estate companies to redevelop sites where vacancies are
appearing. In these cases, long-term vacancy rates will increase.
Extensive or long-term vacancies are unsustainable, being at the same time a waste of resources,
and having tendency to reduce the value of neighboring properties (e.g. flats within the same
building). Vacancies breed vacancies: at some point in the cycle, the process of increasing
vacancies becomes irreversible. An appropriate use for vacant dwellings with little prospect of a
commercial sale would be for conversion to social housing, to help meet the needs for social
housing at a lower net cost than by new building62. It would be appropriate for the Housing and
Social Care Divisions of municipalities to budget for the acquisition of units within existing housing
as they become vacant. As this depends on the availability of State budgetary allocations, the
municipalities might be required by the State to prepare local housing strategies including such
programs for creating and utilizing resources in the Social Housing Funds63.
Assisting Households to Move from Unsustainable Housing
It has been noted that there is likely to be an increasing number of residential buildings in Lithuania
that cannot be economically repaired or rehabilitated. Situations will include buildings that are in
poor physical condition, as well as buildings that are becoming abandoned because of the absence
of market demand and that have no viable alternative use64. The corollary of the policy only to
improve units that are economically viable is that municipalities should assist with removing
nonviable units. It is part of the policy for sustainable housing that no public financial assistance
should be provided for the rehabilitation of buildings that are considered unsustainable.
Although families will be only required to move from those buildings that are structurally
dangerous, families might wish to move from other substandard buildings, but could be unable to
do so because they lack the financial means to move to other accommodation. It would be the
responsibility of the social care divisions of the municipalities to determine appropriate policies on
non-sustainable housing, but these would likely include giving priority for social housing to
families from moving from such housing.
61
The problem is recognized in Vilnius, whose strategy proposes, for instance, ‘to organize engineering, ecological,
sociological and housing market researches, in order to determine territories, which are losing their attractiveness,
housing problems and ways to solve them’ and ‘to prepare renewal program and detail plans of territories, loosing their
attractiveness, planning investment projects and multifunctional building in these territories’ (Goal 3.3). City of
Vilnius, City Strategic Plan 2002-2011.
62
See Section 4.5.2. in the Sustainable Housing Program Development Study, available at: www.am.lt.
63
This is already required, but have not been capitalized yet.
64
This need is acknowledged by the City Council of Vilnius, which has adopted a policy “to evaluate and determine
categories of typical houses, renovation of which is economically and technically baseless” (Strategy Goal 3.3).
46
Other forms of unsustainable housing will include those older blocks that have excessive vacancy
rates. These risk becoming centers of attraction for anti-social elements, such as criminals, and drug
dealers or addicts. Experience from elsewhere shows that buildings like these can be dangerous to
the remaining residents, especially to the elderly, and that their physical condition defies all
reasonable efforts to rehabilitate them. In such cases, it would be preferable for the local
government to re-house the remaining residents in more sustainable housing. We suspect that these
circumstances are more likely to occur in municipalities with a weak economic base (high
unemployment; and, perhaps, a financially weaker local government). In this case, the process of re-
housing would be beyond the financial means of the municipality. It might, then, be appropriate for
central Government to establish a special fund to assist local governments to address problems of
unsustainable housing. The same Social Housing Fund could be used for these purposes.
Homeowners Education and Information
There is a significant proportion of homeowners who benefited from the privatization program of
the early 1990s who remain unaware, or not fully aware, of the benefits and obligations conferred
by property ownership. As the report of the 2000 Household Survey said
‘it may be concluded that part of the households do not regard their own dwelling as
property….This curious situation can be explained by the fact that the majority of citizens
acquired their dwelling during “windfall” (voucher) privatization; in other words, they
received it for free. This circumstance may have determined the answers to this question:
even being lawful owners of their dwelling units, many people do not feel as owners in the
economic sense as they do not consider their dwelling as wealth in the economic sense.’65
It was the economically weaker homeowners that claimed to have no real estate property. This
impinges on the sustainability of housing in several ways. Firstly, if householders are unaware that
their housing has a value or if they otherwise do not believe that they have any rights or duties
regarding the building (as distinct from the interior of the apartment), they will not take
responsibility for its maintenance and repair of the common areas of the building. This, too, will
inevitably inhibit other residents of the same building from taking initiatives to improve the value of
the building. In turn, this will have an adverse effect on the health and well-being of all the
buildings’ residents.
Secondly, property ownership confers choice: the dwelling can (at least in theory) be sold,
mortgaged or let for rental; the owner has a number of options of means for moving to different
accommodation. If the legal owner is unaware in practice of the benefits conferred on him/her by
homeownership, they will be equally unaware of the housing choices offered to them. This impacts
adversely on the quality of life and thus on ‘social sustainability’.
65
See the Household Study (section 1.5) available on the Housing Information page of the MOE’s website: www.am.lt.
47
The project is an important element of public education and information on property rights and
obligations66. The program costs are not large.
There is also a positive impact from local area initiatives such as neighborhood facilities and
community participation, which are described under Policy C on Social Cohesion in Housing.
The following projects within this program should be considered:
Project A4a:
Encouragement of Home Owner Associations
Project A4b:
Purchases of Vacancies for Social Housing
Project A4c:
Aid to Households in Unsustainable Housing
Project A4d:
Homeowner Education and Information
4.3 Policy “B” on Sustainable Housing Choice

This policy directly addresses the need to improve housing choice as related to the Strategic Goal I
on Sustainable Housing Choice, which requires that housing choice be available to as many
household categories and social groups as possible regarding dwelling type, standard, location and
tenure form. It primarily addresses the principles of social sustainability (access to a broad choice of
housing; emphasizing the function of a house as a home), social equity as well as the preference for
targeted subsidy assistance.
4.3.1 The Objective of Policy “B”
Therefore, the policy objective is expressed as:
66
More discussion about this is provided in Section 6.2 of the Sustainable Housing Program Development, available at:
www.am.lt.
48
Policy “B” Objective:
Expanding Housing Choice to More Households
There are several ways to get easier housing choice. Some of them focus on the “demand” side,
enhancing households’ ability to pay. Some of them focus on the “supply” side, increasing the offer
of housing products.
4.3.2 Program “B1” on Housing Allowances
The diagnostic and programmatic studies conducted for the housing strategy project point out very
clearly to severely constrained housing choice faced by lower income people despite the existence
of various government subsidy programs, which tend to help mostly the households with above
average incomes67, who can access state support through qualifying for market based mortgage
loans. Other forms of indirect and implicit subsidy, are also not well targeted68. The only subsidy
program targeted presently at lower income households is the Utility payment compensation, but it
has become very expensive as it embraces up to decile VI households, because of generous
eligibility criteria and because of high energy use in the existing housing stock.
The studies all recommend that substantial savings could be achieved in existing subsidy programs,
by targeting them better towards lower income households. Consistent with those
recommendations, a new program of Housing Allowances (HA) would ultimately seek to integrate
the administration of all household welfare payments (e.g. including utility compensation payments,
and compensation for repayment of loans for common area upgrading) within a common, simple,
transparent, framework, which is exclusively targeted to the needy and provides incentives to
economize on energy consumption69.
Housing allowances would not only retarget the utility payment compensation program, but also
include eligible housing expenses such as rental payments, maintenance fees and even renovation
loan repayments. This would allow for gradual elimination of high implicit subsidies for municipal
tenants and for privatized apartment owners, but protecting weaker households from excessive rise
in housing expenses as a result of rent and maintenance increases. This way households with higher
incomes, who also live in social rental and multi-family dwellings, would stop enjoying the high
implicit subsidies and “release” funds for targeted assistance to the needy lower income households.
67
See especially the Program Evaluation and (Re)development Study, available on Housing Information Page at the
MOE’s website: www.am.lt
68
See summary table on targeting in Chapter 5.
69
At present, the utility compensation program provides no incentive for participants to economize on energy
consumption within the norms, and provides a disincentive to participate in energy conservation programs.
49
This is shown on figure 9, but requires more detailed studies about the effect of such change, since
only sample data exists on households who live in social rental and multi-family housing stock70.
Program B1 Target:
Better Targeting of Subsidies to Qualified Households
Consequently, the HA program would have a cross cutting effect on several targets, but in general it
would enhance housing choice of weaker households by enhancing their ability to pay for housing
of their choice, which would qualify according to supportable standards. This should also include
private rental costs, which could dramatically improve rental tenure choice for many younger and
elderly households not able or not interested in homeownership.
The idea of introducing a housing allowance program has been floating around for years, but has
been rejected primarily due to high subsidy and administrative costs. Consequently, additional
lessons on the HA mechanism are not required—a strategy for implementing allowances is what is
needed.
The challenge facing supporters of the housing allowance concept is figuring out
a way to address the main criticism of past efforts, that is, the high subsidy and
administrative costs. A project team should study and learn from other
countries in transition that have been using the system for some time71, and
begin to build the institutional capacity that is required to administer a housing
allowance program. This includes collecting data that can be used to build
models that will allow them to explore alternative program designs and different
scenarios.
The problem of high costs can be overcome by starting small, and taking advantage of existing
institutional capacity whenever possible. Such a capacity already exists in the utility payments
compensation system. An implementation strategy for housing allowances should take the
following incremental steps.
1. Start by introducing housing allowances for municipal social rental housing only. Gradually
raise rents and fees and use some of this extra income to offset some of the cost of the
housing allowances. Strictly enforce the payment of rent and fees through better property
management by privatized companies. To gain experience with housing allowance
principles, experiment with modifying the utility compensation program, which has an
existing administrative structure and funding.
If there is satisfactory progress with the municipal stock, integrate utility

compensations into the housing allowance. At this stage, do not try to integrate
the social benefit part.
70
The sample data was obtained in the Household Study, but improved version of household survey would need to be
carried out next time.
71
For extensive discussion of experience with housing allowance programs see the Program Evaluation and
(Re)development Study, available at: www.am.lt.
50
2. Later, introduce additional subsidies to repayment of future renovation loans. This could
replace the awkward current funding mechanism for poor households participating in the
energy efficiency program (EEHPP).
3. Introduce a separate housing allowance for renting units from the private sector. By the time
the country is ready for this step, it should have had a considerable amount of experience
with housing allowances on a smaller scale. Problems with tasks like outreach and income
verification will be under control. Municipalities will have developed some institutional
capacity that will make this step easier.
Serious analytical and modeling work will be required for such a project to assure that costs as the
program rolls out, are kept under fiscal discipline. The following financial impacts will need to be
simulated and modeled, with the following expected results:
For municipal housing, revenue from rent and maintenance fee increases may offset some of
the cost of the housing allowances.
If mortgage interest deduction (MID) can be restricted, which is recommended in the
studies, the savings could be used to fund additional housing allowance costs.
Reduction of the funds being spent on utility payment compensations (by tightening
eligibility) can produce additional savings to fund housing allowances.
Shifting of support funds to poor households in the EEHPP to housing allowances.
Housing allowances reduce the need for social rental housing stock, since households will be
supported for rental payment in the private rental stock. This way some of the funds for
social rental housing may be shifted to housing allowances.
Some preliminary cost projections made in the Program Evaluation and (Re) development Study are
included in Appendix A. One should make a general observation here, which is an important
prerequisite for efficient housing strategy. The more targeting one wants to make, in order to adhere
to the Equity Principle and to save funds for other programs, the more technically and
administrative complex the subsidy programs become, which requires additional capacity, which is
often not needed in the case of simpler, but untargeted programs. A good example of this is the
impact matrix in Appendix A, which is a result of quite cumbersome modeling and simulation work
with relatively incomplete information about various parameters.
Tables in Appendix A show the results of modeling work on proposed housing allowance system
coupled with market rents in social rental housing. Table I shows the subsidy cost calculation. Table
II shows potential net revenue gain from raising rents and fees charged to social housing tenants72.
What these tables show together, is that net revenue gain might offset some or all of the subsidy and
administration costs (periodic income and asset screening). It depends on how much of the extra
revenue has to go to the maintenance companies and how much is lost due to collection arrears.
So the program, with rent increase reforms in social housing might cost nothing. However, what
might happen in the long run is that all of the wealthier households in municipal housing will leave,
72
These could be higher or lower depending on before/after collection rates.
51
resulting in mix of households dominated by low income ones, which will lead to higher subsidies
and lower collection rates. We also don't know at the moment if existing municipal tenants will
have to take the income and property test under the new law. This could have an effect on the initial
mix. From an implementation standpoint, one would gradually bump up the rents and maintenance
fees on an explicit time schedule - not do it all at once.
Project B1a:
Housing Allowances with Market Rents in Social Housing
Project B1b:
Housing Allowances with Private Maintenance Companies
Project B1c:
Housing Allowances with Private Market Rental Housing
Project B1d:
Housing Allowances with Repayments of Renovation Loans
Project B1e:
Housing Allowances with Utility Payment Compensation
4.3.3 Program “B2” on Mortgage Financing
One of the most traditional ways for improving housing choice on the demand side is to enhance
households’ ability to pay for mortgage credit. Also in Lithuania, this has been a dominating
approach of state support to dwelling acquisition. As was seen in Figure 9 the incidence of this
program in its old version (so called soft loans) produced benefits mostly for the 30% of the most
affluent households. It was similar with mortgage insurance and will continue to be the same with
the new program based on mortgage interest deduction and credit subsidies (buy downs) for special
household categories. On the other hand, without these programs, perhaps only the uppermost 20%
of household could only buy homes. But undeniably, the most affluent buyers, who did not need the
subsidy were provided additional purchasing power and either bought more housing or increased
consumption of non-housing goods and services.
52
An important objective for mortgage finance program is to spend as little of public money for such
subsidies and focus on enabling the private market financial sector to provide credits to home
buyers at affordable terms. There are various ways of doing it.
Program B2 Target:
Extended Mortgage Affordability to More Households
Mortgage Interest Deduction and Interest Subsidy
The mortgage interest deduction (MID) is widely viewed as a replacement for the existing interest
subsidy program (known as the soft loan program), which is ending in 2002. The MID subsidy is
roughly equal to two percentage points of interest, an amount that might make it possible for some
households that might not otherwise qualify for a loan to obtain financing for a home purchase.
The Ministry of Finance estimates that the MID will cost the government roughly 9.4 million Lt in
foregone revenue in 2004, which is probably more expensive than what the incremental cost of the
interest subsidy program would be, if that program was continued. The cost per beneficiary of the
MID is lower than that of the interest subsidy program, but all borrowers are eligible for the MID. If
possible, the MID should not be implemented because it is not targeted and regressive. It involves a
large off-budget subsidy that will be difficult to modify or eliminate in the future. Furthermore, it
takes away resources that could be used to assist poorer households and implement reforms in the
sector.
If it is implemented, the MID should be modified to target the most needy households and to control
costs. Some of the ways to limit the MID include the following: cap the deduction at an absolute
amount; limit it to first time homebuyers or young households; restrict its use to moderate loan
amounts or house prices; limit the number of years the deduction may be taken; or restrict it to
households with incomes below a certain level.
Alternatives to the MID include continuing the interest subsidy program with a lower benefit and
improved targeting, and calculating the present value of the MID and offering it as an upfront
subsidy. The basis for an upfront subsidy already exists--Article 6 of the new housing law may
create a fairly large upfront subsidy program in which families with two or more children may be
eligible for a ten percent loan credit. Certain needy groups will be eligible for a 20 percent credit.
Up-Front Buy-down Credit Grants to Qualified First Time Purchasers
Housing choice of many marginal household is impaired not only by their incomes and
underwriting criteria used by the banks (gray sphere), but also by the lack of accumulated equity
capital for down-payment on a new acquisition. This equity gap is typical for those households, that
did not benefit from privatization process and thus have no assets to trade in or monetize. Since the
privatization process benefited sitting tenants, who had tenure status at the time of privatization, this
left the young and family less individuals without housing assets to trade in. Also, young
individuals have typically little accumulated equity capital, which leaves them faced with the equity
53
gap when considering home acquisition. On the supply side, these younger households are faced
with one sided forced choice of ownership tenure, since rental tenure is hardly available – even
more so in the formal sector.
Enhancement of housing choice in the short- to medium-term is to reduce the equity gap for
marginal younger households and those who are disadvantaged in this respect. This can best be
done by one-time up-front grants, which can be more precisely targeted at qualified household
categories. This is also a safe way of subsidizing, as the subsidy is paid out only once and does not
linger for years on the state budget. Administratively the government buys down part of the credit
amount, so that the borrower household faces a smaller mortgage amount to repay, which in effect
means lower loan repayment amounts to be paid every month by the household.
The recent amendment of the Law on State Support has already decided to introduce such grants
and address them to qualified groups of households. This is a good move, which should be
continued, so we are proposing that this subsidy be continued, but well monitored to study impact
on the beneficiaries and on the housing stock.
Mortgage Insurance Premium Subsidy
The mortgage insurance premium (MIP) subsidy makes housing more affordable by reducing the
upfront premium that an eligible borrower has to pay for mortgage insurance by up to 50 percent.
The insurance, in turn, increases affordability by allowing borrowers to make downpayments as low
as five percent. A family that qualifies for a soft loan also qualifies for the MIP subsidy. Because
the insurance has been mandatory for all soft loans, all soft loan recipients have received this
subsidy. The soft loan program is ending, and it is not known if the government will require
mortgage insurance for the other types of subsidized loans it plans to offer starting next year.
The MIP subsidy has many desirable attributes for a homebuyer subsidy. It is a transparent upfront
subsidy that reduces the initial amount of money that homebuyers need to acquire a loan. Despite
the positive impact of this subsidy, it has not been well targeted. An income and property limit for
beneficiaries does not currently exist, and all beneficiaries are not equally needy. The subsidy also
tends to be regressive in that households that can afford larger loans receive larger MIP subsidies.
The new housing law requires all beneficiaries of state housing support to not have income and
property that exceeds still-to-be-determined limits. The limits for families trying to purchase a
home will have to be different from the limits for families seeking to rent municipal housing. Given
that income and asset data will exist for beneficiaries in the future, it makes sense to structure the
MIP subsidy such that relatively wealthy beneficiaries receive smaller subsidies than those received
by less wealthy beneficiaries.
Issuance of Mortgage Bonds
Ministry of Finance has prepared a draft law on mortgage bonds, which can be issued by universal
banks. The Contemplated Programs Study investigated this proposal and provided input into the
54
final draft of the law. Mortgage bonds will be particularly attractive when there are more pension
funds and other investors in Lithuania looking for such investments
Potentially any credit institution can issue mortgage bonds and there is a relaxation of some of the
requirements for the matching of loans and bonds. The draft is well developed in general and is a
reasonable basis for starting a market in mortgage bonds. However, there are several provisions
that could benefit from further consideration. Specifically, investors may prefer that the law
require a certain amount of extra collateral for their protection, since some of the traditional
protections have been weakened. In addition, because these bonds will be issued by regular
universal banks making loans with values in excess of the strict limits provided in the law, the
banks would prefer to be allowed to use the "safe" portion of the larger loans as collateral rather
than have to make two loans.
The draft also includes some other provisions that could be harmful to the development of the
mortgage bond market. The most important of these is the restriction of the loans backing mortgage
bonds to those where the money is used for to buy land or housing. This clause could prevent the
use of the funds by farmers or small entrepreneurs who wish to use land or houses as collateral for a
loan. It also excludes mortgages taken by legal persons on non-residential real estate, including
shops and offices.
Mortgage bonds should have little effect on real housing consumption. In fact, under current
conditions, such funds would be more expensive than using bank deposits. However, it will be the
best way for banks to develop sources of funds at a cost fixed for several years, providing extra
protection of moderate income households from sudden shifts in mortgage costs.
Reverse Annuity Mortgages
This may an option for those households who are already owners (asset rich), but who want to
“monetize” part of the equity they have in their homes, without having to move out. They can take a
reverse mortgage from a bank or other institution73. This is a scheme under which the bank pays the
original owner an agreed income for life, based on the present value of the flat discounted by the
owner’s life expectancy74. Title to the property reverts to the bank on the owner’s death. In the case
of common area upgrading, the owner could use part of the mortgage income to repay the relevant
share of the cost of upgrading; at the same time, he or she would keep possession of the home until
death.
Because of the financial arithmetic of reverse mortgages, these could only be an effective answer to
the affordability problems of older people. A privately-financed scheme would only be financially
viable in larger towns where the present value of property is sufficiently high to guarantee loan
repayment. It might, in any case, be necessary for Government (or possibly a local government) to
73
Although such schemes are common in north America and some parts of western Europe, similar scheme have been
introduced in Budapest and Moscow. Discussions are also in course for the introduction of reverse mortgages in
Latvia, where a government guarantee is assumed to be a necessary adjunct.
74
The older the owner, the greater will be the ratio of income to value.
55
guarantee the deal to provide reassurance to householders who might otherwise be mistrustful of
such a scheme.
Reverse mortgages could prove to be important instruments to address the specific financial
problems of the elderly (an issue of human sustainability). It might, therefore, be desirable to offer
an opportunity to local housing authorities to subsidize the scheme in circumstances when banks
might otherwise be reluctant to offer a mortgage against a property with an uncertain future value.
Even though many of the elderly, and other poor households, reside in single-family houses in rural
areas, it would probably not be feasible for these groups to participate in programs of reverse
mortgages. This is simply because the value of these dwellings is often so close to zero that the
level of subsidy required would be unaffordable to the public authorities. The financial and legal
consequences of reverse annuity mortgages have not been investigated. It would be desirable to
undertake a study of what is happening in Latvia, where such a scheme is being developed.
Credit Information Bureaus
One way of lowering the credit risk, which will be rising as the volume of lending rises, is to
improve underwriting process and its own uncertainties. Evaluation of potential borrowers is made
easier and less risky if the banks share information about defaults, bad loans, credit histories etc.
Banks will not need to rely so heavily on mortgage insurance, so its cost should go down. Such an
information infrastructure is common in Western economies. In some transition countries where
lending volumes have been rising quickly the need for credit bureaus (CBs) has lead to their
development75.
A credit bureau should perform the following functions: (a) collect loan-related information on
clients who received and / or were denied credit; (b) processing the data; and (c) selling credit
reports to the participating banks. Founders of the CB may be the banks and their association. Only
banks that have an agreement with the Credit Bureau can obtain credit reports and provide
respective data. The processes are interrelated: the CB provides credit reports only to banks that
provide data on their clients. The Credit Bureau guarantees the timely delivery of the information
requested by the banks, while the banks are obligated to deliver information in accordance with the
requirements of the Credit Bureau. The volume can grow quite spectacularly judging from the
experience of Poland76. The CB’s main sources of income are sales of credit reports, fees for
installing the system and for database maintenance, fees for training, etc. Banks pay about 25
thousand dollars for installation, and are then charged maintenance fee. Average price of a credit
report is 1.5 US$.
75
In Poland, out of 650 operating commercial banks, 45 have residential mortgage lending programs. By mid 2001
mortgage volume has reached the level of 3 billion USD and bad loans constituted 4%. The Company Mutual
Credit Bureau was initiated there in 1997.
76
Within one year of operation the database on private individuals reached 11 million persons, with 1 million credit
reports sold. About 10 thousand credit reports are delivered every day to participating banks.
56
Enabling regulatory framework for development of CB is likely in the Banking Law and in Personal
Data Protection Law. There is also a rule that any client whose information is maintained in the
Credit Bureau database has the right to inquire (every six months) which information was disclosed,
and to what party during that period. In case the Credit Bureau is deemed to have exceeded its
authority, for example, by disclosing data about religion or party membership, or data that may not
be reasonably required for the lending process, the client is entitled to go to the courts.
The credit bureau collects both negative information (payment delays, defaults on the loans, etc.)
and positive information on the client that reflects payment discipline, and timely fulfillment of the
obligations under loan agreement. This approach to the formation of the client database, in the
opinion of Credit Bureau and the banks, gives a fuller picture of the client, sum of debt obligations,
paying capacity, and creditworthiness, and thus enhances the reliability of banks’ lending
operations. The credit report gives comprehensive information on the client. It reveals cases of non-
standard behavior: for example, simultaneous application for a loan to several banks. Data in the
credit report the Credit Bureau provides to the banks at request reduces the time for loan
underwriting and approval.
Some of the key issues that should be addresses when creating a credit bureau are listed below:
Legislative support for sharing bank information and creating organizations that will
collect and disseminate client information.
Standardization of the data that banks are to provide to the Credit Bureau.
Optimum volume of the data to be provided.
Technical means for protecting information in the database of the Credit Bureau, and
ensuring its safety upon transfers.
Forms and types of data that may be disclosed to other banks, credit institutions and non-
depository credit institutions.
Project B2a:
Targeting of Mortgage Interest Deduction subsidy
Project B2b:
Continuation of Mortgage Credit Buy-down Grants
Project B2c:
Feasibility of Reverse Annuity Mortgages
57
Project B2d:
Advocating for Creation of Credit Bureaus
Mortgage insurance program is to continue, so we are not considering development and

implementation of a new program. Nevertheless, we include it in the housing strategic framework,
as it requires more active monitoring of its impact on households and housing stock production.
Project B2e:
Continuation of Mortgage Insurance Subsidy
4.3.4 Program “B3” on Market Rental Housing
The number of households renting private accommodation comprises around 5 percent of all
households, which is way too low77. The potential private rental market doubtless encompasses a
larger variety of households than are presently served: including newly-formed households who
have not yet been able to get a foothold in the owner-occupied market, individuals needing to move
to work in a new location, students, and singles and households that opt for the flexibility offered by
rental housing and choose not to buy. Maybe different economic and cultural forces are still at
work in Lithuania, however, which deter the emergence of a private rental market with organized
rental apartment buildings with pertinent services to tenants.
Program B3 Target:
Increased Formal Market Rental Housing Choice
The market itself normally identifies the characteristics of the housing required by these different
groups. This process has hardly yet started in Lithuania, even though market forces have been
determining housing supply for some ten years now. It might be expected that renting households
would be smaller than average, hence requiring relatively few rooms; and that many groups would
have an income below average, hence requiring cheaper accommodation. This describes the type of
accommodation found in existing multi-family dwellings. However, as in other countries of Central
and Western Europe, it may be expected that young singles and young families would choose to
rent relatively up-market dwellings, not currently widely available in Lithuania. These may emerge
as new housing types.
On the assumption that the market is not working optimally, it is desirable that encouragement be
given to the expansion of the rental sector in the existing housing stock, improving labor mobility,
as well allowing a better match between household preferences and housing solutions. The first tool
77
The equivalent figure for western Europe is around 20 percent (ranging from a low of 9 percent in Spain; about 18
percent in Sweden, Norway, Germany, Austria and Italy; to a high of 29 percent in Belgium and 56 percent in
Switzerland).
58
is the introduction of housing allowances to be available to those households who would rent on the
market.
Secondly, fiscal incentives may be given to encourage individuals and corporate bodies to rent
accommodation for profit in order to increase supply of market rental offerings. For example,
private corporations may be enabled to purchase existing housing in order to upgrade it for rental to
an upper-middle income market. Existing owners may either remain as tenants or be provided with
alternative, improved, accommodation by the new owners.
Many countries recognize a supply of rental housing as of sufficient importance to justify a variety
of fiscal incentives to encourage the private provision of rental housing. These incentives are used
to encourage both new rental housing, as well as the retention or conversion of existing housing for
rental purposes. The main mechanisms utilized are as follows:
Accelerated depreciation allowed for rental units (USA, Germany, Australia, Canada)
Landlords can deduct interest on loans and operating expenses (UK, Germany, USA,
Canada)
Landlords can set rental losses against other income (Germany, USA, Canada; formerly
Finland)
Lower tax rate for landlords’ capital gains (formerly USA)
Landlords can set capital outlays against rental income (Ireland, Italy)78.
Additional assistance may be given to renters through the tax system (e.g. the payment of rent could
be treated as a tax-deductible expense), especially to the elderly or those on low incomes, thus
strengthening the market for lower income rental housing. These programs may be seen as
alternative to providing social housing to needy households who could not otherwise afford to buy
or rent in the open market.79
The market rental housing program should consider alternative ways in which amendments to the
tax code could stimulate the provision of rental housing, particularly by the conversion of existing
owner-occupied housing. Special attention should be paid to the stimulation of ‘affordable’ rental
housing – e.g. housing affordable to households between the IV and VII deciles of the income
distribution.
A supplementary tenure form to the private rental market is non-profit rental housing, which is
discussed in the next program. This could create affordable housing within the existing housing
stock as well as in new housing.
Enhancing Tenure Security
78
Source: Christine Whitehead and Kathleen Scanlon, Fiscal Instrument for the Provision of Affordable Housing.
79
‘In Ireland the over-55s can treat rent to private landlords as a tax allowance. Italy allows low-income renters to
deduct housing expenditure. In Greece tenants may deduct 30% of their rent, up to 15% of taxable net income.’
Whitehead and Scanlon, page 11.
59
A well-established private rental sector often consists of two sub-markets: one for the relatively
affluent and mobile part of the population, and one that, unregulated, can act as a sink for the poor
and disadvantaged. There is experience from the ‘market-liberal’ economies with a small social
housing sector and reliance on household allowances as a welfare mechanism, that the private rental
sector at its low-rent end attracts the poor in low-wage jobs, and households dependent on social
assistance. Low-cost rentals tend to be in areas of deprivation and with poor access to social and
commercial facilities—that is, after all, why they are low cost. ‘The private rental sector is the
sector for social exclusion.’80 Such households need legal protection and assistance with their
housing if they are not to be exploited by private landlords and if they are not to be sucked into the
pit of social exclusion.
The sustainable housing program will therefore include two sets of measures designed to protect
tenure security of low-rent tenants: the establishment of minimum acceptable housing standards,
and amendments to the Civil Code to regulate private rental agreements. In addition, of course,
municipalities would be required to use their powers of social support, outside the housing program,
to identify and assist vulnerable households.
The adoption by the Ministry of Environment of minimum standards for multi-family housing will
enable local governments or other authorities to determine whether rental accommodation (as well
as all other dwellings) is substandard. Consideration should be given to the passage of
complementary legislation that would permit authorities to enforce the standards. (It is, however,
recognized that this may provide opportunities for rent-seeking (i.e. corruption): any legislation
should be designed to avoid this possibility.) Some minimum standards have already been adopted,
such as in the newly-amended Law on State Support to Acquire or Rent Dwellings. Standards of
maintenance have been drafted; health and hygiene standards already exist; and there is a broad
consensus about the facilities that are appropriate for a modern urban dwelling81. Although it will
be necessary to codify these standards and to seek a consensus, the only substantial item
outstanding is the need to define adequate heating standards.
Secondly, although there is little evidence that the absence of legislation governing landlord-tenant
relations is important as a current issue, we believe that it will certainly be needed at some time in
the future to protect the more vulnerable groups of the population. Relevant recommendations of
the UN ECE Mission are as follows:
‘The Civil Code … should be amended to include the following provisions: (a) Rental
contracts, landlord/tenant agreements, need to be mandatory; (b) Excessive tenant
protection should be urgently reviewed with a view to striking a balance between the rights
of tenants and the right of owners; (c) Tenants in clear breach of general legal requirements
… should be liable in accordance with the tenancy agreement; (d) tenants need to be
80
Kath Hulse and Terry Burke, Social exclusion and the private rental sector: the experiences of three market liberal
countries.
81
The UK’s standards for decent housing are, in summary: (a) above the current statutory minimum standard for
housing; (b) in a reasonable state of repair; (c) with reasonably modern facilities and services; and (d) provides a
reasonable degree of thermal comfort.
60
protected against unjustified rent increases, harassment by the landlord and violation of
their occupancy rights.’.82
Project B3a:
Incentives to Expand Market Rental Housing
Project B3b:
Inclusion of Private Rents in Housing Allowances
Project B3c:
Enhanced Regulatory Framework for Tenure Security
4.3.5 Program “B4” on Non-Profit Housing
In many EU countries a non-profit alternative is often available to those income groups that are “too
rich ”to qualify for targeted subsidies and “too poor” to enjoy new home acquisition state support.
This requires development of legal / institutional framework as well as social “culture” for such
type of housing, as well as certain forms of state or municipal support to these activities. The basic
idea of providing housing without a profit is quite old, but difficult to implement.
Program B4 Target:
Institutional Framework Conducive of Non-Profit Housing
Non-profit rental housing may be seen as a form of social housing, i.e., housing provided on a less
than a market-rent basis to the occupants because the State has determined that certain households
need such assistance. Non-profit sponsors are organizations, typically NGOs, who operate for the
public good and who reinvest financial surpluses, if any, back into the work they do for the public
good (statutory goals). Such sponsors organize the development of the project and manage the
project thereafter at cost recovery rental rates. The concept of non-profit housing has not received
much attention in Lithuania and may be still associated by many with the “abused” concept form of
Soviet style cooperatives.
Preliminary calculations of the probable subsidy costs for a new construction rental housing
program targeted at moderate-income families indicate that the subsidies would be quite large, but
82
UNECE, Country Profiles on the Housing Sector: Lithuania.
61
that depends on how high an effort ratio would be assumed by beneficiaries83.While these estimates
should be refined, they do suggest that cost could definitely be a difficult issue in launching the
program, which means that some sort of involvement of “sweat equity” by non-profit housing
beneficiaries would be needed.
The high costs of new construction and the broad perception that the construction of new rental
housing is not critical points out to non-profits as developers and managers for the substantial
rehabilitation of multifamily buildings, which would become rental properties after the renovation.
Several issues should be addressed to move the discussion about a rental housing production
program implemented by non-profit organizations to the next level:
Is there a sufficient non-profit culture in Lithuania based on civil society, grass-root
organizations, advocacy groups, mutual aid, and other non-governmental organizations?
How much less expensive would non-profit production of rental buildings be, in the light
that private developers seem to be achieving high profit margins?84
How much could development cost be lowered if municipalities provided access to
serviced land at no cost to non-profit production?
Can the non-profit model be considered as a tool for the rehabilitation of existing
buildings for rental use?
Who would be a target group for a non-profit program?
How much subsidy and in what form would be needed to encourage provision of non-
profit housing?
Can the program be financially feasible in terms of the per unit subsidy costs?
Are capable non-profit sponsors likely to step forward to participate in the program?
To answer these questions, people need to have a better understanding of what can be achieved
through non-profit development. The government will have to invest in an educational campaign to
generate interest from potential sponsors and beneficiaries. Possible assistance could be obtained
from other countries, with a good example being the City of Vilnius, which has been collaborating
with a Canadian organization of this type85.
Project B4a:
Pre-Requisites for Non-Profit Housing Institutions
4.4 Policy “C” on Social Cohesion in Housing
83
Effort ratio is a share of housing expenses in household budget.
84
The Goals Attainment Study presents some evidence about this phenomenon, reinforced by the belief that producers
are able to capitalize part of state subsidies into higher prices. The Study is available at: www.am.lt
85
Rooftops Canada has helped prepare the first draft of local housing strategy for Vilnius in late 1990s.
62
The alleviation of social exclusion is the most important component of the principle of
social/cultural sustainability (the reinforcement of social cohesion, social justice and fostering social
links and local decision-making). It directly addresses the principle of social equity, which is
receiving an increasing emphasis in the EU policies.
4.4.1 The Objective of Policy “C”
There are many manifestations of social exclusion. Those primarily associated with housing are: (a)
the processes of creation of marginal communities (the creation of ‘social ghettoes’), and
correspondingly, (b) the social isolation of weaker members of the community in marginal housing.
There is little evidence that these processes are yet occurring to any great extent in Lithuania86,
which stems from the fact the “negative externalities” of market operations, have not been
significant due to very low market activity. Overwhelming majority of households still live in
dwellings allocated to them through non-market mechanisms. Extensive evidence from cities in EU
countries, however, suggests that unfettered market forces may create more such communities in
Lithuania unless active measures are taken to prevent their occurrence by “correcting” market
tendencies.
Note, though, that we do not argue that a housing program should be a tool of economic policy. We
do believe, however—consistent with the Government’s expressed philosophy—that it is the
responsibility of society, notably local authority, to attempt to moderate the impacts of those market
forces that nourish social exclusion.
The policy on social cohesion in housing has an obvious objective of enhancing social cohesion.
Policy “C” Objective:

Enhancing Social Cohesion in Housing
The policy is divided into two programs, which can be used to promote this enhancement: (a)
expanding social housing; (b) retaining social mix in multi-family buildings; and (c) local area
initiatives.
4.4.2 Program “C1” on Social Housing
There is a pent up demand for low cost housing, as evidenced by waiting lists, despite all the
inefficiencies of these lists87. On present evidence, municipalities are seen as being ‘better’
providers than the private sector, because of lingering mistrust of the private sector. That would
probably still be the case, even if municipal rents were raised to private levels and complemented
with housing allowances88.
86
Although the City Council of Vilnius has adopted policies that imply its awareness of such a risk.
87
See the Program Evaluation and (Re)development Study for extensive analysis of the existing waiting lists. The
Study is available at: www.am.lt.
88
For extensive argument on this issue see the Sustainable Housing Program Development Study (section 4.5.2)
available at: www.am.lt
63
Program C1 Target:
Municipalities Enabled to Expand Social Housing Stock
Much of the municipal (social) housing that presently exists - the residue of housing that was not
privatized - exists as individual units within blocks of housing that is otherwise privatized. This type
of housing is relatively uneconomic for municipalities to manage, because it is physically dispersed.
It may also not create optimal conditions for management by a homeowners association of a
building with mixed public and private ownership, since the interests of the municipal owner may
be not coincide with those of the owner-occupiers89. On the other hand, it is just this social mix
resulting from privatization that creates the social diversity of which Lithuanians are rightly so
protective.
On balance it is considered socially more sustainable for municipalities to retain ownership of these
isolated units of social housing, and that they should actively seek to add to this stock by purchasing
units in existing housing as and when the opportunity arises.
There are also a number of other arguments for having municipalities involved in providing social
housing, including emergency shelters:
There is no active property market outside the larger towns in Lithuania. There is
little prospect that private rental housing could be induced to emerge in the economically-
weak towns in sufficient quantity to meet the need there for low-rent accommodation. The
only other solution in such places would be for social housing to be provided by the
municipal sector.
There is a need to house the socially-weak population: those families that are not
easily able to fend for themselves in the market, particularly because of behavioral
disabilities, physical disability or extreme old age90. This group of people cannot easily, and
probably should not be expected, to find accommodation in the private market. The proper
provider for all of these groups would be the municipality.
It has been argued in this report that municipalities have a responsibility to play an
active role in promoting sustainable housing, by acquiring units of the existing stock for
specific purposes. We have recommended that: (a) municipalities should offer to re-acquire
housing, especially from the elderly, to help improve affordability; and (b) municipalities
should consider the acquisition of vacant flats as a mechanism for maintaining the social
cohesion of an estate.
For all of these reasons, we believe that it is desirable for national policy to support municipalities
to increase their stock of social housing, if warranted by local circumstances. As previously stated,
89
Personal experience suggests, however, that a non-interventionist municipal owner is not a hindrance to operation of
a homeowners association.
90
Essentially the families on lists 2 and 3 in Article 11 of the new Law on State Support to Acquire or Rent Housing.
64
it would be desirable in most cases that the stock be increased by acquiring units of existing
housing, rather than by building new units. Following present practice, it is totally appropriate for
municipalities to determine their own needs and capabilities, which is consistent with the principle
of subsidiarity. We would not expect, however, that there would be need for a large expansion of
the number of social housing units nationally91.
It has, however, been national practice for central government to make grants from the annual
budget to local governments for the purchase or acquisition of social housing. We do not believe
that it is appropriate to continue this practice, which is neither fully consistent with the principle of
subsidiarity, nor with sound fiscal practice. It is certainly not financially sustainable on any
significant scale. We recommend, instead, that it is better to move to the international practice of
permitting and requiring local governments to fund capital works such as housing primarily from
the proceeds of borrowing through loans or through issuance of municipal bonds92.
Project C1a:
Municipal Debt Financing of Expanded Social Housing
Project C1b:
De-Privatization Repurchases by Municipalities
4.4.3 Program “C2” on Retention of Social Mix
Social mix of existing multi-family buildings should be preserved as it assures continued social
cohesion and inclusion of lower-income households. Consequently, the target is to find ways of
retaining low-income and other vulnerable households in their dwellings. Introduction of housing
allowances will help towards this aim, and this pertains to both maintenance expenses (fees) as well
as repayment of possible renovation loans. The problem in general terms boils down to assuring
affordability of households to stay, and in regards to multi-family housing it pertains to
participation of the weaker households in formation and functioning of HOAs.
Program C2 Target:
Weaker Households Enabled to Stay in Current Housing
91
The Goals Attainment Study finds that “the potential demand for [social rental housing] is at a minimum 6% higher
than the actual supply”. We do not know the source of this statistic.
92
We have not investigated the implications of this recommendation on the broader agenda of reform of municipal
finance systems.
65
Most lawyers would probably assert that if one family refused to participate in a proposed
upgrading project, this would prevent the HOA or administrator from implementing the whole
project. However, options exist within the Civil Code whereby claims can be made against
households that have not entered into a specific contract93. Nevertheless, two options do exist,
which effectively allow the households - particularly the elderly - both to remain in their homes for
their lifetime and for upgrading to take place, but for ownership of the flat to be transferred to a new
owner in return for that new owner agreeing to meet the cost of upgrading. The same instruments
can be used in other circumstances (e.g. where upgrading is not contemplated) to convert the equity
of income-poor households into cash.
The first option is, effectively, voluntary de-privatization. The municipality would buy a flat from
its owner, in return for assuming responsibility for maintaining and managing it. The previous
owner is guaranteed the lifetime right to remain in place as a tenant of the municipality. The owner
is relieved of the financial and managerial burden of managing her or his dwelling, and gains
greater control over personal finances. The net financial cost to the municipality would depend on
the age of the tenant, the rents set by the municipality, the condition of the building, and the
expected future market value of the flat (if any). It is understood that de-privatization has already
been started on a small scale in some Lithuanian municipalities, as some former tenants realize that
homeownership is not only benefits (asset transfer), but also a responsibility (asset maintenance).
The second option is for the owner to be able to take a reverse mortgage from a bank or other
institution, as has already been described94. A recent report95 makes similar recommendations in the
context of constraints on mortgage holders being able to collect their claims against families with
children, who are protected by the social laws of Lithuania. The report argues that if options such as
reverse mortgages were available, it would be much easier for bankers to collect loans outstanding.
Other options identified in the report include making an unpaid loan ‘standing until the owner
passes away, interest on the loan being included in the mortgage’; and to ‘introduce a housing
exchange program for people who live in housing they cannot afford’.
These two options would contribute to the target of enabling households to stay. In addition to
improving the affordability of these households and giving more freedom for housing managers to
implement common area upgrading schemes, it would also increase tenure choice (by allowing
households the freedom to opt for a return to municipal tenancy or de facto tenancy under the
reverse mortgage scheme).
Project C2a:
Voluntary De-Privatization of Owner Dwellings
93
But it would obviously not be desirable to utilize these provisions
94
See section on Reverse Annuity Mortgages in the Program on Mortgage Finance.
95
See the report: Apartment Ownership and Mortgage Finance in Lithuania, available at: www.am.lt.
66
Project C2b:
Feasibility of Reverse Annuity Mortgages
4.4.4 Program “C3” on Local Area Initiatives
All other things being equal, the existing housing stock will hold or increase its value if it is well
located vis-à-vis social and commercial facilities; and if the community views it as desirable for
tangible and non-tangible reasons. There is a group of actions that can be taken at local level to
enhance the sustainability of housing within neighborhoods: the development of improved
neighborhood (ward-level) social and commercial facilities, participation of the community in local
decision-making, and reducing long-term vacancies by purchasing unwanted units for social
housing. Other actions include the education of homeowners about the concept of property, and
measures to clarify the ownership of the land surrounding blocks of multi-family housing.
A number of neighborhoods comprising blocks of multi-family housing are relatively poorly served
with commercial and social facilities. The housing would be socially more sustainable, and
economically more valuable, if the neighborhood facilities were improved, consistent with
commercial and social plans for the city as a whole. Sometimes, actions could be as simple as that
of the Vilnius City Council helping homeowners to make physical improvements to their backyards,
by contributing 50 percent of the cost of the works.
Local organizations in a number of central European countries, often working in concert with local
authorities, have identified the type of facility that is lacking in their neighborhoods, and have
implemented plans that have resulted in an improved quality of life locally and, therefore, increased
property values. Often, plans for the upgrading of local neighborhoods is driven by consultations
between the municipal authorities and residents—see below. In other cases, local officials have
taken the initiative. It would be appropriate for local authorities to benefit from the lessons of this
experience, and to determine how the concepts might be transferred to Lithuania.
Experience elsewhere, and particularly in EU countries, has shown that the value of housing tends
to increase if members of the community are involved in making decisions about how the external
environment is managed. The added value arises because, and because residents tend to have a
better understanding of the needs of their own neighborhoods than do municipal planners, and can
thus better determine ways of adding value to the neighborhood and thus to their own homes; and
because participation by local residents helps to create a sense of community and thus added value
to the neighborhood.
Although public participation is still a relatively new concept in Lithuania, Lithuania is a signatory
to the 1998 Aarhus Convention on Access to Information, Public Participation in Decision-Making
Process and Access to Justice in Environmental Matters. The principle of public participation in the
management of municipal affairs is also enshrined in Lithuania’s Law on Local Self-Government.
67
A number of municipalities already seek the active participation of local community leaders when
drawing up strategic plans (‘Agenda 21’)96.
As an example “Residents of Vilnius are engaged in the activities of modern professional society
“Baltijos konsultacinơ grupơ” (Baltic Consulting Group) or within self-governments of the city of
Vilnius where they devise projects for the development of their city”.97 The City Council of Vilnius
is planning to draw on these initiatives, and its own strategic plan includes the objective “to foster
social partnership and a sense of community...”. Among other activities planned are “to create
community councils of wards and to organize their activity, solving social problems”, and “to sign
contracts between wards and Homeowners' associations on housing and environmental
maintenance”.
A project for promotion of similar initiatives supported by local authorities and the NGOs,
including business sector involvement, would contribute to value retention and enhancement of
multi-family housing stock, and would be consistent with principles of subsidiarity and partnership.
This wold involve mobilization of energies of various NGOs, but would require active
encouragement from municipalities and some grant funding to these projects.
Project C3a:
Municipal Support to More Neighborhood Facilities
Project C3b:
Municipal Support to Community Participation
4.5 Policy “D” on Sustainable Housing Production

The findings of the diagnostic studies point out sharply to insufficiently low housing production
level in Lithuania and for six reasons it should be much larger. On the other hand, the reports find
that too much housing quantity was created during the non-market period of the Soviet economy
given the low real level of economic development, labor productivity and incomes. Consequently,
we have observed that during the 12 transition years market behavior of consumers was pointing
out a sort of quantitative adjustment to the excesses of the past, with households indulging in non-
housing consumption. This might be an overreaction driven also by marketing interest and
persuasion power of non-sector consumer sectors. It is also an apparent failure by consumers to
appreciate positive externalities of better housing consumption and thus failure of policy makers to
reach out with stronger incentives. Finally, it may also be an unfortunate effect of insufficient
96
In the Inception Paper on Sustainable Housing.
97
Republic of Lithuania, National Report on Sustainable Development Implementation.
68
competition in real estate development sector and untargeted nature of production subsidies (mainly
soft loans and mortgage insurance subsidies) partly capitalized into higher prices98.
4.5.1 The Objective of Policy “D”
Housing demand has been projected by both the Housing Choice and the Goals Attainment studies
and converged on an annual level of about 20,000 dwellings compared to the present level of below
4,000 dwellings. Both projections were based on assumption of stabilized housing market with
consumers responding quickly to the changes in life cycle housing needs and to affordability
dynamics. They have also looked at expected production levels to increase mobility, replacement
etc99. They acknowledged that potential demand does not necessarily translates into effective
demand. This is especially true in transition economies where ability may differ widely from
willingness to pay, given the adjustment period of consumer preferences and priorities.
Consequently, in this situation what is proposed is to facilitate a better operation of the production
(development) and allocation (sales) markets so that consumer choices can be realized more quickly
and more cheaply, which should turn back more attention of consumers to housing products. Much
can be achieved by removing various impediments to smoother functioning of the market forces
including more competition and level playing field. This is essentially the focus for micro-economic
policy carried out by, presumably, the Ministry of Economy. Land, real estate and housing sectors
are important sectors of the economy and their efficiency impinges on economic development and
growth. Therefore, the objective will be to enable the housing markets to become more efficient.
Policy “D” Objective:

Enable Housing Market to Be More Efficient and Active
The enabling policy will be facilitating more housing production, but final decisions will be left to
the consumers themselves. Hopefully, this will lead to more of them deciding they want to have a
new home, including new rental apartment. Since this area is not endogenous to this housing
strategy, the programs in this policy area will be developed in terms of being advocacy agendas,
rather than operational interventions. Two of them will focus on faster and cheaper production, and
one will focus on more active sales market for newly produced dwellings.
4.5.2 Advocacy Program “D1” on Land and Infrastructure
Access to land and infrastructure have been diagnosed to be important impediments to more
efficient real estate market in Lithuania, including the housing market. The Soviet period saw land
removed from the unity with buildings, which is the basis of the notion of real estate in market
economies. Consequently, even today, many housing consumers think they only own dwelling or
98
Thus leading to lower production level at higher prices. This is supported by anecdotal evidence regarding high profit
margins achieved in the development sector.
99
See the Goals Attainment Study available at: www.am.lt.
69
building, but not the land, which is especially true with multi-family buildings where the land
around them is treated as a “no mans land”. Municipalities do not own land either, as it is treated as
a state land, which is administered by ... Ministry of Agriculture – even in urban areas.
Program D1 Target:
Better Access to Land and Infrastructure for
Land is an important factor of economic development and urban productivity. At a recent European
Summit on Land for Development by UNECE REAG100 in Rome, there was an overwhelming
consensus that more efforts should be devoted to helping countries develop their real estate markets
It was also acknowledged that it is through the act of trading interests in land that value can be
released, leading to economic and social benefits for a country. Agreement was reached that the
program should improve the capacity of governments to develop a national land policy that
integrates the land for development objectives, as discussed in the background papers prepared for
the Summit.
The role of both institutional framework in land ownership rights and their registration, as well as
the role of local governments in providing more land infrastructure, should be advocated for. Two
specific examples of desirable changes are: (a) cost recovery from infrastructure investments via
betterment fees; (b) shrew use of long-term land leaseholds to lower the investment cost of buying
land; and (c) introducing land value based taxation of land that discourages land speculation and
puts pressure on selling land if not needed101.
A research program into the impact of land and infrastructure policy on housing should be the first
step into preparing the advocacy program by the implementers of this housing strategy. The result
of this additional research, followed by seminars, should make it possible to develop an agenda for
advocating certain changes with collaboration of interested stakeholder groups.
Project D1a:
Research on Impediment Reduction in Housing Market
4.5.3 Advocacy Program “D2” on Planning and Permitting
A similar approach should be taken in reference to planing and permitting impediments that lead to
uncertainties and protracted project preparation, and they impact on housing market efficiency.
Seminars with the development industry could help identify the most serious impediments and,
100
United Nations Economic Commission for Europe, Real Estate Advisory Group.
101
Actually, a draft law has been prepared (maybe already passed) on developing land values by the State Land
Cadastre.
70
again, research projects should be undertaken to inventory the problems and look for solutions. A
skillful use of academic centers and students for gathering information should be used as much as
possible. This program should be made easier, as building and planning has stronger inter-
ministerial linkage than in the case of land and infrastructure.
Program D2 Target:
More Transparent Planning and
Role of municipalities is especially important here, as their planning and permitting “near
monopoly” is particularly prone to generate impediments including moral hazard.
Project D2a:
Research on Impediment Reduction in Housing
4.5.4 Program “D3” on Stimulating Market Activity
Even if land, infrastructure, planing and permitting may work well, the market may be insufficiently
active in selling and renting. This is the case of most places in Lithuania at the moment. Partly it is
driven by the low demand, and partly because most of the consumers do not have a sufficient
knowledge as well as information about housing market mechanics and opportunities. Acquiring a
home is still seen as acquiring just a shelter, while it is also an investment into an asset, which can
bring capital appreciation, or depreciation. A cross-cutting Housing Information System program is
the way to respond and it has already started its development at the MOE through setting up of a
website for Housing Information, where various information pieces will be gathered. The concept
of this website is in the appendix to this chapter.
Program D3 Target:
Better Information to All Housing Stakeholders
This initiative should develop into undertaking additional activities, which would lead to increased
access of all housing stakeholders to housing information dealing with: (a) households; (b) housing
stock; (c) housing market statistics; (d) policy related documentation; (e) documented research, etc.
The Housing Choice Study emphases this very strongly and provides an appendix with description
and experience of Canadian housing information system. Latvia has just completed an extensive
71
study on a concept for a housing monitoring system, to provide the background for development its
housing strategy102.
Public education about opportunities in the housing market can also be assisted by professional real
estate agents (brokers). It is important that these services be on a professional level in order to
protect consumers. In many countries real estate brokers need to obtain a license to practice. In
some countries they are not allowed to trade (deal) with residential properties in order to avoid
conflict of interest. Development of a licensing system may be similar as in case of property
managers103 (and in fact also real estate appraisers), but the main test of practical skills would be
connected with some apprenticeship with licensed brokers. Also, an obligatory insurance could be
required in order to avoid damages to consumers104.
Project D3a:
Integrated Housing Information System
Project D3b:
Licensing of Residential Real Estate Brokers
***
The general chart of policies and programs is shown in Figure 7 below, and followed by a matrix
incorporating together policies, programs and projects (instruments) – Figure 8. The first steps
taken by the Ministry of Environment towards development of Project D3a on Housing Information
System is presented in Appendix B.
Figure 7: Policies of Sustainable Housing Strategy
102
See A Concept for a Housing Monitoring System in Latvia, by Sasha Tsenkova, September 2002, Canadian
International Development Agency.
103
See section with Program on Sustainable Housing Values in this chapter.
104
In cases where brokers receive payment advances from buyers or sellers towards a transaction they intermediate.
72
F ig u r e 7
P O L IC IE S O F S U S T A IN A B L E H O U S IN G S T R A T E G Y
A B C D
S u s ta in a b le H o u s in g S u s ta in a b le H o u s in g S o c ia l C o h e s io n in S u s ta in a b le H o u s in g
M anagem ent C h o ic e H o u s in g P r o d u c tio n
I M P L E M E N T A T I O N P R O G R A M S
A1 D1
B1 C1
R e g u la to r y f ra m e f o r Land and
H o u s in g a llo w a n c e s S o c ia l h o u s in g
r e n o v f in a n c e in f ra s tr u c tu r e
A2 D2
B2 C2
R e g u la to r y f ra m e f o r P la n n in g a n d
M o r tg a g e F in a n c in g R e ta in s o c ia l m ix
p r o p e r ty m g t p e r m ittin g
A3 B3
C3 D3
S ta te s p o n s o re d M a r k e t r e n ta l
L o c a l a r e a in itia tiv e s M a rk e t s tim u la to n
r e n o v in s u r a n c e h o u s in g
A4
B4
S u s ta in a b le h o u s in g
N o n - p r o fit h o u s in g
v a lu e s
73
Figure 8: Matrix of Proposed Policies, Programs and Projects
POLICY Program Project 1 Project 2 Project 3 Project 4 Project 5

A- A1 – A1a: A1b: A1c: A1d: A1e:
HOUSING Renovation Mortgage lien Priority Contract based Flat owner Joint activities
MGT Framework collateral mortgages duties model
A2 – A2a: A2b:
Property Mgt. Licensing of Building
Framework pty managers certification
A3 – A3a:
Renovation Renovation
Financing Insurance
A4 – A4a: A4b: A4c: A4d:
Sustainable Encourage Purchase Vacate Educate &
Values HOAs vacancies unsustain. hsg inform
B- B1 – B1a: B1b: B1c: B1d: B1e:
HOUSING Housing HA with HA with HA with owner HA with HA with utility
CHOICE Allowances municipal hsg renovation flats flats private rentals compensation
B2b: B2c:
B2 – B2a: B2d: B2e:
Credit Buy- Reverse
Mortgage MID targeting Credit Bureau Mortgage
down Grants Mortgages
Financing Insurance
B3c:
B3 – B3a: B3b:
Tenure
Market Rental Expand market HA in private
security
Housing rental rentals
B4 – B4a:
Non-Profit Pre-requisites
Housing for non-profit
C– C1 – C1a:
SOCIAL Social Housing Debt financing C1b:
Flat repurchase
COHESION
C2 – C2a: C2b:
Social Mix Voluntary de- Reverse
Retention privatization mortgages
C3– C3a: C3b:
Local Area Neighborhood Community
Initiatives facilities participation
D- D1 – D1a:
HOUSING Land & Research
PRODUCT Infrastructure agenda
D2 – D2a:
Planning & Research
Permitting agenda
D3 – D3a: D3b:
Market Housing info Licensing of
Stimulation system brokers
74
CHAPTER 5
5. Implementing Housing Strategy in Lithuania
5.1 The Constraints of Existing Subsidies

5.1.1 Interest Rate Subsidy (Soft Loans)
5.1.2 Mortgage Interest Deduction (MID)
5.1.3 Mortgage Insurance Premium (MIP) Subsidy
5.1.4 Credit Buy-down Grants of 10-20%
5.1.5 Energy Efficiency Housing Pilot Program (EEHPP)
5.1.6 VAT Exemption on the EEHPP Loans
5.1.7 Utility Compensation (Energy Subsidy)
5.1.8 Social Housing Acquisition Grants to Municipalities
5.1.9 Low Rents in Social Housing
5.1.10 Privatized Buildings Managed by Municipalities
5.2 The Imperative of Improved Targeting

5.2.1 Targeting of the Present Subsidy Mix
5.2.2 Targeting Improvements in the Proposed Strategy
5.2.3 Pivotal Importance of Improved Waiting Lists
5.3 The Imperative of Budgetary Constraints

5.3.1 Budgetary Implications of the Present Subsidy Mix
5.3.2 Budgetary Implications of the Proposed Subsidy Mix
5.4 The Imperative of Horizontal and Vertical Integration

5.4.1 Horizontal Integration: Stronger Coordination across Ministries
5.4.2 Vertical Integration: Expanded Role of Municipalities
5.5 Prioritizing Programs, Projects and Delivery Mechanisms

5.5.1 General Programming Principle
5.5.2 Selecting Subsidy Mix
5.5.3 Selecting Projects and Implementation Tools
5.6 Towards Adoption of Strategy Document and Work Plan

5.6.1 Active Roles for Coordinating Committee and Strategy Team
5.6.2 Proposed Calibration of the Sustainable Housing Choice Goal
5.6.3 Proposed Calibration of the Sustainable Housing Management Goal
5.6.4 Proposed Calibration of the Sustainable Housing Production Goal
75
The proposed Housing Strategy for Lithuania contains 4 policies, 14 programs and 36 projects to be
developed and implemented during till the year 2010 in order to achieve policy objectives and
eventually strategic goals for housing. Development and implementation of all of these programs
and projects at the same time would be impractical and excessively costly. Consequently, there is a
need to prioritize them, so that limited resources available to strategy implementation are optimally
allocated. This chapter focuses on articulating the necessary steps to be undertaken by strategy
implementers in order to adopt and then carry out a strategy implementation action plan.
Prioritizing of Programs and Projects
In order to proceed with this process, a number of criteria need to be applied to achieve
prioritization and time scheduling of programs and projects. Firstly, there exist already some
government programs, which are assumed to be retained, only because the government has decided
to recently modify them, thus signaling its intention to continue their existence. This draft strategy
is suggesting specific modifications of some of them. Secondly, there are budgetary constraints,
which need to be recognized and the draft strategy assumes that the overall budgetary envelope for
housing will not grow. Thirdly, there are regulatory constraints, which can hardly be eliminated and
will thus continue to impede application of first best solutions, thus shifting implementation efforts
to second best solutions. Fourthly, there exist various information constraints, which should be
eliminated in the long run, but in the short term the policy, program and project decisions will need
to be based on incomplete information. Consequently, program development and project design will
need to foresee substantial flexibility to respond to better information as it becomes available.
Fifthly, there exist institutional constraints which reduce the degrees of freedom in the selection of
program implementers and of project execution teams. Sixthly, there are moral hazard constraints,
which require to be recognized so that the risk of corruption be minimized.
Besides recognizing and overcoming various constraints, there are a number of other
implementation issues to be considered in the final choice of programs and projects. Since the
targeting principle is a high priority of the present government and yet is poorly applied in most of
the existing programs105, there is a need to enhance a mechanism for identifying and enlisting target
groups of beneficiaries. Many of the proposed programs and projects rely on increased involvement
of municipalities in both formulation and implementation capacities. Consequently, there is a need
for a specific review of the role of municipalities including proper empowerment mechanisms.
Finally, but not lastly, strategic coordination function requires sufficient institutional arrangements
to assure proper mobilization of competencies in formulating strategic goals and policy objectives
on the one hand, and in developing programs and projects on the other hand.
Recognizing and Overcoming Critical Constraints
The various types of constraints discussed below, impose actual short-term and long-term
ramifications for developing housing programs and thus defining the choice of housing projects. In
the short-run, these constraints will often require that second best solutions be sought, while in the
long-run, a conscious shift towards first best solutions should be sought once the constraints are
105
See Program Evaluation and Redevelopment Study and Contemplated Programs Study, both available at: www.am.lt
76
overcome or neutralized. Consequently, sufficient flexibility will need to be built into the programs
to make this shift possible. At the same time, one will need to undertake resolute efforts to reduce
the constraints106, and include these efforts as explicit tasks performed under pertinent programs.
Once the constraint has been eliminated, new projects will be phased in taking advantage of the
“unconstrained” circumstances.
5.1 The Constraints of Existing Subsidies

The following government housing subsidies are in existence and thus provide the first set of
“constraints” for formulation of proposed strategic programs and projects. A listing of the
government subsidy programs, together with their status, is provided in Table 1 below:
Table 1: Existing and Proposed Subsidy Programs as of December 2002
Major recent Type of change or current

Program or planned changes operational status
Interest subsidy (soft loans) Yes Expires at the end of 2002

Begins in 2003, regulations under
Mortgage interest deduction implicit subsidy New
preparation
Begins in 2003, regulations under
10-20% loan credit for targeted households New
preparation
New regulation to increase
Mortgage insurance premium subsidy Yes
targeting
HOA grants and energy efficiency loan No
Utilities compensation for targeted households Yes New law to increase targeting
Municipal housing acquisition grants No Not funded in 2002 and 2003
Low rent in municipal housing Yes New law affects targeting
As can be seen in the above table, there have been changes to most of the present subsidy programs
during the period of the housing strategy project. A thorough evaluation of these programs was
performed in the Program Evaluation and (Re)development Study and in the Contemplated
Programs Study107.
In addition to these explicit subsidies, there are also implicit / indirect subsidies without formal
government programs, which nevertheless substantially impact on housing policy goals and on the
flow of public funds into the housing sector. These impacts arise through very substantial indirect
subsidy conferred to privatized dwelling owners and implicit subsidy to tenants in municipal social
housing. These indirect / implicit subsidies take several forms and their estimate of about 200
million litas is provided in Appendix D108. The beneficiaries are subsidized through:
106
Constraint reducing efforts should be included in pertinent programs.
107
Both reports are available on the internet page devoted to the Housing Information System at the website of the
Ministry of Environment: www.am.lt.
108
See Estimate of Implicit Housing Subsidies in Lithuania, available on housing page of the MOE website: www.am.lt
77
very low maintenance fees paid by dwelling owners;
very low rents paid by tenants of social housing;
provision of “free” repairs by municipal maintenance companies;
no charge for land and grounds maintenance services; and
weak execution of arrears in maintenance fees by municipal maintenance companies.
Each of the programs was evaluated and scores as to the following characteristics:
targeting;
overall costs;
transparency;
administrative burden; and
consistency with strategic goals and policy objectives.
5.1.1 Interest Rate Subsidy (Soft Loans)
This government program is being eliminated at the end of 2002, so no modifications are
recommended. It was scored as shown in Table 2 below:
Table 2: Scores for the Interested Rate Subsidy Program per 2002
Characteristics Score
Targeting VIII, IX, X
Overall costs 9.6 million
Transparency good
Administration fair
Budget / cost
good
control
Estimated cost
83 million
2000-2010
Comment: Ending Dec 2002
5.1.2 Mortgage Interest Deduction (MID)
This is a new government subsidy to replace the interest rate subsidy and begins implementation in
2003. This subsidy will fit into the proposed housing strategic framework under Policy B on
Sustainable Housing Choice – Program B2 on Housing Finance – Project B2a on targeting of MID.
78
The program was scored as shown in Table 3 below:
Table 3: Scores for the Mortgage Interest Deduction per 2002
Characteristics Scores
Overall costs Not applicable
Transparency good
Administration good
Budget / cost
Very poor
control
Estimated cost
250 million
2000-2010
Comment: Begin in 2003
The program was estimated by the Ministry of Finance to cost, as an implicit subsidy, some 9.4
million litas in 2004 when first payments are to be made to the beneficiaries109. The project team
has estimated them at 19 million. Consequently, an additional estimate should be made to reconcile
these differences. If, in fact the figure of 19 million is found reasonable, the government needs to
rush with an adjustment of eligibility criteria both in terms of ceilings for qualified households and
in terms of household qualification criteria.
Evaluation of the program has been quite critical and the project team recommends that the first
best solution would be not to implement the program, as it is highly regressive, involves large off-
budget subsidy, which is difficult to control, and it takes resources that could otherwise be used to
assist poorer households. Alternative solutions would include continued interest rate subsidy, but
with a lower benefit and improved targeting or offering a subsidy in terms of up front grant, which
capitalizes future benefits of mortgage interest deduction into one amount110
However, recognizing that the government has already adopted the law, what is realistic in the short
term future is adoption of a second best solution by modifying the problem through introduction of
additional targeting criteria that will select away the most affluent households, without negative
effect on the marginal households111.
109
In form of tax refunds for the year 2003.
110
This way both the government and the beneficiaries would know the total cost / benefit in advance.
111
Marginal household are those households, that are unable to afford a house without this subsidy, because their
disposable incomes would not qualify them for a loan.
79

Recommended Action in Project B2a:
Consider one or more of the following limiting mechanisms:
cap deduction at an absolute litas amount;
limit deduction to the first time homebuyers;
limit deduction to the young households;
restrict to moderate loan amounts or house prices;
limit number of years for applying the deduction;
or
i h h ld i h i i
5.1.3 Mortgage Insurance Premium (MIP) Subsidy
This is an ongoing program, which fits into the proposed housing strategic framework under Policy
B on Sustainable Housing Choice – Program B2 on Housing Finance – Project B2e. It has been
amended in 2002 and scored in its current version as shown in Table 4 below:
Table 4: Scores for the Mortgage Insurance Program per 2002
Overall costs 5.7 million LTL
Transparency to
fair
beneficiaries
Administration good
Estimated cost
34 million
2000-2010
Budget / cost
good
control
Comment: Changed for 2003
The mortgage insurance premium subsidy has many desirable attributes for a homebuyer subsidy. It
is a transparent up-front subsidy that reduces the initial amount of money that homebuyers need to
acquire a loan. Despite the positive impact of this subsidy, it has not been well targeted in the sense
that it benefits not only the marginal households, but also those of high enough incomes to afford
housing without subsidies. An income and property limit for beneficiaries does not currently exist,
and all beneficiaries are not equally needy. The subsidy also tends to be regressive in that
households that can afford larger loans receive larger MIP subsidies.
80
The new housing law requires all beneficiaries of state housing support to not have income and
property that exceeds still-to-be-determined limits. The limits for families trying to purchase a home
will have to be different from the limits for families seeking to rent municipal housing. Given that
income and asset data will exist for beneficiaries in the future, it makes sense to structure the MIP
subsidy such that relatively wealthy beneficiaries receive smaller subsidies than those received by
less wealthy beneficiaries.
Recommended Action:
Leave in the current form, but monitor performance
The subsidy is not being monitored by the Ministry of Environment in terms of stock taking of who
are beneficiaries, what kind of housing and where is being assisted, how much does it affect
affordability of marginal households etc. It is recommended that the MOE institutes a monitoring
procedures for periodic reporting by the LMIC of its activities in terms of both household and
housing stock statistics.
5.1.4 Credit Buy-down Grants of 10-20%
This is a new program to replace the interest rate subsidy and begin implementation in 2003
together with the mortgage interest deduction subsidy. This fits into the proposed housing strategic
framework under Policy B on Sustainable Housing Choice – Program B2 on Housing Finance –
Project B2b.
This subsidy program was scored as shown in Table 5 below:
Table 5: Scores for the Loan Credit Grant Program per 2002
Targeting VIII, IX
not applicable in
Overall costs
2002
Transparency to
excellent
beneficiaries
Administration good
Budget / cost
good
control
Estimated cost
26 million
2000-2010
Comment: begins in 2003
81
As was explained above, the up-front credit buy-down grants are good instruments of housing
programs, because they can be well targeted, their costs can be controlled, and they can reduce
uncertainty about future costs and benefits.
Recommended Action:
Leave in the current form and monitor performance
5.1.5 Energy Efficiency Housing Pilot Program (EEHPP)
This is an ongoing program, which is scheduled to be phased out112. It should be replaced with a
new program in the proposed housing strategic framework – Policy A on Sustainable Housing
Management – Program A3 on Renovation Financing – Project A3a on Renovation Insurance.
The current EEHPP program has four components. Firstly, there are loans disbursed from the
energy efficiency fund, which was capitalized several years ago through the World Bank loan. As
the repayments on the loans come in, the proceeds are used to repay the World Bank loan and the
rest is available for re-lending (revolving loan scheme). Consequently, the amount of capital
available for re-lending is successively dwindling. Secondly, there are general untargeted grants
extended to HOAs, which enter into the program. Thirdly, there are reimbursements to lower
income families towards repayment of their shares of the loan113. Fourthly, construction works are
“subsidized” in that no VAT is charged on the costs. We consider here the first two components of
the program. The third component is integrated into the utility compensation program and the fourth
(VAT) is reported separately below.
The program has been scored as shown in Table 6 below:
Table 6: Scores for the Energy Efficiency Program per 2002
Targeting little
Transparency to
good
beneficiaries
Administration poor
Budget / cost
Poor
control
112
The initial capital was financed with the World Bank loan, which is being gradually repaid with proceeds from
energy loan repayments.
113
An innovative of utility compensation mechanism is being used here.
82
Estimated cost
14 million
2000-2010
Comment: Grants to HOAs
The current grant and loan program for energy efficiency improvements satisfies a number of key
goals and objectives. It contributes to the efficient use of existing housing by creating the incentives
and conditions that are needed to improve the existing stock. It improves the ability of families to
pay for housing choices, and promotes responsible homeownership by supporting the development
of HOAs. The grant subsidy is transparent, but it is not targeted on low-income households. The
loan payment assistance funded through the utilities compensation program, however, is targeted on
the poor. Given the importance of being able to subsidize the loan repayments of poor households,
this subsidy should be made transparent by making it a line item in the program budget.
Commercial banks need to become involved if any significant expansion of the program is to take
place. To access more capital, a conventional market-rate lending approach has to replace the
revolving loan scheme. The long-term answer to attracting the interest of banks rests on the ability
of HOAs to demonstrate that they can collect steady revenue streams from their members. The
program generates more interest from potential beneficiaries when complementary energy and
structural investments are being implemented. This program should be expanded to cover structural
renovation needs on a massive scale. Proposal for such a program is presented in Appendix C.
Recommended Action:
Replace with new program on energy and structural renovation
The new program, should be developed in a package with other programs and should be based on
the experience gained in the EEHPP assuring proper transition between them. The 30% subsidy is
unsustainable on a larger scale, so there will be a necessity to gradually lower the subsidy to a more
affordable (from fiscal point of view) levels.
5.1.6 VAT Exemption on the EEHPP Loans
This is an ongoing program, which is integrated with the EEHPP (see above) dynamics.
Table 7: Scores for the VAT Exemption in EEHPP Program per 2002
Targeting little
83
Transparency to
good
beneficiaries
Administration good
Budget / cost
very poor
control
Estimated cost
10 million
2000-2010
Comment:
Since the exemption is an integral part of the EEHPP program the comments are similar as those to
the grant portion. Essentially, this implicit subsidy increases the benefits to over the 30% level,
which is already pretty hefty. As the 30% grant level appears to be unsustainable for a massive
program, one should consider eliminating this exemption to test how this might affect willingness
of HOA to participate in the program. One should reduce excessive expectations by some HOAs to
“bribed” into program participation. Elimination of VAT exemption would also be compatible with
the EU directives for eliminating this type of implicit subsidies.
Recommended Action:
Eliminate the VAT exemption in housing renovation
5.1.7 Utility Compensation (Energy Subsidy)
This is an ongoing subsidy program, which has been modified in 2002 to take effect in July 2003. It
fits into the proposed housing strategic framework under Policy B on Sustainable Housing Choice –
Program B1 on Housing Allowances – Project B1e.
Table 8: Scores for the Utility Compensation Subsidy per 2002
Targeting Fair/good
Overall costs 110 million
Transparency to
poor
beneficiaries
Administration poor
Budget / cost
poor/fair
control
Estimated cost
1,183 million
2000-2010
84
Comment: Modified 2003
This is the most costly housing-related program in terms of direct subsidies and the largest in terms
of participation with almost half a million beneficiaries. Between 2000 and 2001, the cost of this
program rose about 31 percent, while the number of beneficiaries increased by about 75 percent. It
has been urgent to contain this alarming development through by modifying the law to take effect
from July 2003. The changes still do not have an explicit income limit, although it will apply
property limit.
The idea of means tested allowances is strongly supported in this strategy and a long-term
development of housing allowance program is proposed to eventually incorporate utility
compensation. In the short-term, however, something needs to be done about the lack of incentives
to households in respect of energy conscious consumption. To create these incentives it is proposed
that beneficiaries simply be given an amount equal to the maximum norm they are entitled to
without regard to the amount they actually consume. This is essentially the same concept on which
housing allowances are based, and could be a relatively easy way to gain experience with the
housing allowance approach
Recommended Action:
Flat amount of energy subsidy regardless of consumption
5.1.8 Social Housing Acquisition Grants to Municipalities
This is a subsidy, which has been practically suspended for the years 2002 and 2003, after spending
a large amount of almost 20 millions in 2001. It fits into the proposed housing strategic framework
under Policy C on Social Cohesion in Housing – Program C1 on Social Housing – Projects C1a
and C1b.
Table 9: Scores for Social Housing Grants per 2002
Targeting poor / fair
Transparency to
poor / fair
beneficiaries
Administration good
85
Budget / cost
good
control
Estimated cost
60 million
2000-2010
Comment: Resumes in 2004
This government subsidy is to help municipalities to increase social rental stock in response to
waiting list participants registering for this type of housing, and in response to general need to
widen housing choice with rental tenure alternative. The central government is to decide each year
how much grant money it will give to municipalities for acquiring social housing. This spending has
been very uneven and adjusted to budgetary possibilities, as well as to municipal submissions.
Consequently, in the year 2000 the grants totaled to 5.6 million, in 2001 the shot up to a whopping
19.5 million, while in 2002 only 0.3 million was allocated. No allocation has been made for the year
2003114.
Generally, there is a principal problem with such capital grants financed by the budget, since it is
the banks who should be engaging in raising funds and disbursing them to various borrowers –
including municipalities. State intervention may be provided through assistance in repayment of
these loans. This way or another the State can be expected to help municipalities in solving this
recognized problem, so that the total estimate for the period of 2000-2010 amounts to 60 million
litas in the Housing Strategy. Municipalities should be encouraged to start borrowing and
minimizing costs of acquisition b repurchasing some dwellings from privatized tenants, rather than
build new social housing stock.
Recommended Action:
Debt financing by municipalities to acquire
5.1.9 Low Rents in Social Housing
Since not all of the housing stock was privatized, municipalities continue to rent the remaining
stock of social housing. Rents are very low by market standards and municipal maintenance
companies (MMC) are not very strict in collection these rents. Consequently, tenants in the social
rental stock are receiving a considerable indirect subsidy. It fits into the proposed housing strategic
framework under Policy B on Sustainable Housing Choice – Program B1 on Housing Allowances –
Project B1a.
Table 10: Scores for Low Rent Social Housing per 2002
114
Ministry of Finance has apparently put on hold this process in anticipation of proposals made in the adopted version
of the Housing Strategy.
86
Targeting poor
Transparency to
good
beneficiaries
Administration poor
Budget / cost
very poor
control
Estimated cost
750 million
2000-2010
Comment: Implicit subsidy
The new housing law on state support will create new waiting lists that will take into account the
income and property of a family for the first time. These lists might give analysts a rough idea of
how much municipal housing is needed. An important change is that beneficiaries of municipal
housing will have to submit proof of their continuing eligibility every three years. The condition of
this stock is deteriorating given such low rents, so there is an acute need to concentrate on
preserving the stock that is presently available. This goal will only be achieved if rents are raised to
levels that will support the operation and maintenance of the municipal units. Raising of rents has to
be preceded by implementation of housing allowance scheme available to tenants of social housing
stock.
Recommended Actions:
Housing allowances with market rents in social housing
This is essentially the nature of project B1a described also in Chapter 4.
5.1.10 Privatized Buildings Managed by Municipalities
Most of the privatized multi-family buildings in Lithuania continue to be managed by municipal

maintenance companies (MMC). This phenomenon fits into the strategic framework under Policy B
on Housing Choice – Program B1 on Housing Allowances – Project B1c.
As is elaborated in Appendix D, maintenance fees charged by the MMCs to privatized dwelling

owners are much below the rates necessary for cost recovery including depreciation115. The
companies themselves use very low depreciation allowances, which decreases their costs116. In most
115
For example, the project has estimated that in Vilnius, the artificially low maintenance fees translated to in implicit
subsidy of about 12 million Lt in the year 2001. See the note: Estimate of Implicit Housing Subsidies in Lithuania,
posted on the Housing Information System page on the website: www.am.lt.
116
For example, the project team has estimated that in Vilnius the companies charged depreciation of about 1 million Lt
when an amount of 5-10 million should have been used.
87
of municipalities grounds around the buildings are maintained also by MMCs, and is some –
notably Vilnius – municipalities do not charge for this service, because of the unclear property
rights to land surrounding multi-family buildings117. Finally, although collection of maintenance
fees is more effective as compared with social rental housing, the rate of uncollected arrears is still
in the range of 10-15%. Adding up all these implicit subsidies to dwelling owners for the country as
a whole yields a rough estimate of 180-200 million litas. This amount constitutes effectively a deep
discount of 40-50% to privatized tenants, who are owners of private housing assets.
All this money foregone could be part of public sector budget revenues targeted to qualified
marginal households. Instead, considerable part of it is probably spent by private dwelling owners
on non-housing goods and services, which perpetrates the under-spending on existing housing stock
and thus exacerbates the resultant maintenance gap. This situation, as described in the Goals
Attainment Study, is definitely unsustainable and continuation of this level of implicit subsidies by
municipalities enables the benefiting households to effectively siphon out public resources
earmarked for housing to non-housing sectors aggressively competing for consumer spending.
Recognition of this mechanism should be made transparent in state budgetary reporting on housing
sector spending.
This implicit housing subsidies to privatized dwelling owners has been scored as shown in Table 11
below:
Table 11: Scores for Implicit Subsidies to Dwelling Owners per 2002
Targeting poor
Transparency to
good
beneficiaries
Administration Very poor
Budget / cost
very poor
control
Estimated cost
1,821 million
2000-2010
Comment: Implicit subsidy
Looking at the amount of public revenues foregone through this mechanism, one should openly
admit that this is the biggest housing subsidy of all, which is not addressed to targeted households.
What is recommended as the first step is to make them transparent and visible in the housing
budgetary analysis and to start reducing them as soon as possible, but providing simultaneous
117
The project team has estimated that, for example, in Vilnius the free land servicing by MMCs add up to an implicit
subsidy of about 10 million per year.
88
protection (housing allowances) to marginal households who will not be able to afford the resultant
higher maintenance fees. And the most expedient way of doing it is to privatize municipal
maintenance companies, as this will ensure market determined maintenance fees free from local
political pressures, that have made these subsidies possible.
Recommended Actions:
Set market maintenance fees and provide housing
allowances
5.2 Imperative of Improved Targeting

The preference for household targeting with subsidies is based on the social equity principle, which
is one of the anchors of the socio-economic development strategy. Consequently, it is imperative to
recognize the present targeting performance and look for ways of visible improvement in this
pivotal area118.
5.2.1 Targeting of the Present Subsidy Mix
Analysis of the existing targeting performance is shown in Table 12 below:
Table 12: Targeting of Existing Housing Subsidies

Prog / Proj Income Deciles I II III IV V VI VII VIII IX X
Direct Subsidies
B2 / a Soft loans (int subsidy) X X X
B2 / e Mtg insurance premium X X
A3 / a EEHPP grants to HOAs X X X X X X X X X X
C1 / a,b Soc hsg grants to muni
B2 / b Loan buy-down grants X X
Indirect Subsidies
B1 / c Fees in privatized hsg X X X X X X X X X X
B1 / e Utility compentation X X X X
Implicit Subsidies
B2 / a Mortgage interest deduct X X X
A3 / a VAT on EEHPP project X X X X X X X X X X
B1 / a Rents in social housing X X X X X X X X X X
The table 12 above recognizes changes introduced in 2002/2003, as well as defines three categories
of housing subsidies: direct, indirect and implicit. While direct subsidies are officially allocated to
the housing sector, the indirect subsidies are also on the budget, but not categorized as housing. For
example, municipal maintenance companies and their performance influence municipal budgets
(Ministry of Interior). Utility compensation is allocated to social policy budget (Ministry of Social
Security and Labor), while EEHPP grants are allocated to energy efficiency program (Ministry of
Economy). The third group of subsidies are implicit subsidies which are not even on the budget, as
they are not accounted for and one can calculate them only by analyzing foregone budgetary
118
The other pivotal area of the proposed housing strategy being sustainable housing stock (renovation).
89
revenues. In this case we have foregone revenues on VAT (on EEHPP projects), foregone rental
revenue on social housing and foregone tax revenue which could be collected if mortgage interest
deduction is not granted. It is relatively easy to see that, in the long term perspective, explicit
subsidies (direct, indirect) constitute a minority 37% of total subsidies, while implicit subsidies
constitute the majority at 63% of total subsidies.
Targeting of housing subsidies, if any, is mostly focused on wealthier households in deciles VIII, IX
and X. Targeting of homeownership marginal households in decile VIII makes sense, because
without the subsidy they would be able to afford homeownership. But targeting of subsidies on
highest income households in decile X, given their overwhelmingly higher incomes (see figure 4),
constitutes a redundant subsidy that could easily be spent on non-housing consumption by
households who do not need this subsidy for their housing purposes, or may use it for dispensable
housing luxury.
The table reflects the impact of programs after their modifications made in 2002. As can be seen the
only existing housing program, which targets lower and medium income deciles is the utility
compensation program, which is not part of the housing budget in the existing budgetary system119.
Most of the programs, and most of the money benefits either any household or focus on higher
income households, who can qualify for subsidized lending from the banks. Recent changes have
tried to introduce more targeting, so that in the future, all beneficiaries of homebuyer assistance
must satisfy such a test120. Although the limits are not yet known, they will presumably screen out
the richest households.
5.2.2 Targeting Improvements in the Proposed Strategy
The proposed strategy should bring about improved targeting as is shown in Table 13 below:
Table 13: Targeting after Implementation of Housing Strategy
119
It is administered by the Ministry of Social Security and Labor.
120
Except for the mortgage interest deduction, which is available to all borrowers.
90
Prog / Proj Income Deciles I II III IV V VI VII VIII IX X
Direct Subsidies
B2 / a Soft loans (int subsidy) X X X
B2 / e Mtg insurance premium X X
A3 / a EEHPP grants to HOAs X X X X X X X X X X
C1 / a,b Soc hsg grants to muni X X X
B2 / b Loan buy-down grants X X
B4 / a Non profit housing X X X X X
A3 / a Renovation program X X X X X X X X X X
B1 / b Renovation HA X X X X
B1/ c, d Rental and HOA allow X X X X
Indirect Subsidies
B1 / e Utility comp HA X X X X
Implicit Subsidies
B2 / a Mtg inter deduction X X
A3 / a VAT on EEHPP project X X X X X X X X X X
Implementation of the proposed strategy will substantially improve targeting and thus satisfy the
requirements of the social equity principle. New programs, see non-bolded X, will focus on
targeting except the renovation program, which is an imperative regardless of targeting. This
assumes also improvement of the existing housing subsidies along the lines recommended in
section 5.1.
5.2.3 Pivotal Importance of Improved Waiting Lists121
A basic knowledge of waiting lists is necessary to understand targeting in state-funded housing

programs. The current interest subsidy (soft loan) and low rent municipal housing programs draw
their beneficiaries from the same waiting lists. A family must also meet waiting list criteria if it is to
receive a mortgage insurance premium subsidy. There have been persistent recommendations to
eliminate or replace the existing waiting list system due to a relative lack of targeting and questions
about the integrity of the lists. Currently, there is no way of knowing how many waiting list families
are eligible for state-funded housing assistance.
The version of “state support law” amended in 2002122 should improve the oft-criticized waiting
lists; however, some problems related to targeting will remain. In an effort to improve targeting, the
government will increase the number of lists from three to five, and introduce means testing for all
potential beneficiaries of state-funded housing assistance123. It appears that most families will have
to submit a new application to get on one of the new lists.
At the start of 2002, there were approximately 106 thousand households on waiting lists with about
72 percent of these on a first (general) list. The second (social need) lists and the third (young
121
Substantial analysis of the waiting list issue is made in the Program Evaluation and Redevelopment Study, available
at: www.am.lt
122
Law on the Amendment to the Law on The Provision of Residents with Housing adopted by the Seimas in
November 2002, is available at: www.am.lt
91
family) lists contained about 11 percent 18 percent of the waiting list households, respectively. The
amount of housing assistance provided has varied a lot in recent years with only 3,5 thousand
households receiving state support in 2001, and with about 75% percent of them obtaining soft
loans (interest subsidy) 124. The rest 900 households were awarded low rent in municipal dwellings.
The number of newly assisted households increased by almost 2,400 between 2000 and 2001, due
primarily to a sharp rise in the number of households receiving soft loans.
Preferences for types of housing assistance vary by list. Overall, about 82 percent of households
eligible for any type of state support prefer soft loans, whereas the remaining 18 percent prefer to
rent municipal housing. However, about 90 percent of households on general lists and about 83
percent of the households on young family lists prefer soft loans over municipal housing. In
contrast, only 31 percent of the households on social need lists desire soft loans; about 69 percent
would prefer to rent municipal housing.
The problems of waiting lists seem to be well known, but many of these problems are anecdotal and
have not been documented in print. Many of these real and alleged problems are interrelated;
however, they all tend to result in an overstatement of government obligations. The lack of updated
lists has been something of an administrative nightmare for municipal officials trying to select
potential beneficiaries for programs125. The lack of information about housing assistance options
among waiting list households impedes also decision making by potential beneficiaries. Households
are unsure of how to respond to various offers, because they rarely know what other options they
may have in the future126.
It has reached a point where the waiting list system is neither transparent nor fair, which is why the
amended state support law contains new waiting list rules. The new waiting list system will have
five lists instead of three. Due to elimination of the soft loan program, and its replacement with the
untargeted mortgage interest deduction available to all households, the new waiting lists only apply
to the renting of municipal housing: (1) young households; (2) orphans and persons without parental
care; (3) disabled or seriously ill; (4) general list for those not covered in 1, 2 and 3; and (e) current
social housing tenants entitled to improved housing. Families presently on a waiting list will have to
reapply to get on one of these lists.
The most significant change is the introduction of a means test for all recipients of state-funded
housing assistance. To be eligible, the total income and property value of a family must not exceed
maximum amounts to be established by the government or an authorized institution127. It is not clear
if municipalities will use income and property data as an additional factor in deciding a family’s
123
The criteria for the means test are contained in the Law on Declaration of the Property and Income of Residents,
which is considered for amendment.
124
The average loan amount was 50,700 litas.
125
See an illustrative example on the City of Vilnius described in Chapter 1 of the Program Evaluation and
Redevelopment Study, available on: www.am.lt
126
A household may be removed from a list after it refuses assistance, but this provision in the law does not seem to be
enforced.
127
Definitions of income and property are contained in the Law on Declaration of the Property and Income of
Residents.
92
waiting list position. It may be possible that the government will create two sets of income and
property standards - one for recipients of acquisition assistance and another for recipients of
municipal housing. Such an arrangement could dramatically improve targeting for both types of
support, and would be highly desirable. Another welcome change is a reduction of the maximum
useful area per household member from 18 m2 to 14 m2.
It remains to be seen how successful the new waiting lists will be with regard to defining the
neediest marginal households and establishing the order in which they receive assistance. One
problem is deciding the priority among the five lists. This is the responsibility of local authorities,
which will need to maintain transparency by making public the method for establishing priority
among the lists, as well as keeping the lists public. Another problem is that the emphasis on time of
application for establishing waiting list positions may discriminate against relatively immobile or
isolated households, such as the elderly or disabled.
5.3 The Imperative of Budgetary Constraints

The second major constraining circumstances to implementation of the strategy is the budgetary
“envelope” available to the housing sector for subsidies. This should not be considered in a one-
year perspective, but requires that a longer-term period be taken into consideration, since most of
housing subsidy schemes have longer-term commitments that cannot be changed later128. This may
conflict with budgetary dynamics, which may require that overall budgetary spending on the
housing sector should be reduced, while the subsidy dynamics may cause increased spending due to
staggering past commitments.
First of all, however, a proper accounting of the flow of public funds to the housing sector needs to
be established and analyzed. The diagnostic work on the housing strategy discovered profound
discrepancies between formal budgetary reporting on housing sector support and the analytical
evaluation of the flow of funds including indirect and implicit public subsidies. The total flow of
public funds to the housing sector is thus a different “story” from the official statistics, which
underpin the popular perceptions and the housing subsidies debate. Taking stock of this different
story makes it possible to appreciate the higher level of public spending, as well as substantial mis-
targeting of the public funds on households, that do not necessarily require such support. This leads
to a conclusion that substantial budgetary savings could be realized through better targeting or re-
targeting of subsidies, which would make room for funding additional programs and projects
proposed by the strategy.
Consequently, there is an acute need to bring more clarity and transparency about the level and
incidence of public funds flowing to the housing sector. Two recommendations are submitted for
consideration by the strategy:
First Recommendation:
Increase transparency of public spending on the housing sector
by including indirect and implicit subsidies.
128
Exceptions are usually one-time grants that can be changed from year to year.
93
Second Recommendation:
Look for budgetary “savings” better targeting, which can be
used for new programs and projects.
These two recommendations mean in essence, that regardless of the need for new programs
required by various policy objectives, there are financial / budgetary limitations stemming from the
existing subsidy programs: direct, indirect and implicit. Making room for new subsidy programs
can only happen through either cancellation of some of the existing programs, which is highly
unlikely due to political constraints, or through generating savings in the existing programs by re-
calibrating them into more targeted ones.
5.3.1 Budgetary Implications of the Present Subsidy Mix
The present situation in Lithuania is such that the budgetary envelope is bound to be strongly
constrained in the coming years by macro-economic factors exogenous to the housing sector129.
This requires that spending on subsidy schemes be carefully analyzed and planned with a special
emphasis on understanding the full extent of current and future spending on housing sector. The
task is difficult because of apparent lack of transparency in accounting for this spending, since part
of it is indirect – i.e. going through non-housing budgetary allocations, as well as implicit – i.e.
going through non-recorded flows of public funds. Much of budgetary spending for housing in the
coming years will stem from previous commitments, which means that it will not be discretionary,
leaving little room for new subsidy schemes. Consequently, one needs to assume that overall
spending on housing cannot increase during the housing strategy’s time horizon till 2010, and that
fixed commitments will need to be honored. Implementation of new proposed programs and
projects requires that existing subsidy schemes be rationalized to make room for new programs and
projects. It also means that every efforts should be made to search for such strategy implementation
instruments, which do not require budgetary subsidies, but act as enabling mechanisms for
mobilizing market forces and household initiatives.
If the current pattern of subsidy schemes is simply continued, the level of mis-targeting will remain
high and continue to divert funds from other recommended programs, such as renovation and rental
housing. The budgetary implications of continuing existing housing subsidies is summarized in
table 14 below:
Table 14 illustrates the need for more transparency in budgetary accounting, since official figures
for the ten year strategic horizon (2000-2010) on direct housing subsidies cover only 4 percent of
the overall public funds flowing to the housing sector, while indirect subsidies cover 73 percent and
implicit subsidies cover 23 percent. Such complication as provided in table 14, even though with
some simplifying assumptions as to future spending, provides a very meaningful basis for strategic
planning. It provides an important information that budgetary spending on housing sector is
129
Recent (2002) World Bank Country Economic Memorandum for Lithuania notes that it is: “desirable to continue
reducing the fiscal deficit, as a lower growth rate coupled with unexpected higher interest rates may pose a
sustainability issue in the future”.
94
significantly higher, at about 4% of total expenditures, than official figures and popular belief of
slightly more than 2% based on them.
Table 14: Budgetary Implications of Existing Subsidy Mix

(figures in millions of litas)
Direct Subsidies Prog / Proj Tot 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Soft loans (old) B2 / a 83 6 6 10 9 9 8 8 7 7 7 6
Loan buy-down grants B2 / b 26 N/A N/A N/A 2 2 2 3 3 4 5 6
Mtg insur premium (MIP) B2 / e 34 0 4 6 3 3 3 3 3 3 3 3
Soc hsg grants to muni C1 / a, b 60 6 20 0 0 5 5 5 5 5 5 5
Indirect Subsidies
Fees in privatized hsg B1 / c 1821 194 194 194 184 175 166 158 150 143 134 129
Utility compentation B1 / e 1458 75 98 110 123 129 136 142 150 157 165 173
EEHPP grants to HOAs A3 / a 15 3 3 2 2 2 1 1 1 0 0 0
Implicit Subsidies
VATon EEHPP project A3 / a 10 2 2 2 1 1 1 1 0 0 0 0
Rents in social hsg B1 / a 748 68 68 68 68 68 68 68 68 68 68 68
Mortgage int deduct B2 / a 250 N/A N/A N/A N/A 19 27 30 35 40 46 53
GRAND TOTAL 4.505 354 394 391 392 412 417 418 423 428 432 443
Even when it is not fully transparent to the government what is the true cost of subsidizing the
housing sector, beneficiaries are likely to be well aware of the ways in which they can benefit from
the existing subsidy schemes. This pattern is evident in the Program Evaluation and Redevelopment
Study, where ratings for transparency to potential beneficiaries tended to be higher than the
corresponding ratings for budget and cost control. The government, for example, has little control
over the use of the mortgage interest deduction (MID), but borrowers will usually have a fairly
good understanding of what the deductions are worth from their individual perspectives, and will be
eagerly advised by banks. Not surprisingly, the indirect subsidies attributable to municipal housing
and the mortgage interest deduction received the worst ratings for budget and cost control.
Subsidies that received the highest ratings for transparency from the beneficiary perspective
included the mortgage insurance premium (MIP) subsidy and the loan buy-down grants. Both of
these schemes offer up-front subsidies to beneficiaries. In contrast, beneficiaries of the low rent
implicit subsidy are less likely to have a good sense of the value of the subsidies they are receiving.
Administrative complexity is a problem for any subsidy scheme that uses, or will use, means
testing. This helps to explain the pattern where subsidies intended for the poorest households tend to
have poor ratings for administrative ease. Even though income and asset household means testing is
yet to be implemented, these subsidies already have elaborate eligibility rules that require
substantial documentation. The inefficient waiting list system can be a nuisance particularly for
those waiting for scarce municipal housing, which has to be rationed. In contrast, the most
expensive homebuyer subsidy (on interest rate) was recently available to anyone on the waiting
lists.
95
The EEHPP energy efficiency grant has also been rated poor for administrative complexity, but for
a different kind of reason. For this project to be effective, it must invest heavily in institutional
development that involves extensive technical assistance to HOAs, technical specialists, and
government officials. The energy efficiency grant program and many of the programs intended for
the poor and needy households require a long-term financial and institutional commitment from the
government to succeed.
Some of the homebuyer subsidies are relatively simple to administer because of their design. The
mortgage interest deduction (MID), for example, is just one of a number of deductions that the
Ministry of Finance is going to allow starting in 2003. The mortgage insurance premium (MIP)
subsidy and loan buy-down grant exploit services already provided by commercial banks. Also, the
upfront nature of the subsidies in these latter two schemes means the government does not have to
make any long-term commitments.
5.3.2 Budgetary Implications of the Proposed Subsidy Mix
The proposed housing strategy emphasizes the need to implement non-subsidy instruments in the
first place and resort to subsidies as a residual. It emphasizes also the need for more targeting, in
order to generate savings in the existing subsidy mix, so that released funds may be applied to
necessary new programs focused primarily on sustainable housing choice, sustainable housing
management and social cohesion in housing.
The proposed subsidy mix, if implemented, should generate long-term budgetary implications
shown in table 15 below:
Table 15: Budgetary Implications of Proposed Strategy’s Subsidy Mix
(figures in millions of litas)
Direct Subsidies Prog / Proj Tot 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Soft loans (old) B2 / a 83 6 6 10 9 9 8 8 7 7 7 6
Loan buy-down grants B2 / b 26 N/A N/A N/A 2 2 2 3 3 4 5 6
Mtg insur premium B2 / e 35 0 4 6 3 3 3 3 3 3 3 3
Social hsg grants C1 / a, b 60 6 20 0 0 5 5 5 5 5 5 5
Renovation Program A3 / a 20 N/A N/A N/A N/A 2 3 3 3 3 3 3
Hsg allowances B1 / b,c,d 77 N/A N/A N/A N/A 11 11 11 11 11 11 11
Indirect Subsidies
Fees in privatized hsg B1 / c 936 194 194 194 184 100 50 20 0 0 0 0
TA on Renovation A3 / a 12 N/A N/A N/A N/A N/A 2 2 2 2 2 2
Info, edu, res, advisory * 6 N/A N/A N/A N/A 1 1 1 1 1 1 1
Utility comp (old, new) B1 / e 1.183 75 98 110 123 120 117 114 111 108 105 102
EEHPP grants to HOA A3 / a 35 3 3 2 2 4 4 4 4 3 3 3
Implicit Subsidies
Rents in social hsg B1 / a 372 68 68 68 68 40 30 20 10 0 0 0
VAT on EEHPP project A3 / a 10 2 2 2 1 1 1 1 0 0 0 0
Mtg inter deduction B2 / a 259 N/A N/A N/A N/A 19 28 31 37 42 48 55
GRAND TOTAL 3.114 354 394 392 392 317 264 225 197 190 193 197
* This is „infrastructual” activity serving various programs and projects, but mostly related to the Renovation Program.
96
Analysis of table 15 shows that the overall budgetary spending during the strategic horizon (2000-
2010) goes down from 4,5 billion litas for the existing subsidy mix, to 3,1 billion litas for the
proposed subsidy mix, including already the new renovation program130. This is attributable to
substantial additional “savings” from restructuring of the present subsidy mix with more
transparency and targeting. If one adopts a principle that the budgetary envelope for the housing
sector should remain unchanged, the proposed subsidy mix would allow to spend the amount of
budgetary savings in the amount of 1,4 billion litas for faster pace of the renovation program and /
or funding of other non-subsidy programs and projects listed in Chapter 4, figure 8. These savings
would be made available in different points in time, which can be estimated by comparing tables 14
and 15 below:
Table 16: Dynamics of Additional Savings from Proposed Strategy’s Subsidy Mix
2003 2004 2005 2006 2007 2008 2009 2010
Present subsidy mix 392 412 417 418 423 428 432 443
Proposed strategy mix 392 317 264 225 197 190 193 197
Savings to be used 0 95 153 193 226 238 239 246
As can be seen in the above table 16 the additional savings grow with time, so that action planning
for other programs and projects should be planned in accordance with growing availability of
budgetary funds. Designing of these programs and projects should also be dynamic enough to adjust
to possible changes in this uncertain trajectory. Fortunately, most of the programs and projects
exhibit high degree of spending discretion, since they are not based on previous subsidy
commitments as in the case with many present housing subsidies.
5.4 The Imperative of Horizontal and Vertical Integration

Implementation of each program and project requires that technical and organizational capacity is
developed for its administration. It may be administered through existing agencies at central,
regional or municipal levels. At the same time, policy and program monitoring has to be taking
place at responsible ministry, in order to periodically evaluate how policy and program objectives
are being realized. This may lead to problems with both competencies and staffing, since there
seems to exist ambiguity as to who is the “champion” of housing in Lithuania. Housing has many
aspects and these appear to be dispersed horizontally across ministries: (a) physical aspects belong
to the Ministry of Environment; (b) social aspects belong to the Ministry of Social Security and
Labor; (c) energy and real estate aspects belong to the Ministry of Economy; (d) financial aspects
belong to the Ministry of Finance; (e) “municipal” aspects, such as social housing, belong to the
Ministry of Internal Affairs; and (f) land aspects belong to the Ministry of Agriculture.
130
Without the new renovation program the overall spending would amount to some 2,7 billion litas.
97
An illustrative example is the mortgage insurance program, which is being implemented by the
Lithuanian Mortgage Insurance Company (LMIC), which reports to the Ministry of Finance (MOF).
This reporting is focused on financial performance and not on housing policy performance, which
presumably should be monitored by the Ministry of Environment (MOE). However, the MOE does
not appear to have sufficient competencies and thus capacity to be engaged in this function, so as a
result the LMIC is not reporting housing policy performance to the MOE. Another example is the
Housing and Urban Development Foundation (HUDF), which is reporting to the MOF, despite its
housing name, but it is implementing the Energy Efficiency Housing Pilot Project. Housing
Advisory Agency and its Housing Advisory Centers report to the HUDF and thus to the MOF, even
though their role is to provide advice on housing management matters.
There is a strong imperative of clarifying these roles and enhancing both horizontal (across
ministries) and vertical (across levels) integration of the process of housing strategy development
(goals and policies) and implementation (programs and projects).
Integration Imperative:
Strategy development and implementation requires
enhanced horizontal and vertical integration.
5.4.1 Horizontal Integration: Stronger Coordination across Ministries
First important conclusion in this area is that the presumed lead housing Ministry of Environment
does not posses sufficient internal capacity to be fully involved in monitoring and modifying the
existing housing programs, let alone developing and monitoring new programs, which are needed in
the area of housing. The few people who are assigned to this area within the Department of
Construction and Housing, are overworked and spend much time on answering letter and
entertaining inquiries. To our knowledge, no single document clarifies overall responsibility for
housing policies, with resultant dispersion of legislative initiatives and budgetary spending
competencies. In fact, the presumed lead housing Ministry of Environment, has legislative initiative
mostly in “state support” law and various property maintenance and construction regulatory acts.
Other Ministries retain initiatives in financial, social, energy and municipal areas. In terms of
budgetary spending the lead housing Ministry of Environment “controls” less than 10% of flow of
public funds to the housing sector131.
Housing related programs and projects may be addressing several housing issues as well as other
socio-economic issues. A good illustration is the new tax law, which is allowing mortgage interest
deduction to all households. It has been promulgated by the Ministry of Finance with much interest
in further development of the financial sector and particularly banks. Consequently, it has chosen to
offer mortgage interest deduction to as many borrowers as possible, without much regard to
targeting and the necessity to save public funds for other necessary housing programs and projects.
Calls by the Ministry of Environment for introduction of targeting mechanisms were rejected with
131
MOE controls through the state support law some 2% of all flows to the housing sector or 6% of flows excluding
indirect subsidies through low maintenance fees and implicit subsidies through low rents. See Table 14.
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an astounding argument about “discrimination of taxpayers”. Such an interpretation is should
seriously be considered at the highest political level, since any further targeting of housing subsidies
may be rejected using such a principle.
Another recent case is the decision by the governmental Strategic Committee, which has requested
the Finance Ministry to prepare a concept of Housing Renovation project in consultation with other
ministries132. While the very concept of aiming at housing renovation project is strongly compatible
with the proposed strategy, the decision to charge the Finance Ministry with preparing the concept
contravenes the presumed lead role of the Ministry of Environment in the area of housing strategy
coordination.
These recent cases illustrate the acute lack of necessary competencies required for coordination of
housing strategy and its implementation and may become a stumbling block in further process of
strategy adoption and preparation of pertinent work plan. A serious thought should be given by the
government to resolve this issue before adopting the housing strategy. This is connected with the
lack of housing implementing agency belonging to the lead Ministry of Environment, since the
Housing and Urban Development Foundation (merged in 2002 with another agency) and the
Housing Advisory Agency are both controlled by the Ministry of Finance.
The coordination function could be vested with another body if there is political will. There is no
single international model for institutionalizing housing policy development and control. In some
countries it is the Ministry of Environment – as in the United Kingdom, in some others it is the
Ministry of Economy – as in the Czech Republic, in some countries it is the special housing
ministry – such as in the United States, in some countries it is the Ministry of Infrastructure and
Regional Development – as in Poland.
One may envision a number of options for better horizontal integration of housing strategy in
Lithuania. The first best option advocated for in this report is that the Ministry of Environment
strengthens the strategic function (goals, policies, analyses) within the ministry and then creates a
Housing and Urban Development Agency to accompany the Environmental Protection Agency as
its implementation body. Housing Advisory Agency becomes part of the HUDA, which if possible
should be based on the structures developed by the liquidated Housing and Urban Development
Foundation (HUDF). At the same time, municipalities strengthen their strategic and implementation
capacities, after a national audit of their situation and capacity has been made, preferably by the
new HUDA.
Failing this first best option a second option may be that housing moves to the Ministry of Economy
where housing is merged into an agency overseeing related sectors of the economy: construction,
housing, real estate. The third option would see new ministry of Infrastructure and Regional
Development created and strategic housing function placed there. A separate Housing and Urban
Development Agency would be created under all options. The fourth, and the least desirable option
132
Ministry of Environment has been requested to prepare their version of this concept and submit it to the Finance
Ministry.
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would see housing moved up to the Prime Minister’s office as a strategic cross-sectoral issue to be
strategically coordinated there. A separate State Agency for Housing and Urban Development
would be created.
The most realistic option for Lithuania is the enhanced role of the Ministry of Environment, since
the EU integration process calls for stronger emphasis on both horizontal integration and on
sustainable development, and the proposed Strategy for Sustainable Housing fits well into these two
postulates. The EU integration process calls also for stronger emphasis on the vertical integration
and subsidiarity principle, which brings us to the need for expanded role of municipalities in
housing.
Responsibility for housing should be strongly vested with the Ministry
of Environment together with requisite competencies and capacity.
Ministry of Environment needs to control a housing agency
implementing state programs and projects
5.4.2 Vertical Integration: Expanded Role of Municipalities
The principle of sustainability requires that municipalities should be able to fulfill their statutory
housing functions within the budgetary limits set by Government. Those responsibilities are many
and varied, including the following:
Ownership of municipal housing maintenance companies (MMCs);

Ownership, management and provision of social (municipal) housing;
Maintaining and managing the waiting lists for housing133,
Management of external common areas of much of the privatized housing;
Appointment and regulation of administrators for residential buildings;
Establishment of a fund to provide financial support to homeowners associations in payment
for structural and other common area improvements;
Calculation and payment of housing benefits;
Ownership of district heating plants; and
Responsibility for administering ‘social support’ payments.
To our knowledge, these responsibilities have not been formally codified within a single document.
Correspondingly, we believe that no estimate has been made of the cost to municipalities of
fulfilling the duties listed above, nor, therefore, of the revenues or sources of revenue needed.
133
The existing 3 categories of waiting lists are to increase to 5 waiting lists upon implementation of the recent
(November 2002) Law on amendments to the law on provision of dwellings.
100
Equally, we believe there is no record of the extent to which the different municipalities do actually
fulfil each of the responsibilities they bear for housing management. Although the principle of
economic sustainability is phrased in terms of the finances needed by municipalities to undertake
their statutory functions, it is equally important that they should have human resources. We believe
that few municipalities have carried out an assessment of the human resources required, but expect
that there is likely to be a substantial shortfall, so that capacity constraint exists there as well134.
Diagnostic studies found municipalities subsidizing privatized owners by providing them under-
priced maintenance services to common areas. Also, by keeping very low rents in social housing,
they are providing high subsidies to tenants of social housing, who are not always low income
families that require public assistance. They also fail to effectively collect arrears in maintenance
fees and municipal rents. These indirect / implicit subsidies can be reduced and thus create more
financial resources available to municipalities for increasing their organizational capacity to deal
with housing and provide, for example, better advisory and educational services to their inhabitants
in the area of housing maintenance, investment and mobility.
Recommendation on Municipalities:
Municipalities should expand their housing roles by reorganizing
maintenance and social housing to create additional housing capacity.
5.5 Prioritizing Programs, Projects and Delivery Mechanisms

There are various principles and preferences, which may be adopted and used for deciding about
which programs should be continued and in what priority. Programs, which do not require subsidy
financing are easier to develop and implement if they can be shown to assist in the achievement of
one or more strategic policy goals. Therefore, they should be undertaken as early as possible and
can be listed in priority ranking. The principles and preferences were proposed at the beginning of
this strategy report (see Figure 2). Final choice of programs will also require setting of priorities and
criteria for selection of projects as implementation instruments.
5.5.1 General Programming Principle
There is a wide array of program choices for implementation of housing strategy goals and policy
objectives. We propose that a general programming principle be adopted as to priority ranking of
housing programs:
1. General socio-economic development of the country;

2. Improvement of regulatory and institutional framework;
3. Information, training and public education in housing;
4. Subsidies and grants; and
5. Direct provision of special housing.
134
See Section 6.1 of the Sustainable Housing Program Development Study, available at: www.am.lt.
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This ranking emphasized the need for more varied approach than just giving away public subsidies
to beneficiaries. No subsidy program can dream of achieving the most powerful effects that can be
generated through general socio-economic development of the country. Lower inflation and
stronger competition in the well developed financial sector will create sizable reduction of interest
rates on mortgage loans, and this in itself will increase affordability without the necessity of
spending public funds on interest rate subsidies. This has actually happened to a high degree in
Lithuania and the powerful effect on affordability has been very strong.
Growing real incomes will generate additional capacity to accelerated savings and repayment of
larger loans. The increased ability to pay does not necessarily translate into the willingness to pay
by consumers, who are approached by aggressive marketing campaigns by providers of non-
housing goods and services. The lesson learned during the recent years is that increase of the ability
to pay for housing, thanks to the highly positive socio-economic developments, does not
automatically translate into the willingness to pay for housing, as the consumer preferences point to
other goods and services. If the government wants households to consume more housing there is a
need to affect willingness to pay also, and this will require public education and awareness
campaigns on housing asset management, rather than providing excessive subsidy “bribes” to entice
households into spending more on housing.
The second area of intervention is regulatory and institutional framework. This is based on market
efficiency principle, which needs to be enhanced by providing easier choice to households
regarding housing. Removal of regulatory impediments, such as those regarding HOA and common
area management, is always less expensive than making up for deficient regulations with
compensatory subsidies. Similarly, creation of additional institutions, such as open market rental
housing, will be conducive of market based solutions enhancing housing choice of households
without the need for heavy subsidies. Regulatory “investments” by the government will pay off by
mobilizing market forces to provide housing, although this will happen through shifting some
resources from other goods and services consumed in the society. Provision of a neutral choice and
level playing field for various sectors of the socio-economic system will generate more sustainable
choices and solutions.
Creation of most favorable conditions for market provided housing choice does not guarantee that
all strategic goals will be attained. Some intervention will always be needed in terms of
affordability enhancement through subsidies. The choice of subsidy mix will depend on targeting
preferences and budgetary constraints as was discussed before. One time up-front subsidies are
generally preferred, since they can be better controlled, are more transparent and do not “lock”
beneficiaries for years.
Finally, there are some areas where the government might consider intervening directly by
providing some type of housing, such as social housing, emergency shelter etc. However, this is
better done by local authorities rather than central governments.
5.5.2 Selecting Subsidy Mix
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As was mentioned above, programs which require subsidy are more difficult to prioritize, since one
usually deals with a fixed “budget envelope” for housing policy interventions. The upper limit of
public spending on housing thus becomes an important programming principle. In Lithuania it was
estimated by the strategy team (see Table 14) that the total spending of the first decade of this
century can be assumed to amount to some 4,5 billion litas, if the present subsidy mix is continued.
It was further recommended that the existing subsidy schemes be restructured to generate savings,
which should then be spent on necessary new programs. This would even provide possibility for
reducing budgetary spending (see Table 15), by shifting emphasis on non-subsidy programs as well.
This raises an issue of prioritizing subsidy spending of public funds. There are two priority rankings
that can be developed to help make choices. One of them deals with households and the other with
housing stock.
Priority Listing on Household Categories
The priority ranking on households proposed in this strategy is as follows:
1. Budgetary commitments on old and existing programs;

2. Homeless and vulnerable households;
3. Low income households;
4. Selected social groups: young families and the elderly;
5. First time home ownership
The above ranking essentially establishes the targeting principles, which have already been
articulated in the amended state support law and embodied in the creation of 5 waiting lists. There
have also been articulation of these preferences in the mechanism for awarding loan buy-down
grants of 10-20% aiming at young families and some vulnerable groups. However, this ranking
proposes to take a stand regarding which groups should obtains assistance first, if public resources
need to be rationed.
Before considering priorities of additional programs, the existing commitments on old and existing
programs need to be honored. This may become quite a constraint for the choice of additional
programs. Once they have been satisfied and there are any funds left for additional programs, there
is a need to set priorities to select new programs.
It is proposed in this strategy that homeless and vulnerable household be given the highest priority
score, as they have no housing choice available to them. The second priority would go to low
income households who have essentially no housing choice, as well. The third priority would go to
younger “starter” households who typically face the problems of equity and income gap, as well as
to elderly households who typically face the problems of being “income poor and asset rich”, as
was discussed elsewhere. This does not mean, that these households should be supported to acquire
home-ownership. Both groups in mature and sustainable housing systems in the European Union
tend to get helped into suitable rental housing rather than into home-ownership, which is too
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expensive for society to support at massive scale. The fourth priority would go to first time home-
buyers, which would include any age group including young and elderly.
Priority Listing on Housing Stock Categories
The priority ranking on housing stock proposed in this strategy is as follows:
1. Budgetary commitments on old and existing programs;

2. Securing proper accommodating for homeless and emergency cases;
3. Assuring sustainability of the existing housing stock;
4. Facilitating completion of dwellings already under construction; and
5. Stimulating construction of new dwellings.
Before considering priorities of additional programs, the existing commitments on old and existing
programs need to be honored. This may become quite a constraint for the choice of additional
programs. Once they have been satisfied and there are any funds left for additional programs, there
is a need to set priorities to select new programs.
It is proposed in this strategic report that the following priority listing be adopted as a principle.
First, after the fixed commitments should be programs concerned with securing accommodation for
homeless and emergency cases, such as fires, floods etc. Next in line should be the assurance that
the existing housing stock is managed in a sustainable way, so that its value is retained and can be
passed to future generations. This is the biggest challenge in Lithuania as far as the housing stock
focus is concerned. After assuring the proper maintenance of the existing housing stock, there is a
focus on housing construction, but first emphasis should go to those dwelling units, which are
already under construction, since resources have already been invested and it will be cheaper to
complete them rather than begin with new construction. Finally, new construction can be stimulated
with subsidies.
5.5.3 Selecting Projects and Delivery Mechanisms
Programs can be implemented in variety of ways, which depends on what projects are chosen as
implementation instruments with their delivery mechanisms. Each mechanism has its “costs and
benefits” and the general criteria for selecting mechanisms are “cost effectiveness” and “cost
benefit” payoff. In case of cost effectiveness one assumes a fixed real effect, like the number of
dwellings renovated, and looks for a mechanism, that will do it in the least costly way. In case of
cost benefit payoff, one compares different benefits generated by alternative mechanisms and
compares their costs by using selected financial performance measures like, for example Net
Present Value or Internal Rate of Return. Selection of delivery mechanisms is often subject to
intensive lobbying by “mechanism providers” who stand to gain from providing particular service.
As was mentioned before, the Lithuanian Government has already decided on a number of
programs and project delivery mechanisms, so the choice has been pre-empted and can hardly be
changed. The studies, which have been done on program evaluation have suggested some changes,
both as first best solutions and as second best solutions. We have also provided suggestions on what
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delivery mechanisms should be used in implementing new proposed programs, which if accepted in
principle, will need to be operationalized through specific work plans prepared for their
implementation.
5.6 Towards Adoption of Housing Strategy and Work Plan
Lithuania is undergoing a rapid transformation into a market economy integrating with the
European Union. The overarching imperative of the EU accession process sets the conditions and
directions for what the governments will be doing during the coming decade. This EU adjustment
provides both a constraint and an opportunity for development of national housing strategy.
Housing as such, is not high on the list of European integration, since this area is traditionally left to
member countries and thus no specific housing assistance programs are provided by the EU funds.
Housing is also not very high on the list of problems on the minds of Lithuanian voters, which was
confirmed by the Household Survey showing that unemployment, low income and high taxes are
the biggest problems perceived by Lithuanian households135. This means that policy makers might
not be very responsive to calls for a more proactive housing strategy, since their voters, as well as
their EU partners, are not likely to create much political pressure.
Housing consumers are not concerned with the issues of housing sustainability as the government
should be, similarly to the issues of environmental protection (for future generations). Integrating
housing issues into the Sustainable Development Strategy for the country should meet with better
political interest both domestically and at the EU level. Therefore, we are recommending for these
reasons the housing strategy becomes strongly linked to the concept of sustainable development
rather than function as a stand alone issue.
Secondly, the EU principle of subsidiarity, provides more powers and responsibilities to local
authorities, and housing is traditionally a problem best addressed at the local level. Consequently,
promotion of the subsidiarity principle holds promise of “discovering” housing issues by
municipalities, once they have been provided with more effective competencies and capacities.
Promoting social cohesion and inclusion, or combating social exclusion, is strongly articulated in
EU policies at local levels, so that subsidiarity and social cohesion go well together.
Integrate housing strategy with the strategy for sustainable development.
Shift housing initiatives to municipalities and integrate them with social
cohesion policies.
135
Only one percent of respondent households listed housing among the three most critical problems.
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5.6.1 Active Roles for Coordinating Committee and Strategy Team
The process of housing strategy adoption requires that this working proposal of the strategy be
discussed with relevant stakeholders who are members of the Coordinating Committee, to verify the
choice and formulation of strategic goals and policy objectives, as well as principles and
preferences. They will also need to verify the evaluation of goals attainment status as a measure of
housing problems to be addressed by the strategy. In doing this the Coordinating Committee might
want to invite other stakeholders as well as experts in order to gain wider support for its work. This
diagnostic phase will be concluded by the Coordinating Committee taking “ownership” of the goals,
objectives, principles, preferences as well as housing problem definition and measurement.
Once there is stakeholder and expert consensus on the housing problem and the ambitions to solve
it, there is a need to start preparing implementation work plan. This will require that a strategy
implementation team be set up at the Ministry of Environment, which will transpose this working
report, after its modifications by the Coordinating Committee, into a special format used by the
government Strategic Committee for preparing strategies. It will also require that, given the final
selection of goals, objectives, principles, preferences and priorities against the background of
political, fiscal, financial, technical and legal constraints, the team will propose the final list of
programs and projects to be approved by the Coordinating Committee as implementation tools. It
will be a modified version of Table 8 with matrix of proposed policies, programs and projects.
The matrix of policies, programs and projects will need to indicate also execution priorities and
approximate timing. This will make it possible to focus and sequence the work of the strategy team,
that will begin operationalizing each project with respect to expected results and their timing,
delivery mechanisms, as well as required institutional, financial, organizational and human
resources. The material in this strategy report will be used as basis for terms of reference for
policies, programs and projects.
The Housing Strategy Team does not have to be large, but should consists of 2-3 persons
experienced in strategic and analytical thinking. The Team will need to be thoroughly familiar with
the Basic Framework, with this strategy report and with all the other reports prepared during the
course of this strategy project, including the materials listed in the website and pertaining to all
other know reports and studies regarding housing in Lithuania.
5.6.2 Proposed Calibration of the Sustainable Housing Choice Goal
Although the strategy itself deals mostly with qualitative finding and goals, the process of strategy
implementation requires that one introduces quantitative measures increasingly, as one moves
towards programs, projects and delivery mechanisms. This proposed strategy also uses certain key
quantitative measures helpful in calibrating strategic goals, policy objectives and program targets.
Below, we offer synthetic quantified conclusions and propose strategic values of the key indicators,
which should be the aim of implementation programs and projects. Once adopted, these indicators
will help monitor and evaluate progress in strategy implementation.
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Qualitative findings of the level of attainment of this strategic goal indicate unsustainbly low level
of housing choice through restricted housing product choice of many households regarding
dwelling type, standard, location and tenure form. Consequently, most of households experience
lower housing utility, then should be possible in the country.
The qualitative findings on the level of attainment of the Sustainable Housing Choice Goal can
be expressed through a number of quantified indicators pointing out to attainment gaps:
1. Restricted choice available to 45% of households

2. No housing choice available to 25% of households
3. Overcrowding of 13% of households (large households in small dwellings)
4. Housing over-consumption by 10% of households (small households in large dwellings)
5. Rental alternative available to only 3% (social) 5% (private) of households
6. Housing turnover of only 2,6% of dwellings per annum
7. Urban housing stock consists in 80% of M-F dwellings
8. Multi-family dwellings with small size range of 48-55 m2
Quantitative Strategic Objectives
These indicators support the qualitative findings of unsustainable housing choice of many
households. Therefore, their values should improve as a result of strategy implementation. How
they should improve it is difficult to say, since there are no single consensus values of these
indicators to be found in mature European housing markets. Consequently, strategic objectives
should be pointing out to quantitative directions for these indicators rather then set exact values.
Only 30% of households enjoy unrestricted housing choice, and this in the financial affordability
sense excluding the most expensive housing areas of Vilnius. Supply and diversification of housing
products is low in regards to location or tenure choice – no high quality rental accommodation is
available, except narrowly in Vilnius and catering mostly to the few foreign residents. On the other
hand, the 25% of households without housing choice should be diminishing as quickly as possible.
This suggests a profound re-orientation of the current subsidy mix towards targeted subsidies and
towards rental housing, rather than new housing ownership addressing the higher income groups136.
The quantitative ambition is to lower the proportion of households facing no housing choice below
the present 25%.
This is connected to the overcrowding of larger households in smaller dwelling units (13% of
households), which should be eased by increasing housing choice of lower income households.
However, this overcrowding is also a result of the structure of housing stock in large urban areas,
where 80% of housing stock consists of small dwellings in multi-family housing. Consequently,
there is a need for addition of larger dwellings in large urban areas, which can mostly be done
through new construction or merging of small dwellings into larger ones. Another phenomenon
connected to this overcrowding indicator may be the effect of rent controls, which effectively
encourage families to remain in social housing and enjoy very large implicit subsidies conferred by
136
However, it helps move some marginal households in decile VII from restricted to unrestricted housing choice.
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very low rents. Deregulating rents in social housing coupled with housing allowance protection to
marginal households would probably help ease the overcrowding problem137. The problem will be
much better known once the results of the Housing and Population Census of 2002 is available in
2003 for analyses. The quantitative direction is to lower the value of this indicator below the present
13%.
There is also a flip side of the overcrowding issue, with 10% of households consuming excessive
amount of housing. This is often due to small elderly households being trapped in larger dwellings
in the country side, as well as those privatized tenants who cannot move in the housing market and
adjust their housing consumption. This problem may be eased by providing incentives and
assistance to higher market mobility and providing rental alternative to elderly households.
However, this will not help those who are trapped in the country side and those who do not want to
move because of age. The quantitative ambition is to lower the value of this indicator below the
present 10%.
One of the most spectacular indicators of restricted housing choice is the amount of rental housing
available to households. These figures are very low indeed in international comparison. Only 3% of
households have access to social rental housing and only 5% of households have access to private
rental stock, and this usually unorganized and scattered through individual dwellings let by their
owners. These proportions should be much higher than that and the ambition of increasing these
indicators cannot be satisfied just through new construction as is discussed elsewhere. It seems
reasonable to assume that social rental housing should constitute at least 15% of the housing stock
and private market rental another 15%, so that the total rental offer increases to some 30% of the
housing stock. The composition between social and market rental may be different and depends on
the way housing allowances can be introduced in the housing system in Lithuania.
Housing market turnover in the country is also very small, at under 3%, which reflects lack of
housing consumption adjustments by households and therefore continued restricted housing choice.
The figure should be around 10% if judged by European standards and even higher as judged by
North American standards. There is a program with several projects devoted to the problem of
enabling and stimulating housing market activity and interest by households to move and adjust not
only their housing consumption, but also relocated in response to labor market changing
dynamics138.
Composition of housing stock is also indicative of restricted choice of housing products with 80%
of urban housing in the form of small apartments (48-55 m2). Larger apartments are available only
in the single family home-ownership market. There is a lack of choice of compact low density
housing either homeowner or rental. The share of multi-family dwellings in urban areas should go
down from the present 80% and this through variety of measures, such as dwelling mergers, new
137
One would need to study the composition of households in the social housing stock.
138
Market mobility can be especially enhanced by: Housing Allowance Program B1, by Mortgage Financing Program
B2, by Market Rental Housing Program B3, by Non-Profit Housing Program B4, by Social Housing C1 Program, by
Market Stimulation Program D3.
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construction of compact low-density housing in various tenure forms including non-profit housing.
Continued construction of spacious single family homes will also contribute to improved indicator.
Quantitative Matrix of Strategic Objectives for Sustainable Housing Choice
The above objectives can be compiled into a summary matrix shown in Table 16 below.
Table 17: Quantitative Matrix of Strategic Objectives

for Sustainable Housing Choice
Indicator Present Level Strategic Aim
Restricted 45%
lower
housing choice households
No housing 25%
much lower
choice households
Over-crowded 13%
much lower
housing households
Over-
consumed 10% lower
housing
Rental 8%
much higher
alternative households
Housing 2,6%
much higher
turnover housing stock
Multi-family 80%
lower
urban housing housing stock
Multi-family
48-55 m2 larger units
dwelling size
5.6.3 Proposed Calibration of the Sustainable Housing Management Goal
Qualitative evaluation of attainment of the goal of sustainable housing management indicated that
the situation is highly unsatisfactory, especially in regards to the multi-family block housing of the
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Soviet era. It was found that the present way of managing this housing stock was unsustainable
from economic, environmental and social points of view.
The qualitative findings on the level of attainment of the Sustainable Housing Management Goal
can be expressed through a number of quantified indicators pointing out to attainment gaps:
1. Maintenance spending on existing stock is about 0,7-0,8 litas per month per m2;
2. Utility expenses take up over 20% of household incomes;
3. Housing expenses (effort ratio) about 25% of household incomes;
4. Home owner associations only in about 20% of multi-family buildings;
5. Backlog of maintenance and repairs at 150 litas per m2 or 11 billion in total
6. Energy consumption about 200 KJ per m2 per degree day
Quantitative Strategic Objectives
Current spending on maintenance and repairs, including preventive and periodic maintenance, is at
best between 70-80 cents per m2. It should be closer to 1,4-1,5 litas per m2 if the existing stock
value is to be preserved and passed on to future generations. In European Union one reckons with
the need to reinvest equivalent about 10-20% of building construction costs every ten years, to
reinvest equivalent of about 20-30% of building construction costs every 30 years, and to reinvest
equivalent of about 50% of construction costs every 50 years if buildings are not well maintained.
These reinvestments are financed through regular payments of sufficiently high maintenance fees.
Failure to spend on maintenance in the area of 1,4-1,5 litas per m2 per month will exacerbate the
future problems while decapitalizing the existing stock further.
One of the reasons for under-spending is the fact that households are forced to spend excessive
amounts on utility payments, which are “crowding out” maintenance spending. This is attributable
to high energy prices dictated by inefficient monopolistic providers and by low energy efficiency of
Soviet era buildings. Spending over 20% of household incomes on utilities is unheard of in mature
European housing systems and needs to be addressed with all determination that can be mobilized
in housing strategy. This will necessitate massive investments in order to improve energy efficiency
and thus release more funds for sustainable level of maintenance.
The under-spending on housing maintenance will also require that households shift their spending
preferences more towards housing, by cutting down on other non-essential goods and services. The
current effort ratio of about 25% is lower than OECD and European levels of 30-35%. This will
require substantial educational and information campaign efforts on part of the government in order
to make owners aware of asset value management and the need to retain these values.
Sustainable building maintenance is strongly related to common areas, which are managed jointly
by dwelling owners. The best way to do it, universally used in transatlantic housing systems, is to
have owners organized into Home Owner Associations (HOAs). In Lithuania, for the painfully well
known reasons, the rate of HOA formation is only approaching 20%. This will need to go up as
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close to 100% as possible. This will assure better maintenance and facilitate necessary renovation
lending by the banking sector as is done in transatlantic countries.
Persistent under-spending on housing management over many years, has lead to staggering backlog
of deferred maintenance and repairs, estimated at 150 lts per m2 or 11 billion litas in total. As this
constitutes about 25% of the Gross Domestic Product and will require substantial financial effort by
households, its pace cannot be too fast with probable volume of about 200-250 million per year.
Removal of backlog cannot be followed by renewed under-spending on maintenance. This is the
crucial program package of the housing strategy.
Energy consumption is the major culprit for much of the deficient sustainability of the existing
Soviet era housing stock, although the other housing stock has also some problems. The present
level of energy consumption at about 200 KJ per m2 per degree day is way too high as compared to
Sweden with 80 KJ per m2 per degree day. Improvement of about 30% is probably the ambition
level possible both technically and financially.
Quantitative Matrix of Strategic Objectives for Sustainable Housing Management

for Sustainable Housing Management
Maintenance 0,7-0,8 1,4-1,5

spending lts/m2/month lts/m2/month
20%
Share of utility
household much lower
payments
income
25%
Housing effort
household 30-35%
ratio
income
Formation rate 20%

100%
of HOAs buildings
Repair /
150 lts/m2
maintenance much lower
11 bln lts
backlog
Energy
200 KJ/m2/DD 30% reduction
consumption
5.6.4 Proposed Calibration of the Sustainable Housing Production Goal
111
Housing production is needed for variety of reasons that were discussed in section 3.5.3. The
current level as well as composition if highly unsustainable. The thorough analyses made in the
Goals Attainment Study show that there is a need for an annual level of housing production in the
area of 20 000 dwellings with the following composition: 80% large compact low density housing
such as single-family detached, single-family attached, as well row houses. The remaining 20%
should be in multi-family rental configuration. It should however be reminded that strategic
ambitions cannot be treated as directives to the construction and investment sectors. It is ultimately
households and investors who decide in a free market setting how much they want to invest in
housing as compared to other goods and services, as well as what composition will be chosen by
them. The strategic ambitions are to enable these decisions, but not force them.
1. Statistical deficit of households / dwellings is about 3.7 %;

2. Annual level of housing production about 4 000 dwellings;
3. Production addition rate is about 0,3% of existing housing stock;
4. Ownership share in new production is at 100%;
5. Share of multi-family dwelling production is about 50%.
The statistical deficit measured as the ratio of the number of households and dwellings is about
3.7%, which is an indication of insufficient number of dwellings, although as is argued in section
3.5.3 it does not have to 0%. It is assumed that a European benchmark of 2% be used as strategic
ambition.
Annual level of housing production has fallen below 4 000 which is equivalent of 0,3% of housing
stock addition. This level is half of what is found in other transition countries and way below the
1.0-1.5% addition rate in European housing systems. Demand analyses made in the Housing Choice
and the Goals Attainment Studies indicate that the level of production is possible at the level of 20
000 dwellings per year, which would put Lithuania at the addition rate of 1,5% of housing stock.
Tenure form of the present housing production is 100% ownership housing, which is contrary to the
strategic goal of sustainable housing choice. This should be lowered to 80% so that 20% of new
construction is in the form of market based rental dwellings.
Multi-family housing production has gone down substantially, but still constitutes 50% of housing
production in the situation where larger and lower density housing is needed. There is thus a need to
switch some of the multi-family production into lower density compact housing, not necessarily the
single family detached housing production which dominates this segment.
Quantitative Matrix of Strategic Objectives for Sustainable Housing Production
112
for Sustainable Housing Production
Statistical 3.7% 2%
deficit dwellings dwellings
Housing Under 4,000

20,000
production annually
Production 0.3% 1,0-1,5%

rate housing stock housing stock
Ownership 100% 80%

share production production
Multi-family 50% 20%

share production production
113
APPENDIX A: Estimated Cost Impact of Housing Allowances in Social Rental Housing
Example of Estimating the Cost of a Housing Allowance Program for Municipal Housing (1)
(all monetary figures are in Litas)
A B C D E F G H I J K L M N O P
Avg (4) Fam (7) Avg (8) Avg (9) Avg(10) Avg (11)
2
Mo Avg (6) Contrib Avg m Mo Mo Tot Mo
Inc Mo Expr Remain Usef Mkt Mkt Rate Mkt Rent Average
Adj for Avg (5) Guaran Share Avg Mo Floor Rent Maint and Monthly Est (12)
Avg (3) Min Fam Min of Adj Exp Inc Space per Repair Maint Subsidy No of Total Total
Mo Fam Size Fam Fam Mo Aft per m2 Fees Repair Cost per Benef Monthly Annual
Decile Inc Inc Pers inc Inc Contrib Contrib Unit per m2 per Unit Unit in hhlds Subsidy Subsidy
(2) (B) (B-E) (D) (D*100) (F) (C*F) (B*G) (I) (J) (K) (I*(J+K)) (L-G) (N) (M*N) (O*12)
I 100 0 1,7 170 0,35 0,0 100,0 55 2,6 0,5 170,5 170,5 1.110 189.255 2.271.060
I 200 30 1,7 170 0,35 10,5 189,5 55 2,6 0,5 170,5 160,0 1.110 177.600 2.131.200
II 400 160 2,4 240 0,35 56,0 344,0 60 2,6 0,5 186,0 130,0 2.302 299.260 3.591.120
III 600 340 2,6 260 0,35 119,0 481,0 65 2,6 0,5 201,5 82,5 2.302 189.915 2.278.980
IV 700 440 2,6 260 0,35 154,0 546,0 65 2,6 0,5 201,5 47,5 2.302 109.345 1.312.140
Totals: 9.126 965.375 11.584.500
Alternative Simple Calculation (13):
II 500 250 2,5 250 0,35 87,5 412,5 60 2,6 0,5 186,0 98,5 9.126 898.911 10.786.932
115
Source: Program Evaluation and Redevelopment Study
(1) Figures are based on 2001 values.

(2) Approximate deciles based on LFMI household survey data.
(3) Assumed typical values for subsets of hhlds in a given decile based on Household Study
(4) One of the key param in "gap formula." Zero in the 1st row bec avg inc below guarant min. These hhlds receive max subs.
(5) Approx sizes from Household Study (Table 1.11). Poor hhlds tend to be smaller (e.g. fewer workers, more pensioners).
(6) Similar to figure (abt 109 Lt) that MOS was consider for proposed allowance programs that incorpor dwelling
expenses.
(7) In proposed progr mentioned in note (6), 60% contrib was suggested, but benefit in that progr incl more than rent and maint (e.g.utilities).
(8) Gov stats show that avg useful space in public apts is larger than that of all apts (abt 79.7m2 vs 61.5 m2). Lower figs here
based
on the belief that gov probably had lower fig in mind when providing est of mkt prices for rents, maint and repairs. Using these lower figs insures
that we do not overestimate market prices.
(9) A weighted avg based on Modeen (2002), who assumed mkt rent for mun hsg (excl maint and repair) was abt 6 Lt/m2 in Vilnius and 2 Lt/m2
elsewhere.
(10) This was also derived from Modeen (2002). It is assumed that 0.15 Lt/m2 is for administration and 0.35 Lt/m2 is for physical works.
(11) This is the payment standard in the "gap formula." It is a norm that can be further adjusted based on additional criteria.
(12) Based on Table 6.3, abt 1/3 of renter hhlds in social hsg have inc of 800 Lt/month or less. Applying the distrib in Table 6.3 to total nr of mun apts
(28083 units) yields follow nr of hhlds in each of the shown inc groups: 2219 hhlds (up to 350 Lt); 4184 hhlds (351 to 600 Lt); 2724 hhlds (601 to 800
Lt).
IV decile has a range of abt 777 Lt to 890 Lt. Starting with IV decile, it is assumed that most hhlds will find that subsidy is too small to be worth pursuing.
(13) This is a simple vers of above calcul based on rough avgs for a "typical" beneficiary. Total cost est similar under both approaches. The simple appr,
does not give the analyst any insight into the characteristics and behavior of subgroups.
116
Estimate of Potential Additional Revenue Due to Raising Rents and Fees for Maintenance and Repairs
in Municipal Housing
(all monetary figures are in Litas)
Current Rent Charged Maximum Potential Rent
A B C D E F G H I J K
Average (2)
Average (1) Square Average(3) Net (4)
Monthly Meters Average Total Monthly Average Revenue
Rent of Useful Monthly Number Total Total Market Monthly Total Total Gain From
Charged Floor Rent of Monthly Annual Rent Market Monthly Annual Charging
per Square Space Charged Municipal Rent Rent per Square Rent Market Market Market
Meter per Unit per Unit Units Charged Charged Meter per Unit Rent Rent Rent
(A) (B) (A*B) (D) (C*D) (E*12) (G) (B*G) (D*H) (I*12) (J-F)
0,4 60 24 28.083 673.992 8.087.904 3,1 186 5.223.438 62.681.256 54.593.352
117
Source: Program Evaluation and Redevelopment Study
Notes:
(1) Derived from Modeen (2002). This figure includes 0.2 Lt/m2 for rent and 0.2 Lt/m2 for maintenance and repairs.
(2) Government statistics show that the average useful space in public dwellings is larger than that of all dwellings
(roughly 79.7m2 versus 61.5 m2, respectively). The lower figures assumed here are based on the belief that
government officials probably had the lower figure in mind when they were providing estimates of market prices
for rents and maintenance and repairs. Using these lower figures insures that we do not overestimate market prices.
(3) See explanations for columns J and K on Table 8.1.
(4) Actual net depends on collection rates. The current collection rates for municipal rents are quite low--in the 50 to 60 percent range.
If the collection rates of market rents are superior to current efforts, the net gain could be much larger. Conversely, if the collection
rates deteriorate with the higher market rents, the net gain will fall. Some of the net gain would go to the municipal
maintenance companies, and some would go to offset the roughly 11 million Lt housing allowance subsidy cost
(and administrative costs). The State Tax Inspectorate (MOF) estimated it would cost about 9 million Lt per year to
screen 370,000 additional residents for income and property. Assuming three people per family, this implies an annual cost of
about 73 Lt per family. This translates into about 2 million Lt per year for 28,083 municipal units (if income recertification
occurs annually).
118
APPENDIX B: Concept of Internet Based Housing
Information System at the Ministry of Environment
Objective
The work on the National Housing Strategy revealed the lack of sufficient awareness and
information about housing awareness and sector data among both the general public and the policy
making and expert community. As the first step towards buildings an institutional framework for
housing strategy, the Ministry of Environment is considering a launch of a program with the
objective to create housing sector information system available to general public and expert
community through Ministry of Environment’s internet site. The www home page will contain:
Housing strategy, its housing programs, projects and implementation instruments

Official studies, reports and data bases on housing situation in Lithuania
Brochures on existing government housing programs with instructions on formal procedures
Laws and regulations, both existing and in draft form
Research papers, seminar proceedings, graduating and diploma work at universities
Calendar of events related to housing issues in Lithuania and internationally
Information on housing sector stakeholder organizations
Housing affordability calculation sheet with links to housing finance products and lenders
Internet based chat room for the public interested in housing issues
Each section will have a listing of useful addresses and internet links
Implementation
In the main internet site of MoE should be included additional reference - “Informacija apie bǌsto
sektoriǐ”. – Information About the Housing Sector
The following themes will be introduced to visitors after the opening of new page “Information
about the Housing sector”:
Strategy, Programs, Projects, Instruments

Studies, Reports, Data
Events Calendar
Laws and Regulations
Stakeholders
Research
“chat room”
Affordability calculator
119
Web site MoE
Reference “Information about the Housing Sector”
Strategy and
Programs Studies, Reports, Data
Events Calendar Research
Laws and Regulations Stakeholders
“Chat room” Affordability calculator

1. Strategy and Programs
This page will contain the documents related to the National Housing Strategy in both draft form
and adopted text. It will also contain information about all housing programs related to the Strategy
– again existing and being developed. These documents will be downloadable in a PDF format. It
will be listing local government housing initiative as well, by referring to pertinent municipalities.
Construction and Housing Department of the Ministry of Environment will be responsible for
updating the contents of the page. The Department will also have in its calendar period review of
the contents – possibly every month. The initial list will be provided by the Housing Strategy
Project Team at the HUDF.
The administration of this page will be carried out by the pertinent unit at the Ministry of
Environment, which in the future should develop a future possibility for the Department to make
changes into the contents from their computer. Links and references to related websites will be
provided, including international institutions involved in strategic housing work, such as the World
Bank, OECD and EBRD, as well as country specific agencies such as USAID, Know How Fund,
SIDA, CIDA etc.
1. Studies, Reports, Data
All known studies, reports, conference materials and data on housing issues in Lithuania will be
listed on this page, together with possibilities of downloading them in a PDF format. If reports are
available at other internet sites there will be a link to these. Some of the studies may be in English
only and some studies may be referring to international reviews of issues relevant to Lithuania.
Housing sector data will either be contained in the studies and reports, or will be stored separately
in form of a data base. Usually, the data will be available at another source, like Department of
Statistics, but this page will list this data and provide short description.
120
updating the contents of the page. Institutions usually involved in undertaking studies and
producing reports will have a MOU with the Ministry on providing information about changes. The
Department will also have in its calendar period review of the contents – possibly every month. The
initial list will be provided by the Housing Strategy Project Team at the HUDF.
changes into the contents from their computer. Useful links and addresses will be provided to sites,
which list studies and reports and provide housing statistics, also internationally.
2. Events Calendar
All the information about events (conferences, seminars, exhibitions, etc.) organized (or planed) by
the MoE (or with the participation of MoE), as well as those known by MoE will be listed on this
page. This will include upcoming events and those, which have already taken place. Links and
addresses of organizers, as well as programs (where possible) will be placed. This will include links
to other pages, which usually list events related to housing, such as the HUDF, Association of
Municipalities, and international organizations such as World Bank, OCED, European Network of
Housing Research etc.
updating the contents of the page. The collaborating institutions, through their MOE with the
Ministry will be expected to inform the Construction and Housing Department of the upcoming
events. The initial calendar will be provided by the Housing Strategy Project Team at the HUDF.
changes into the contents from their computer. The initial list will be provided by the Housing
Strategy Project Team at the HUDF.
3. Laws and Regulations
Listing and description of laws and regulations relevant to the housing sector will be placed on this
page. This will include draft laws and regulations, which are already in the legislative and
regulatory process. Links would be provided to full documents, accessible at the Seimas or
Government web sites for downloading. Reference and useful links would be made to laws and
regulations of other countries in transition.
the contents – possibly every month. The administration of this page will be carried out by the
pertinent unit at the Ministry of Environment, which in the future should develop a future
possibility for the Department to make changes into the contents from their computer.
121
4. Stakeholders
This page will contain listing and short description housing sector stakeholders in Lithuania
including various governmental units and agencies. Addresses and links to the stakeholders will be
provided. The initial list of the stakeholders will be provided by the Housing Strategy Project Team
and will include:
Office of the President of Lithuania

Office of the Prime Minister of Lithuania
Ministry of Environment
Ministry of Finance
Ministry of Social Affairs
The Seimas: pertinent committees
State Land Cadastre
Housing and Urban Development Foundation
Housing Advisory Agency
Housing Credit Insurance Company
Lithuanian Free Market Institute
Association of Lithuanian Municipalities
Association of Housing Maintenance Companies in Lithuania
Association of Building Construction Companies in Lithuania
Association of Engineering Consultants of Lithuania
Association of Lithuanian Engineers
Association of Heat Suppliers in Lithuania
Association of Water Suppliers in Lithuania
Associations af HOA’s (Vilnius, Kaunas, Klaipeda, Druskininkai, Alytus, Marijampole,
Panevezys, Siauliai, Birstonas)
Lithuanian Universities
The minimum input is needed for the development of this page after its preparation. The primary
information should be collected from the stakeholders by the Department of Construction and
Housing, which already has a “mailing” list. The Department will have MOE with stakeholders
obliging them to provide information about pertinent changes in their information, which should be
reflected in the page. The Department will also have in its calendar period review of the contents –
possibly every month. The administration of this page will be carried out by the pertinent unit at the
Ministry of Environment, which in the future should develop a future possibility for the Department
to make changes into the contents from their computer.
5. Research
Research information, research work, possibility studies prepared for the housing sector by the
different academic and research institutions will be placed on this page, if these are not completed
or published studies and reports. Monitoring results of different housing projects and short reports
122
about these results (for example Energy Efficiency Housing Pilot Project results) could be
presented additionally in this page. Summary of graduating work and theses provided by
Universities will be included in this page. This will include any information about international
research together with addresses and links to research organizations.
the contents – possibly every quarter. The administration of this page will be carried out by the
pertinent unit at the Ministry of Environment, which in the future should develop a future
possibility for the Department to make changes into the contents from their computer.
6. “Chat room”
This page could be designed for visitors opinion and suggestions. Chat room may be divided
according to various issues:
Strategies, programs, projects

Reports
Legal acts
Events
Research, results, University works
Each category could have possibility for open and closed chatting. Closed chatting would be
restricted to approved housing experts circle using special password. Open chatting would be made
available to the general public. For questioning or providing suggestions to individual institutions
could be created links in this page.
It is expected that the chat sessions will be monitored by Construction and Housing Department in
order to provide answers, comments, as well as to benefit from what experts and the public are
chatting about in reference to various facets of housing in Lithuania.
7. Affordability Calculator
Simple computer calculations will be prepared in this page. Visitors insert data (according to the
calculation what they want to use) and get information about the value of the real estate they have
or amount of a loan possible to get. Calculations of different projects could be prepared - for
example Energy Efficiency Housing Project loan. After the inserting data (number of apartments,
total area, area of individual apartment and requested measures for implementation) computer
calculation could calculate following data:
amount of investment for a building

preliminary energy savings after project implementation
amount of payment in advance
amount of loan and grants for a building and individual apartment owner
123
preliminary schedule of repayment of the loan for the apartment
Such calculations could be prepared for each new future programs. The calculation program would
be downloadable. Persons interested in pursuing their interest further, would be referred to a list of
financial institutions and implementing agencies. The affordability calculator will be developed by
a selected consultant according to current parameters. This will require additional funding and it is
proposed that Canadian government agency CIDA be approached for financing of such a project
based on what the Canadian Crown Corporation CMHC is using.
Expected results
The creation of new page “Housing Sector Information” first of all will provide possibility to
systematize information about the housing. That ensure better contact with society for the MoE and
helps for preparation of new legal acts, programs, projects and strategies. Also information will be
collected about the participants in Housing sector and their activities.
124
APPENDIX C: Maintaining and Renovating Common Areas
in Multi-unit Apartment Buildings
I. What is the problem?
Poorly defined public and private roles in the sector combined with a deficient legal framework
have lead to inadequate maintenance of common property in multifamily residential buildings and
consequently to unsustainable management of existing housing stock, which contravenes Strategic
Goal II. As a result social housing needs can be said to be funded to a high degree by running down
the existing housing stock, de-capitalizing its economic value on a massive scale and thus
compromising future generations. This has been occurring during the whole transition period due to
a number of factors working concurrently:
Despite nearly universal privatization of individual dwellings, maintenance of common areas in

multi-family buildings continues to be provided “by default” through municipal maintenance
enterprises MMCs charging maintenance fees estimated to be only about one-third of operating
and maintenance (O&M) costs. Local authorities allow their MMCs to cross-subsidize
residential units with surplus from commercial renting, and they do not finance any resulting
difference between necessary level of O&M spending and maintenance fee revenues.
Consequently, the result of this housing under-spending by dwelling owners is the pervasive and
staggering under-maintenance of the majority of the multi-family housing stock in order to
mobilize funds for maintenance of the limited number of buildings, which are in need of
emergency repairs.
Privatized dwelling owners lack sufficient incentives to spend on proper maintenance and
renovation of common areas, even for energy saving investments, because there is no clear and
enforceable legal framework to ensure that all owners contribute to maintenance of common
property and because of the way existing housing-related subsidies are structured.
Reducing the staggering inefficiencies that affect the provision and maintenance of so much of the
capital stock – more than 50 percent of total fixed capital – should generate large gains for the
overall economy. It will also generate savings for the national budget by allowing subsidies (such as
those for heating) to be reduced when buildings become more energy efficient. This will require,
however, that spending pattern by household be restructured by shifting some household spending
away from non-housing goods and services towards more housing related spending on common
area maintenance and upgrading. But above all, it will require that spending on housing be
restructured by spending less on utility payments and more on structural maintenance and
upgrading.
Affordability and subsidies: As Table 1 shows, on average Lithuanian households spend 30% of
their income on housing and utility costs, far more than in similar countries in the region. Near
universal privatization has meant that households spend little on capital related payments (rent,
interest, principal) but this is more than compensated for by exceptionally high shares of income
spent on utilities. Energy costs are the single largest expense for households, especially those with
lower incomes, who cannot insulate or control heat usage. These households pay for energy that
125
largely goes up in smoke due to poorly insulated buildings, which have one-third the energy
efficiency of OECD countries. In almost all multifamily buildings some of the dwelling owners are
unable or unwilling to pay for the structural upkeep of the buildings including energy efficiency
upgrading investments.
TABLE 1 Household Expenditures on Utilities and Rent as % of Income in Selected Countries139

Housing costs Lithuania Poland Hungary Czech R. Slovakia Portugal
Public utilities 28 9 3 11 14 7
Rent /
2 2 14 3 1 14
accommodation
Total % of
30 11 17 14 15 21
income
Source: The Goals Attainment Study
Direct support for low income families can be justified if sufficient public finance is available.
The Lithuanian government spends well over 100 million litas a year on two programs: (a)
subsidy to reduce heating costs (utility compensation); and (b) matching grant to lower the cost
of borrowing for renovation (EEHPP). As the chart below shows, heating subsidies, which have
increased substantially since 1998, account for 75% or more of all explicit housing-related
subsidies in the sector. In addition to that, municipalities spend or forego revenues implicitly of
approximately twice as much on indirect subsidies for housing maintenance companies and in
the form of very low rents on social housing. Much of this spending is not targeted by means
testing of households, which contravenes the social equity principle. The targeting of subsidies
should thus be considerably improved, which could help reduce the budgetary cost of these
programs.
Furthermore, the heating subsidy (utility compensation) program is structured in such a way
that households have little incentive to conserve energy through energy saving behavior and
upgrading investments. Unless the incentives are introduced, household behavior will not
change and the costs to the Government for the subsidy will continue to increase. By
redesigning these programs with better targeting and energy efficiency in mind Lithuania could
both reduce budgetary costs and leave low income families better off .
139
The figures for Lithuania and other countries may be distorted due to varying degrees of unreported incomes. In
Lithuania it is estimated that some 30% of household income is unreported. Consequently, the figure of 30% effort
ratio based on official income statistics becomes an effort ratio of 23%.
126
140,000
Subsidies and grants for housing
120,000 credits, insurance premiums,
HOAs' energy efficiency
measures, and municipal social
100,000 housing programs
LTL, thousand
80,000
60,000
Compensations for inhabitants
with low incomes for heating and
40,000 hot water
20,000
0
1998 1999 2000 2001 2002
(est.)
II. A Proposed Program to Improve Maintenance and Upgrading of Common Areas
A government program to address the problem of inadequate common area maintenance and
upgrading should include financial, fiscal, and legal mechanisms whereby both public and private
sector resources could be mobilized to improve and upgrade the existing housing stock for low and
moderate income Lithuanians. The objective would be to improve the targeting of public sector
resources and more clearly define the public role so that it encourages rather than replaces private
sector efforts.
The key steps in realizing this objective are to:
(1) encourage efficient provision of property maintenance services through

privatization/corporatization of management companies;
(2) improve the regulatory framework for co-ownership, so that homeowner associations become viable
partner capable of borrowing from financial institutions
(3) provide sufficient comfort, i.e., credit enhancements, to private banks so that they are willing to
focus their emerging interest in consumer finance on providing funding for maintaining and
upgrading the existing housing stock;
(4) make sure that the subsidies now provided for common area upgrading are targeted so that the
presence of lower income families in a building does not discourage high return investments (i.e., in
energy efficiency improvements);
Privatization of municipal maintenance companies is under way but is progressing slowly. And
privatization itself is no guarantee for better and more effective maintenance, unless genuine
competition is ensured and maintenance fees are, at least gradually, freed by city councils. Vilnius
municipality has been preparing for maintenance privatization with the help of Norwegian technical
assistance. If successful, the procedures (i.e. restructuring and commercialization of the
maintenance companies and comprehensive information campaigns to homeowners regarding pros
and cons of HOAs and of private maintenance) used in Vilnius could be a model for other
municipalities.
127
The improvement of the regulatory framework for co-ownership is an important but long-term task.
The implementation of other components should therefore be initiated without waiting for
improvements in the framework. However, a project to implement such improvements should also
be started immediately on the basis of the recommendations made in the legal study “Apartment
Ownership and Mortgage Finance in Lithuania”140.
The program proposed below would address the last two points, namely making lending for
common area renovations attractive to banks and better targeting of subsidies.
Component 1:
Government-sponsored insurance for common area maintenance and upgrading
Commercial banks in Lithuania already provide mortgage lending and it represents a growing
portion of their portfolios. A large part of such lending is covered by partial insurance of principal
and interest from the government-backed Lithuanian Mortgage Insurance Company (LMIC). Banks
have expressed interest in expanding their current lending to uncollateralized consumer finance, but
as of yet have done little such lending and are unlikely to do so without insurance of part of the risk
stemming from deficient regulatory framework. The government program to improve housing
maintenance could build on the results of prior programs for energy efficiency and mortgage
insurance–e.g. zero defaults on energy efficiency loans – and require significant private risk
sharing when providing insurance for loans for upgrading and maintenance of common areas of
residential housing.
By linking access to insurance to improvements in the co-ownership structures (i.e., establishment

of Home Owners Associations “HOA”s), the insurance program would increase the likelihood that
in the future renovated buildings will be adequately maintained which will increase their collateral
value and the potential for further bank financing. If, in addition, the regulatory framework for co-
ownership is improved as indicated above, the banks’ willingness to share the risk will increase.
Thus the coverage of government-backed insurance program could be sharply reduced compared to
the current energy efficiency program, and phased out over the medium term
Component 2:
Targeted subsidy program
The targeted subsidy program would replace a significant portion of existing housing subsidy
programs. The new program would provide a safety net so that the costs of investments in
renovation to the poor and near poor – a population who are dispersed throughout the housing
stock – do not remain as political impediments to undertaking any property improvements and that
the poor are not further marginalized by forcing them into non-renovated buildings. Subsidies
would be paid as family (housing) allowances rather then related to energy costs or borrowings as is
currently the case, thereby increasing incentives for energy conservation and remove the regressive
effect of subsidizing those with sufficient income to borrow. There will be significant savings by
140
Prepared by Nordic and Lithuanian legal experts and funded by the Nordic Council of Ministers, see this report on:
www.am.lt
128
better targeting and by eliminating subsidies to a large number of high and middle income families
which could be used to expand the coverage of the program to more low income families. This
redistribution of subsidies would be consistent with government ambition to increase equity impact
of government programs. At the same time this would be consistent with the government’s stated
goal of improving efficiency in the economy, by relying on market competitive forces.
Cost of the Program

Component 1
Assuming total loans for renovations supported by the proposed program of LTL 100 million over a
4-5 year period (compared to loans totaling LTL 40 million under the energy efficiency program
extended mainly during the last two years of the program , and insurances of mortgage loans
totaling LTL 244 million in a bit more than 2 years), a 50% insurance coverage of such loans, and a
minimum capital ratio of 20%, the capital required for the guarantee facility would be LTL 10
million.
Component 2
A restructuring of heating and water subsidies and the current 30% matching grant in combination
with a more efficient screening of eligibility will decrease the subsidy per building substantially.
The safety net to enable the poor and near poor to participate in upgrading of common areas could
be provided up front as a partial payment of upgrading cost or as a conditional addition to the
housing allowance to cover interest and amortization for eligible homeowners.
However, as there is a need to accelerate common area maintenance and banks supported by
insurance are likely to be willing to support such investments overall subsidies may not decrease.
We recommend that the government maintain the current level of subsidy (about 130 million in
2001) for the next two years and thereafter gradually reduce the subsidy with the aim of a total
phase out by year 2010. With proper targeting this would allow for a substantial increase in the
numbers of buildings renovated and a complete overhaul of the housing stock by 2010.
Annex
The insurance program would have to be structured to minimize the public share of the cost and
risk and at the same time provide enough incentives to private banks to start lending for this
purpose, which so far they have not done. The main factors to be considered in relation to the
insurance are: (a) risks to be covered; (b) the portion of loans to be covered by the insurance; (c) the
sharing of losses between the insurer and the banks; (d) preconditions for payment of the insured
amount; and (e) how much capital should be required in relation to outstanding and committed
insurance amounts .
In terms of risks to be covered there is the credit risk and the ‘political risk’, the latter being mainly the risk of
deficiencies in the legal framework and practices. A guarantee of only the political risk would most likely not be
sufficient to get the banks interested. The preliminary cost estimate below assumes that the insurance would be
for a maximum of 50% of the loans. This and other details needs to be discussed with the banks. The insurance
currently being extended to banks for loans to homeowners is first loss insurance, that is the insurance pays all
129
losses of principal up to 25% of the outstanding loan. The insurance to HOAs is assumed to be pro rata, that is
losses are shared equally between the insurer and the bank. One important question is also at what stage the
insurance amount is paid. Will the insurer pay upon demand or does the bank first have to take legal action and
force a sale of the apartment building? This also has to be investigated further.
The LMIC could be the implementing agency for the insurance facility. The LMIC has more than
two years experience in mortgage insurance. It insures (guarantees) up to 25% (previously 100%) of
loans by Lithuanian banks to homeowners for the purchase or renovation of flats and houses against
a mortgage. This enables homeowners to buy homes with as little as a 5% down payment. The
LMIC’s credit record can be judged as good and for a number of incidental reasons its current
portfolio is undoubtedly strong. Since the first insurance was made in June of 2000 and up to
October 2002, the LMIC has approved guarantees for a total of LTL 244 million for about 5,800
loans. So far there have been only three defaults corresponding to an insignificant share of
outstanding insurance amounts.
The insurance supervisor has not established any capital requirements or other criteria limiting the
total amount of outstanding insurance for the LMIC. The Ministry of Finance has made clear that
the existing public subscription is the limit of public capital. For banks the minimum capital
requirement established by Bank of Lithuania is 10%. On this basis the LMIC’s current capital ratio
is estimated to be 11-12%, which would give little room for increasing the amount of outstanding
insurance without an increase in capital. Due to the relatively higher risk of insurance of unsecured
loans to HOAs, the capital coverage should be higher. As a basis for the cost estimate, the minimum
capital coverage has been assumed to be 20%141.
141
In case of the World Bank’s loan to Latvia, the capital coverage was initially set at 50%
130
APPENDIX D: Estimate of Indirect / Implicit Housing
Subsidies in Lithuania
The below calculations of indirect / implicit subsidies of rents and maintenance fees by the Vilnius
Municipality are based mainly on discussions with and information received from people in the
Energy and Housing Department of the municipality142. Although these people were very well
informed about the municipality’s and the maintenance companies’ affairs in respect of housing and
housing maintenance, and there was a large amount of information available on these matters, the
calculations are based on a number of assumptions, which can not be verified. The calculated
amounts can thus be regarded only as rough estimates of indirect / implicit subsidies. In case of
assumptions, the lower end of the ranges have been chosen to avoid overestimating subsidies. The
order of magnitude of the estimated subsidies should not be far from reality.
The calculations for the country as a whole are mainly extrapolations of the estimates for Vilnius.
The extrapolations were checked and adjusted on the basis of discussions with the people
mentioned above, who are knowledgeable also on circumstances in the rest of the country To
further check and, if necessary, adjust the extrapolations, three other municipalities – Kaunas,
Alytus and Siauliai – were visited. These municipalities were chosen to represent different solutions
in regard to municipal maintenance. Municipality officials as well as staff of both private and
municipal maintenance companies were interviewed.
Estimations for Vilnius Municipality
Rents for Municipal Housing

Vilnius Municipality owns 4,020 social housing apartments. The total area of these apartments is
158,000 m2. The municipality owns the apartments, not because of a concerted effort to provide
social housing, but mainly because when housing was privatized, some people - mostly from the
poorest deciles - chose not to privatize. Vilnius' apartments are thus scattered over a large number
of buildings, usually with only a few municipality owned flats in any building. The municipality has
not built any houses for social purposes. It has been buying a few apartments yearly.
The municipality charges 0.2 lts per m2 per month in rent for most of its apartments. In one district,
where the buildings are newer, the rent is 1.7 lts per m2 per month. An average market rent for
similar apartments was estimated by municipality officials to be in the order of 6-8 lts per m2 per
month. This corresponds to information from other sources and seems plausible, when comparing to
average rents in Vilnius of 11 lts per m2 per month and rents for renewed and well equipped
apartments in the Old Town, which start at around 25 lts per m2 per month.
In the estimation, we have also taken into account, that only about 60% of municipal rents are
actually collected. The collection rate in 2001 was 54%, and in the district with the higher rents,
only 30%. Rents actually collected in 2001 totaled 305,000 lts. Based on a market rate of 6 lts per
142
Kestutis Nenius and Vaidotas Vilutis.
131
m2 per month, rents during 2001 would have totaled 11.4 million lts. At the rate of 8 lts per m2 per
month rents would have totaled 15.2 million lts. The implicit rent subsidy would thus amount to 11-
15 million lts per year. The administration of the municipally owned apartments has now been
transferred from the maintenance companies to the municipality. The mayor is intent on improving
collection and also in the long run raise rents closer to market rates.
Maintenance and repairs
For part of their services, the municipal maintenance companies (MMC) are charging more or less
commercial rates, even if practice varies somewhat from district to district. This is the case for
inspection, maintenance and repairs. The MMCs are doing maintenance and repairs only if the
dwelling owners pay, and in case of repairs only if the owners ask for it143. However, charges for
administration are said to be much below market rates and grounds maintenance is paid from the
municipal budget rather than charged to apartment owners.
For administration, the MMCs are charging 4.5 cents + VAT per m2 per month (VAT is 18%). A
commercial rate for administration would, according to the municipality officials, be 15-20 cents +
VAT per m2 per month. Using the lower end of the range, 15 cents + VAT, the implicit subsidy for
maintenance administration for the approximately 8 million m2 of apartment space in Vilnius
would be about 1 million lts per month or 12 million lts per year. At the higher end, the subsidy
would be close to 18 million lts per year.
The total charge for grounds maintenance was 9 lts million in 2001. In addition, the municipality
has to pay VAT, which brings the total to about 11 million lts. According to the municipal officials,
most or all of this should be charged to apartment owners. The implicit subsidy for grounds
maintenance would thus be around 10 lts million. The main reason for not charging dwelling
owners is that due to unclear regulatory framework, it has not to date been possible to determine the
boundaries of the land belonging to each apartment building or group of apartment buildings.
Depreciations on fixed assets are currently made by MMCs at rates much below rates implied by
economic and physical life. In 2001 depreciations totaled approximately 1 million lts. The actual
need for depreciations, according to the municipal officials, should have been 5-10 million lts. The
implicit subsidy due to low depreciation would thus have been between 4 and 9 million lts per year.
Collection of maintenance and repairs is much better than for municipal housing, but about 10-15%
of fees remain uncollected. On the basis of total collections of fees (less grounds maintenance fees)
in 2001 of 31 million lts between 3.4 million lts (90% collection rate) and 5.5 million lts (85%
collection rate) was lost due to non-collection of fees.
Taking into account charges for administration and depreciation, as well as the non-collection of
fees, the MMCs in 2001 were thus allowing apartment owners a “discount” of 40-50% on
maintenance and repairs. Based on the above total implicit subsidies of maintenance and repairs
were thus 29.4-42.5 million lts in 2001. Depreciations have already been increased to required
143
The popular notion that the municipality takes care of buildings if owners don't do it, is not valid any more with
exceptional cases.
132
levels for 2002. Most of the other implicit subsidies should disappear when the maintenance
companies are privatized.
Estimations for Lithuania

Rents for municipal housing
The three municipalities visited outside Vilnius144 charge 0.21-0.50 lts per m2 per month in rent for
municipal housing. However, these rents include charges for maintenance. Excluding the
maintenance, the rents range from only 0.06 lts in Alytus to 0.33 lts in Kaunas. According to the
Ministry of Environment (MOE) statistics, municipal rents are on the same level in Klaipeda and
Panevezys as in Vilnius. We don't have statistics from smaller towns and rural areas, but would
expect rents to be lower than or equal to those in Vilnius. One factor to be taken into account is that
in many municipalities (for example in Alytus and Siauliai) hostels145 are part of municipal housing.
Rents for such apartments are lower than for other apartments On the basis of the above, we have
assumed rents (excluding charges for maintenance) for municipal housing to average 0.20 lts per m2
per month. This may be the result in some underestimation of rent subsidies.
Collection rates of municipal rents were reported to be 60% in Siauliai and 80-85% in Alytus. In the
latter, however, the collection rate for the maintenance part has been only 50%. In Kaunas, a
municipal official had no information about collection rates. We have assumed, that the collection
rate has been 60% in the rest of the country; the same as in Vilnius.
Commercial rents are considerably lower in the rest of the country than in Vilnius. Based on MOE
statistics, rents for private housing in Kaunas, Klaipeda, Siauliai and Panevezys – which are the four
largest cities after Vilnius - average 47% of those in Vilnius. In smaller cities and in rural areas it is
difficult to establish the level of rents, since both supply and demand is almost non-existent. Even in
Siauliai and Alytus flats are known to be rented against payment of utilities only. Vilnius
municipality officials estimated, that rents would be 30-40% of Vilnius rents in the rest of the
country. We have assumed that market rents for housing equivalent to housing owned by
municipalities would be at the lower end of this estimate, or 2 lts per m2 per month.
According to national statistics there were 2.6 million m2 (including 158.000 m2 in Vilnius) of
publicly owned dwellings in Lithuania at the end of 2000. On the above basis the implicit rent
subsidies have been 55 million lts per year in the rest of the country, and 66-70 lts million in
Lithuania as a whole.
Implicit Tenant Subsidies

66-70 million lts in Lithuania per 2000
According to some other statistics there are 31,643 publicly owned apartments and 28,083
municipally owned apartments in the country. The difference is apartments owned by universities,
144
Kaunas, Alytus and Siauliai.
145
Apartment houses in which usually kitchens and sanitary facilities are common for several apartments.
133
state companies, etc. Rents in the latter are presumably also subsidized. We have not been able to
determine, which one of these corresponds to the 2.6 million m2 used above. If, as we assume, the
latter corresponds to municipally owned apartments, implicit rent subsidies would be somewhat
higher than the estimates above.
Maintenance and repairs
On the basis of information from Vilnius officials, we have assumed, that in the rest of the country
there are little or no subsidies of land maintenance costs. This was confirmed in the three cities we
visited. Average actual and claimed commercial rates for maintenance in Vilnius and the three other
cities we visited are as follows (cents per m2 per month):
Vilnius Kaunas Alytus Siauliai

Actual 23 cents 13 cents 20 cents 18 cents
Commercial 40-50 cents 26 30 30
Accordingly, subsidies would be higher both absolutely and relatively in Vilnius than in other
municipalities. Although costs are higher in Vilnius, the difference seems too big. The commercial
rate in Alytus are rates charged by private maintenance companies. These complained that the rates
were too low and were due to competition from the undercharging municipal company. In Siauliai
the rates are set by the municipality also for the private companies. These charge an additional 10
cents in reserve for larger repairs. It is not known how such reserves are actually utilized. We
believe Kaunas, Alytus and Siauliai somewhat underestimated commercial rates and that these for
the rest of the country could be around 35 cents or somewhat lower than the lower end of the range
in Vilnius. This is supported by the fact that subsidies for municipally owned flats are somewhat
higher, since maintenance is often charged as part of the rent The average subsidy would thus to be
18 cents, which is the same as the lower end of estimated subsidies in Vilnius.
According to national statistics the total area of dwellings in the country was 81.5 million square
meters and 73.5 million less Vilnius at the end of 2000. On this basis total implicit subsidies of
maintenance and repairs were 158 million lts in the rest of the country and thus 187-200 million lts
in Lithuania as a whole.
Implicit Owner Subsidies

Total implicit subsidies
Total implicit municipal subsidies (social housing and maintenance) would thus be in the range
250-270 million lts per year in Lithuania. This compares with 107 million lts in total direct housing
subsidies in 2001.
Total Implicit Housing Subsidies

134
As a comparison, the Ramboll Diagnostic Report146 estimated that in 1997 “Indirect support of
tenants in rental” according to a “rough estimate” was 375 million lts, and that “Indirect support of
municipal services” was “approximately” 250 million lts. Total implicit subsidies (or “hidden
subsidies” as the report says) would thus then have been 625 million lts or 130-150% higher than
the estimate in this paper. On the other hand, total direct subsidies in 1997 were also higher;
according to the Ramboll report, 285 million lts, or 166% higher than in 2001. The Ramboll report
reportedly had access to less facts than we have and therefore had to rely on “guesstimates” to a
higher degree.
146
See “Study on Government Assistance Programs in the Housing Sector” of April 1998, available at: www.am.lt
135

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NATIONAL STRATEGY FOR SUSTAINABLE HOUSING

WORKING PAPER FOR

VILNIUS, DECEMBER 2002

1. Developing National Housing Strategy for Lithuania

1.1 Brainstorming with Housing Stakeholders

1.2 Diagnostic and Programmatic Studies

1.3 Further Activities towards Housing Strategy

1.1 Brainstorming with Housing Stakeholders

1.2 Diagnostic and Programmatic Studies

Household study by incomes, attitudes, preferences and social status;

Evaluation and modification of contemplated housing programs;

1.3 Further Activities towards National Housing Strategy

2. Basic Housing Strategic Concepts and Definitions

2.1 Housing Strategy as a Long-Term Vision

2.2 Housing Strategy as a Process

2.3 Containing the Scope of National Housing Strategy

2.1 Housing Strategy as a Long–Term Vision

2.2 Housing Strategy as a Process

Figure 1 Housing Strategic Process

2.3 Containing the Scope of National Housing Strategy

Housing production: building, rebuilding

Housing Finance: loans, subsidies, taxes:

Housing Allocation: market, non-market:

Rental housing: social (public), private (market):

Housing Management: maintenance, renovations:

Division of Housing Responsibilities and Competencies:

Housing Policy Implementation: programs, instruments

Policy Evaluation and Monitoring: strategic goals, policy objectives

3. Housing Strategic Principles, Preferences and Goals

3.1 Housing Strategic Principles and Preferences

3.2 Defining the Housing Problems

3.3 Articulating the Shared Vision

3.4 Setting the Strategic Goals

3.5 Evaluating Attainment of Housing Strategic Goals

3.1 Housing Strategic Principles and Preferences

3.1.1 The Overarching Principle of Sustainability

Efficient and equitable use of resources by

E fficient and equitable us of resources for present and future generations

P rinciple of econom ic sustanability

P rinciple of social sustainability

P rinciple of environm ental sustainability

P rinciple of integrated governance

P rinciple of social equity

P rinciple of econom ic efficiency

N ATIO N AL S TR ATE G Y FO R S U S TAIN AB LE H O U S IN G

In further elaboration of components of the overarching sustainability principle we adopt three

First principle of economic sustainability: costs affordable in

Second principle of economic sustainability: cost affordable to

Third principle of economic sustainability: program for

The principle of environmental sustainability: rational use of

Principle of human sustainability: minimized impact on health

Principle of cultural sustainability: reinforcement of social cohesion

3.1.2 The Principle of Subsidiarity

3.1.3 The Principle of Integrated Governance

3.1.5 The Principle of Social Equity

3.1.6 The Principle of Economic Efficiency

3.2 Defining the Housing Problem

3.3 Articulating the Shared Vision

3.3.1 Emphasizing the Life Cycle Model

3.3.2 Recognizing the Disturbed Model in Lithuania

Source: Statistics Lithuania; Statistical Yearbook of Lithuania 2001 Thousands

3.4 Setting the Strategic Goals

3.4.1 Strategic Goal I – Sustainable Housing Choice

3.4.2 Strategic Goal II - Sustainable Use of Existing Housing

Household study by incomes, attitudes, preferences and social status;

Evaluation and modification of contemplated housing programs;

Weak structural condition: roofs, windows, joists, doors, balconies,

Program A2 on Regulatory Framework for Property Management