J. Hegedüs, V. Horváth and N. Tosics:
Landlord tenant conflicts in the private rental sector in Hungary
European Network for Housing Research Conference
Tarragona, Spain
June 19-22, 2013
József Hegedüs
Metropolitan Research Institute, Budapest
[email protected]
Vera Horváth
Metropolitan Research Institute, Budapest
[email protected]
Nóra Tosics
Ránky Law Office, PhD student at Faculty of Law at the University of Pécs
[email protected].
Metropolitan Research Institute
1
Contents
Introduction............................................................................................................................................. 4
1.
2.
3.
“Private rental” in the socialist housing system .............................................................................. 5
1.1.
The forced private rental sector (FPRS)................................................................................... 6
1.2.
The sublet market – informal sector ....................................................................................... 7
Emerging a new housing regime – constrains of the expansion of the private rental sector ........ 9
2.1.
Financial disadvantages – user cost approach ...................................................................... 10
2.2.
Legal under-regulation of the private rental sector .............................................................. 11
An overview of the private rental sector ...................................................................................... 13
3.1
Typical actors on supply and demand side of the private rental market.............................. 13
3.2
Conflicts between the landlord and tenants ......................................................................... 15
3.2.1
Determination of the rent, duration and prolongation of the tenancy agreement ..... 15
3.2.2
Enforcement of termination, emptying of the dwelling ............................................... 16
3.2.3
Tax evasion .................................................................................................................... 17
3.2.4
Utility payments ............................................................................................................ 17
3.2.5
Residence ...................................................................................................................... 19
3.2.6
Damages by the tenant and, the landlord’s lack of compliance ................................... 20
3.3
4.
Managing the risks ................................................................................................................ 20
3.3.1
Handling of legal disputes ............................................................................................. 20
3.3.2
Real estate agents and other informal solution ............................................................ 21
Conclusion ..................................................................................................................................... 22
Bibliography........................................................................................................................................... 24
2
Abstract
After the privatization in the 1990s, the Hungarian public rental sector has been reduced to 3% of the
housing stock. Against expectations, the private rental sector did not undergo a dynamic progress,
and its size is also estimated to be around 3% by official statistics (while, because of widespread tax
evasion, its actual rate could be 8-10% of the total housing stock). The present paper focuses on the
landlord-tenant relations in both the public and the private sector. In public rental, the property
rights of the landlords – of which municipalities were the most prominent ones – had been
constrained by the law. Following the decentralization process after transition, municipalities
became able to substantially change the content of the public rental tenure through the modification
of the public tenancy contracts, and by changing the selection of tenants, the rent setting
mechanisms and the allocation of housing etc. As a result, they significantly increased their control
over their relations with tenants. Meanwhile in the private rental sector, landlord-tenants relations
remained under-regulated in the past two decades of the establishment of market economy, which
has led to conflicts between tenants and landlords, and resulted in risks and uncertainties on both
sides. After offering some insight of the role of the private rental in the socialist housing system, the
paper will focus on the economic and legal constraints on the development of private rental sector
after transition. The nature of the changes will be demonstrated through the analysis of the landlordtenant conflicts, and their influence on the legal environment. The paper will attempt to show how
micro conflicts lead to macro consequences: sharp decrease in the rental housing supply (both
private and public) and a disproportionately high demand for private property (owner-occupation)
contribute to the creation of a “super home-ownership” structure; whereas a more balanced
structure of multiple tenure options could help address fundamental housing and affordability issues.
3
Introduction1
The development of the private rental sector (PRS) can be viewed from two perspectives. From a
historical perspective, we can follow how the position of the PRS changed in the course of the
transition. From a comparative approach, we can analyse how the Hungarian private rental sector
evolved in relation to other housing models. In this paper we will adopt the first approach: we
present an overview of the development of the PRS, and examine the key factors that influence the
direction this development took.
Private rental sector have not come to play an important role in the post-socialist housing systems,
against the expectation of most housing (policy) researchers. Strictly following the text-book
approach, we would expect to find two main types of the tenure forms in the socialist housing
system: public rental in the urban areas, and privately owned family houses in rural areas. According
to housing and property law under the socialist regime, private property was not to be used for
“exploitation” (Marcuse, 1996); it was only acceptable for personal use, and only to the extent that it
responded to a person’s housing needs. Owning private property in order to make profit was
considered to disintegrate the social fabric of communist society. After the transition, when respect
for (and protection of) private property became the basic principle of social order, the road to private
rental sector opened. However, research on the post-socialist housing systems (Hegedüs et al., 1996;
Struyk, R., 1996; Lux, 2003, Tsenkova, 2009; Pichler-Milanovich, 2001, Hegedüs, 2012) could not
identify significant progress in the development of the PRS. The question is, why? This paper will
study the factors that explain the limited role of private rental sector in Hungary, which we expect to
apply – if only to a certain extent – to other post-socialist housing systems, due to their similarities in
recent history and policy development. We argue that two basic factors explain the apparent lack of
PRS: economic reasons on the one hand (user cost approach), and legal uncertainties on the other
(tenancy law relations).2
We will first present the role of the “private rental sector” in the socialist housing systems, which –
against expectations of policy makers and researchers – played much more important a role than the
text-book approach would have supposed. In the second part of the paper we summarize the main
trends after transition, which, in theory, would give rise to the development of the private rental
sector through the privatization of the public rental stock, and the withdrawal of state subsidies. The
third part will focus on the economic and legal constraints which prevent the potential tenants and
landlords from entering the rental market. The paper argues that because of the housing tax and
subsidies (economic aspect), and because of the risks inherent in tenancy relations (legal aspect), a
rational actor will try to avoid the rental market. The fourth part of the paper shows that in spite
economic and legal disadvantages the private rental sector exists in Hungary, partly because there
are households who have no other viable options, and partly because the cost of the financial
1
The paper is based on the TENLAW (Tenancy Law and Housing Policy in Multi-level Europe) project under EU
Seventh Framework Programme. The research partly based on interviews with real-estate agents, property
managers, lawyers and judges dealing with cases in the private rental sector.
2
There is, of course, a strong cultural factor influencing people’s tenure choice, which is the result of a long
historical development based on long term general housing experience. A large part of the population will have
a strong attachment to property, which they hold to be a precondition for a safe and reliable tenure. However,
the analysis of this factor is beyond the scope of this paper.
4
disadvantages and the legal risk can be managed in certain conditions. In the last part we conclude
that from the policy point of view, managing the market and state failure in the regulation of tenancy
relations could trigger significant progress in the development of the housing systems in the postsocialist countries.
1. “Private rental” in the socialist housing system
In principle the private rental sector should not have played any role in socialist housing systems, as
its existence meant that private ownership was used for profit making. In order to understand its role
in the pre-transition period, we present the East-European Housing Model (EEHM; Hegedüs-Tosics,
1996). This model was based on the principle that society’s key integrative mechanism (using of the
term of Karl Polanyi, 1957) was the “state”, which exercised a control over the housing sector
through different political and economic mechanisms (single-party system, investment control, price
setting, welfare policy etc.). A similar approach to socialist societies, in which the state functions as
the main integrative mechanism of society, can be tracked from different disciplines: political science
(Fehér et al., 1983), sociology (Szelényi, 1983), and economy (Kornai, 1980, 1992). The key element in
the theory of EEHM was that the socialist system developed in a “globalized” world in the sense that
the political, economic and military position of the Soviet type societies was defined in the context of
the competition with Western societies. Thus in this competition not only that the socialist countries
went through a development from the Stalinist system towards more liberal authoritarian societies,
but even the solutions in different countries could be very diverse in terms of the institutional setups.
Hungary, Yugoslavia, Romania, the GDR, Poland etc. followed slightly different paths under the
control of the Soviet-led socialist political hegemony (which, as an extreme, resorted to military force
to lead countries back the politically acceptable path, like the invasion of Czechoslovakia in 1968, or
Polish martial law).
Studying the housing systems in the socialist countries, the EEHM approach used the term “cracks”
(Hegedüs, 1992): systemic errors that necessarily emerge, as principles of the socialist housing ideal
clash with social and economic realities. These cracks challenge policy to manage them either by
eradicating the field entirely, or by reintegrating it under a state controlled mechanism. The
sociological and historical study of the housing sector attempts to understand the logic and rationale
behind the management these cracks. The presence of a private rental sector is an example of these
cracks, since theoretically it should not exist in a socialist society. While the state could have
eradicated private rental altogether, decision makers decided to accept the compromise of its
existence due to the huge social and financial costs this would have incurred. There were two
interesting examples of the “private rental sector” in Hungary: (a) “forced private rental”; and
(b) subletting in the public rental sector.
We can differentiate four housing regimes under the socialist period in Hungary (HegedüsTosics, 1983, 1998); these represent modifications of the basic socialist housing model
(EEHM) under the economic and political pressure caused by “cracks” and shortage. In the
first period (1949-1956) there was an attempt to introduce a total control of the housing
system. In the second period (1957-1969) the housing system was based on a compromise
between the state and the private sector. In the third period (1970-1983) the role of the
5
state had been reinforced based on the new housing industry (“age of the housing estates”);
and in the fourth period (1983-1989) market elements were introduced under the control of
the party (including slow privatization, state backed mortgage system, etc.).3
The private rental sector accounted for 30% of the housing stock before the large scale
nationalization of 1952 (four years after the regime change), and even at the end of this process 6%
still remained in private ownership, because the nationalization law only applied to properties with 6
or more rooms. The state strictly controlled the private rental sector (through local councils under
party rule), in terms of tenant-landlord relations, rent setting, assigning tenants, extension of the
tenancy contract, and so on. The tenants in the private rental sector enjoyed a high security of
tenure. This sector was called “forced private rental” sector (FPRS).
On the other hand the public rental sector (the nationalized housing stock and the newly built state
owned housing) was not under total state control. Tenants had the right to sublet parts of the state
owned rented apartments. The formal law of course regulated the conditions for subletting including
the rent, etc. However, the effective control of the sector was not enforceable: shortage in housing
forced the state to let private incentives work on the sub-let markets – this is an example for a
“crack” in the East-European Housing Model.
1.1. The forced private rental sector (FPRS)
The origin of the “forced private rental tenure” dates back to World War I regulations (in 1916 and
1917), when a coercive-restrictive private renter policy was introduced with two important regulative
elements: (a) rent control, and (b) limitations to the termination of the rental contract.4 (Body, 2004;
Oláh, 2010) The details of the intervention have been varied between the two World Wars, but the
main elements remained intact until the introduction the second Housing Codex in 1956.
One of the most important changes was the nationalization of private houses and apartments with
more than 6 rooms in 1952. Moreover, all houses and apartments built before 1 April 1953 that had
more than three rooms were moved under the direct council control. In the 1950s forced private
rental became an important tenure form with a specific set of rules:
1. Tenants had very strong property rights. Tenancies could be inherited, or exchanged
between tenants with the approval of the housing authorities (while the owner had no
influence on it).
2. The rent was regulated by the state at the same level as that of public properties, which were
systematically under the cost recovery level.
3. The rehabilitation and the main maintenance was the responsibility of the owner.
4. If an apartment became vacant, the landlord had the right to move in (although due to the
strong tenant rights, apartments rarely became vacant).
3
Each period had its basic housing laws: Office of the PM Ordinance 8000/1946; Governmental Decree
31/1956 (IX.20.); Governmental Decree 1/1971. (II.8) and its modification in 1982; and the Housing law, Act
78/1993. The discrepancy in the timing of the introduction of the laws and the start of the housing regimes
deserve special attention, which is beyond the limits of this paper.
4
PM Ordinance 3787/1916. on the termination of, and limitations to, tenancy contracts, and prolongation of
tenancy contracts concluded on behalf of public institutions (November 1916); Ministry Ordinance 8133/1917.
On rent committees and their regulation (10 February 1917).
6
5. The landlord could only terminate a tenancy if they could also provide a substitute
equivalent apartment for the tenants.
While the property in the FPRS was not explicitly nationalized, the landlords lost their control over
their property, which practically meant a hidden nationalization. However, the strong tenant
protection at the expense of landlords’ access to their property was gradually eased throughout the
1950s. As shown above, landlords could move into their property if they offered an equivalent
substitute rental home or ownership for their tenants. In the first half of the 1950s, the public
housing authority could also assign new tenants to utilize “underused space” in private properties;
this practice was abolished with the introduction of the Second Housing Law in 1956. Consequently,
gradually a specialized market was developed for the sale of properties with sitting tenants,
especially after 1971, when a Government Decree5 granted that every family had the right to own a
home (and a second home for leisure purposes). Moreover, the Decree allowed private landlords to
reclaim their property for their own use (or for the use of their family members), but the landlord has
to offer an alternative accommodation. This meant that the landlord could negotiate with the
tenants about the conditions of leaving the apartment, namely about the quality of the unit offered
as a compensation for leaving the tenancy. This became a typical conflict in the system, as landlords
tried to use this feature of the law to recover their property. An interesting discussion developed
about the abuse (misuse) of the law. Sárándi (1965) argued that socialist law and judicial procedures
should abolish all opportunities for private landlords to use the law for “profit making”, while still
allowing them to access their property for personal use.
According to anecdotal information, a special market emerged for the apartments of FPRS, where
the buyers invested in hope of making a profit when the tenants eventually leave. According to the
law the landlords had to offer substitute housing to the tenant. The rule of thumb on the housing
market was that the price of the inhabited privately owned apartments was half the price of vacant
housing units, so if the landlord could negotiate with the tenant to accept less that 50% of the
market price in order to move into another apartment, the transaction would be profitable.
Around 1977-1979 around 6% of the housing stock was private rental (Hoffman, 1981, p. 72), a part
of which belonged to the FPRS. After the transition a special program was introduced for the FPRS, in
which the municipalities assumed the responsibility to offer substitute accommodation to FPRS
tenants. According the statistics in Budapest there remained few thousand FPRS units.6
1.2. The sublet market – informal sector
After World War II, the newly formed socialist/communist economies pushed their populations
towards industrialization, which meant that investments in the centrally planned economies were
concentrated to urban-industrial hubs, and a massive urbanization process was launched, based on
5
Government Decree 1/1971 (8 February) on the allocation of housing and tenancy. Interestingly enough, this
law had two “massages” to the society. First, it is against the law to own more than one unit for a family
(defined as couple or one person); secondly, the law guarantees that citizens have the right to own as a
“personal” property a residential and a recreational unit. (Households get around the limitation set by the law
by divorcing, and having legally two units, or buying the unit on the name of the children.)
6
In 1996, in Budapest 1745 FPRS contract was reviewed and 662 was solved, and it nwas estimated that there
were 1100 unsolved case in Budapest, an 1500 in the country side. (Source: Motion proposed by Gál Zoltán MP,
in 1997 http://www.parlament.hu/iromany/fulltext/03482txt.htm)
7
the exploitation (over-taxation) of agriculture. People from rural areas moved to the cities en masse,
and the demographic pressure on the urban housing markets became overwhelming. However, as
investments were concentrated on the “productive” sectors, housing shortage became one of the
most prominent sources of social conflicts.
The socialist state cannot be conceived of as a unitary (single tier) organization: it balanced several
conflicting sectoral and territorial interests – represented by braches of industries and regional
governments, respectively – which also translated into urban politics. The forced industrialization
process absorbed the increased urban workforce, but the ministries responsible for urban
development wanted to control the influx of people to cities because of the housing shortages.7 For
example, the population growth of Budapest was highest in the 1950s in spite of the facts that at
that time the move to Budapest was forbidden. A “softer” control of the urbanization remained in
force until the transition: to obtain the right of buying a private apartment or house, or becoming a
public sector tenant in Budapest, one had to prove being a resident in the capital for at least five
years.
Because of the chronic urban housing shortage, efficient use of the housing stock was a crucial goal
of housing policy, which forced the housing regime to make compromises. In the first period (19491956), according to the law, any “underused” property could be occupied by the housing authority,
which could then turn the “superfluous” units into rental arrangements (see Hegedüs-Tosics, 1983)
following a procedure. However, this method did not work efficiently, because the state control had
both administrative and technical limitations (due to the information asymmetry). Consequently,
housing regime had to make compromises with the existing private sector, and sacrifice some of the
principles of the socialist housing system. One important element of this compromise was allowing
private sub-letting in the public rental sector. It meant that the tenant in the public sector could sublet a part of the property (although not more than 50% of the space) at a maximum price set by the
housing law.
However, this particular market was outside of the strict control of the housing authorities, which led
to the development a relatively liberalized submarket. The rent payable of one room in the sub-lease
sector could be 2-3 times the official public sector rent, despite the legal rent control which was not
enforceable on this sub-market. There was no registration of the sublets in the period of the first
housing regime, thus the rent control remained theoretical (Zalán 1958, p. 258-259). As one of the
leading housing experts of the period stated in his study, the sublet market gave opportunity for
“exploitation” (Némethy, 1958, p. 227).
“Such an examination would shed light on one of the darkest aspects of housing issues. Ever
since immigration bans have been lifted, rents accepted for sub-let rooms in and around the
capital have reach the levels of usury. No one is shocked to see sub-tenants pay more for a
room than the rent of the whole apartment, as some of the prospective tenants offer a
monthly fee of 500-600-7008 in classified ads. On top of that, lessors often demand guaranty
7
The “closed cities” policy (official ban on moving into a town or city) was and extreme case of such urban
growth control politics, although limitations on moving to cities were not enforceable because of the
conflicting institutional interests mentioned above.
8
Around 1980, the average rent for an apartment was HUF 243 per month in the public sector, while the rent
of a room was HUF 1500 per month (Hegedüs-Tosics, 1981, p. 85). In 1954, the monthly rent of a 2 room
apartment with a bathroom and toilet was HUF 112, and the monthly sub-let around HUF 600-700 for a single
8
in order to let a tenant stay in the room to let for a certain period. Some lessors are able to
undertake such exploitive activities with because they retain rental rights to rooms to which
they should have no rights according to the housing laws in force.” (Némethy, 1958, p. 227)
It was always very difficult to estimate the size of the market for sub-letting. In Budapest, it was subtenancy was estimated to be the tenure status of 10-15% of the households
The tenants had broad property rights in the sub-lease tenure according the housing law. However,
in practice the emerging risks were managed through private sector solutions. One way to achieve
property right protection on the landlord’s side was to let out a property through the state tourist
agencies, which specialized in letting private homes to tourist, but sometimes – informally – offered
longer term stays to workers; these agencies could provide a guarantee to owners that the tenants
will not misuse their rights.
2. Emerging a new housing regime – constrains of the expansion of the
private rental sector
After the transition a new political system emerged, committed to market liberalisation and respect
for private property, multi-party democracy, and the rule of law. The new regime abandoned the
main integrative role of the state: free market and a transparent legal system were to become the
new key integrative mechanisms of society. The result was not the idealized “self-governing market
system” (in the term of Karl Polanyi again), but a mixture of the remaining – and weakening – state
control, and the developing and expanding market mechanisms. The role of the law has changed
with the introduction of (and strong international support for) rule of law, but the legal system
reflected the compromises of the transition process. Another important element of the transition
was the conflicts of different forces, particularly of specific interest groups, structured around parties
and influential economic groups, in a free market environment.
According to our judgement, no generally valid theory of the transition was developed to date, as the
transition process did not follow the same pattern in different post-socialist countries, and we are
too close in time to form a historical perspective to the events.
In the housing sector, transition involved mass privatization of the public housing stock; gradual
withdrawal of the state from housing interventions; and launching and initially providing support to
private sector investment and operation of the housing sector, both financially and institutionally
(like housing finance, phasing out subsidies, transferring housing related responsibilities to
municipalities, etc.). The development of the “self-regulated market”, however, went down a rough
path, as not only the behaviour and attitudes of the actors have been changed, but a new operating
legal system of the market economy was being developed as well.
Two main trends have to be emphasized: (1) the privatization of the state owned rental sector (85%
of which was privatized to sitting tenants), and (2) the withdrawal of the state from the housing
room (Némethy, 1958, p. 224). Interestingly, very similar ratios could be observed between the official rent
levels and the informal market price.
9
sector, and especially from the direct support of the housing finance system. Both trends had an
important effect on development the housing market:


Local governments became responsible for housing provision on the local level, but
because of the extensive privatization they did not have adequate resources for local social
policy (Hegedüs, 2012). For example, the number of units to allocate to needy households
decreased sharply, due to low levels of housing investment and the quickly depleting stock
of vacant units to reallocate.9
The typical developers of the housing regimes of the socialist period (the state owned
banks) disappeared from the system, and most of the subsidies were withdrawn, which led
to a deep recession of the housing market in the 1990s. Housing became unaffordable, the
price/income ratio rose above 4, and Housing Affordability Index was 23% in 1992, slowly
rising to 40% in 1999, and 70% 2003, as opposed to the 120-140% ratio of developed
countries (Hegedüs-Somogyi, 2005).
These two facts would justify the expansion of the private rental sector, especially if we consider the
increasing income differences.10 We could reasonably expect that with the growing prominence of
the free market and state backed incentives to entrepreneurship, a new middle class of potential
landlords would emerge. However, judging from official statistics, such a class did not appear, which
can be explained by two main factors: economic reasons (user cost), and legal uncertainties (tenancy
law relations).
2.1.
Financial disadvantages – user cost approach
The tenure choice of the rational households depends on several factors, but one is the long term
relative financial advantages and disadvantages of the tenures (Haffner et al., 2010, Hulse et al.,
2011). We can compare the cost of the homeownership to the rents, and if the homeownership cost
are larger than the rent levels of the same home, the rational household choose rental sector. There
are several approaches (see Diaz and Luengo-Prado, 2008, Green and Malpezzi, 1999, Elsinga, 1996 ).
In an earlier study, Hegedüs (1998) concluded that at the present rent level for a rational investor it
would not be profitable to invest in the rental sector, because the present value of the expected
profit would be lower than the alternative investments. On the other side the paper concluded that a
rational consumer who has a choice would move into owner occupation than to the rental sector,
because they would realize higher individual “profit” in the owner occupation. A number of reasons
within the tax and subsidy system make the rented sector as a whole disproportionately more costly
compared to other tenures:
9
In 1980s 15-20 000 units became vacant annually; in the 1990s new vacancies fell to about 1 500 a year. The
social housing programme between 2000 and 2004 did not bring about a significant change; the number newly
built units was less than the number of housing unit sold during the same period.
10
Income differences among the lowest and highest earning income groups rose sharply after the transition,
and kept growing for most of the last two decades, albeit at a more moderate pace. Based on the survey data
of TÁRKI Social Research Institute, the difference between the average per capita income of the lowest and
highest income decile grew from less than five-fold before the transition to around nine-fold in 2012 (Szívós et
al., 2013). As for the demand versus supply in social rental housing in Hungary, housing experts estimate the
number of households in need of – and legally qualified for – social housing to be around 300 thousand, while
the number of available units is roughly the third, with a very low number of housing units becoming available
annually.
10
1. No imputed rent: the practical consequence of this is that while owner occupation is tax-free
once the owner fully acquired the dwelling; while every rent payment is taxed, thus making
(legal) rental more expensive even when the direct costs are the same.
2. Profit from renting is taxed the same way as other income. This approach gives tax no
incentive to potential landlords, in spite of the significance (and sensitive nature) of housing;
neither does it take into account that the most significant group of landlord in Hungary is the
accidental landlord, who – as opposed to its professional counterpart – works with high
transaction costs, and no returns to scale.
3. Capital gains exemption and other subventions for owner occupation, as well as the lack of
direct subsidy for rental tenure on the private market, lead to the prominence of ownership
as a tenure form. While the ambition to provide stable homes to households is
understandable, under the current terms this enthusiasm is partly responsible for the current
mortgage credit overburden in Hungary. In the meantime, other affordable tenure options
were – and remain – unavailable.
These factors made the private rental sector financially unfavourable. The conclusion is that the main
economic factor explaining the low size of the rental sector is the financial disadvantages, and the
lack of the tenure neutral subsidy and tax system.
Consequently, private rental sector is not an outcome of free choice, but more a coercion (Lowe,
2000, 2003; Erdősi et al., 2000, Hegedüs-Teller, 2007): both on the demand and supply side the
actors have no other realistic alternative choices. The rent level in the PRS was 2,5 times higher than
in public rental; but the cost recovery rent level for a professional investor was 40-60% higher than
the market rent (Székely, 2011).
2.2.
Legal under-regulation of the private rental sector
At its conception, the Housing Act of 1993 had a twofold objective: resolve the privatization of the
public housing stock and bring about a clear distinction of rental and ownership relations after the
quasi-ownership character of the socialist tenant position. In both respects, the Act opted for a
fundamentally liberal approach. (Baar, 1993) On the one hand, it encouraged the general
privatization of the housing stock, ensuring an unlimited right for tenants to buy their rented
apartments, for up to 50% of the market price. On the other hand, the regulation of the tenantlandlord relations – in particular as regards private rental - was based on the civil law principle of
contractual freedom of the parties.
Accordingly, tenancy relationship is the result of the free agreement of equal parties, and only the
basic conditions are laid down by law. This underlying concept is well illustrated by the fact that
initially, the Housing Act did not foresee an obligation for the parties to lay down the rental
agreement in writing. Although the Act did define the basic rights and obligations of tenants and
landlords, it did so with the objective of defining this form of legal relationship, rather than with the
ambition to ensure the development of a well-functioning private rental market.
Since its adoption, the 1993 Housing Act has been amended 27 times. However, these modifications
did not alter the fundamental approach of the legislation regarding private rental. The 2005 reform
of the Housing Act focused primarily on the municipal rental sector in connection with the so-called
“housing mafia” cases, a typical criminal phenomenon of the post-communist era, essentially
11
consisting in organized fraud in connection with public or private housing, for example by means of
fictive changes or purchases to the detriment of tenants and owners. With regard to private rental,
the most important change of the 2005 amendment was the introduction of an obligation to
conclude tenancy contracts in written form. However, with regard to the other aspects of the
tenancy relationship, the agreement of the parties remained the determining factor.
In fact, the Housing Act merely contains general rules regarding the conclusion of tenancy contracts
(in particular the obligation to conclude the contract in written form), the obligations of the parties
(for example, it provides that the tenant is obliged to pay the rent and the landlord guarantees that
the dwelling is suitable for proper use), the sharing of the necessary works among the parties
(regarding the works in the dwelling, however, the agreement of the parties is decisive), as well as
the possibilities to terminate the tenancy agreement as referred to above (it guarantees the right of
the landlord to terminate the tenancy contract for example in case of breach of the contractual
obligations or intolerable behaviour by the tenant). The general character of the rules of the Housing
Act does not provide for predictability in the landlord-tenant relations. The same applies to the
provisions of the Civil Code, applicable for all issues not specifically addressed in the Housing Act.
Although the new Civil Code, foreseen to enter into force on 15 March 2014, includes a number of
new provisions regarding tenancy contracts, such as regarding the termination of the tenancy
agreement, the level of regulation remains similarly general.
These rules do not contain solutions for the typical issues of a tenancy relationship, such as the
implementation of rent increases, prolongation of the tenancy agreement, handing over of the
dwelling, responsibility for utility costs, registration of tenancy contracts and of tenants, deception of
the tenant regarding the condition or characteristics of the dwelling, damages by the tenant, etc.
Therefore, the principal source of rights and obligations of the parties and the starting point for
resolving any disputes will be the individual tenancy contracts. The importance of the individual
contracts is further underlined by the fact that in line with the general civil law principle of
contractual freedom, it is generally considered that the parties to the tenancy agreement are free to
deviate from the provisions of the Housing Act as long as they do not contravene an explicit
prohibition. For example, parties may typically foresee a right of termination of the landlord also in
the case of contracts concluded for a determined period, despite the fact that the Housing Act does
not provide for this option.
This practice is however not clearly endorsed by the Housing Act and the case law. Furthermore, it is
also unclear what will be the status of those provisions of the new Civil Code that are different from
the rules contained in the Housing Act. For example, unlike the Housing Act, the new Civil Code
provides for the right of the tenant to terminate the tenancy agreement in case of the renewal of the
dwelling, and provides for different deadlines for the termination of the tenancy contract by the
parties. Tenancy relations are by nature particularly sensitive. On the side of the tenant, they concern
the primary factor of their existence, and on the side of the landlord, a particularly valuable asset. A
careful combination of flexibility and legal certainty is therefore needed for the rental sector to be
attractive for both parties.
In a situation where the legal framework is not sufficiently clear and the conditions of the tenancy
relationship are left for the discretion of the parties, the content – and as we will see later, the form of the tenancy contract becomes particularly important. This may in itself represent a difficulty for
12
those who are not familiar with the legislative framework and the enforcement system and in
particular for those who are not in a position to afford the involvement of a qualified lawyer.
Of course, over-regulation entails similar risks and policy failures may effectively hinder the
development of a well-functioning private rental market. Clearly, it is not possible or desirable to
regulate every aspect of the tenancy relationship by law. Experience shows that certain issues, such
as the amount of rent or the initial length of the contract, need to be left to the discretion of the
parties. When it comes to the other aspects, the level of regulation needed would greatly depend on
the effectiveness of the enforcement and dispute handling system; and in all cases, the tenancy
relation has to be predictable for both parties.
When the legal framework does not prevent or resolve the most common conflicts among the
parties, the role of the national jurisdictions handling legal disputes and of the enforcement system
becomes naturally more important. While uncertainties in the legal regulation need in all case be
avoided, the flexibility of the legal framework may be compensated by effective and foreseeable
ways of dispute resolution and enforcement.
At present, however, the Hungarian civil procedure and enforcement system does not seem to meet
these requirements. Therefore, in our view, more legal certainty in the typical conflict situations
addressed in the following section could contribute to increase the attractiveness of this tenure.
3. An overview of the private rental sector
3.1
Typical actors on supply and demand side of the private rental
market
Reliable data is very scarce on the size of the private rental sector. Private rentals could take up 810% of the housing market, but due to tax evasion, there is no reliable information about the correct
size of the sector. Available information supports the view of a World Bank study on private sector
housing in selected post-socialist countries:
“As the number of households who did not benefit from the privatization continues to grow
– especially the young, the mobile and the poor – the lack of accessible and affordable formal
rental housing is pushing them into informal rentals with little tenure security, discouraging
higher residential mobility and thus labour market flexibility.” (Dübel et al. 2006, p. ii forward
by Thomson, P.)
The market is very fragmented, because of the financial/tax and legal regulations both on the
demand side and the supply side the actors choose this option because of the lack of other options.
The only exception could be the very tiny market on the high end for well-paid foreign expatriates
and the sub-market for students.11 On the other hand, interviews with local social workers, housing
policy makers and housing entrepreneurs supported the residual nature of private rental: when low
11
Even families with children in higher education try to buy homes for the years at school if they can afford it,
because it is considered to be a better option (Classified ad: “Help! Need to buy apartment for university
student offspring”).
13
income households, already facing affordability issues, lose their property or social tenancy because
of the non-payment of mortgages, rent or utility cost often end up in the low-end of the private
rental sector, typically in marginal housing situations.
% in private rental sector
10,0
9,0
8,0
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
8,7
5,9
3,5
3,2
1,9
0,8
0,8
0,6
Figure 1: Share of the households in private rental according to family type (Source: Székely, 2011)
According to survey data, the low income households and the higher income households are overrepresented in the private rental sector (U-shape distribution), but the differences according to
income groups are not significant. (The public sector follows a clearer pattern: low income groups are
systematically overrepresented.) According to the family type, young households without children
are overrepresented.
Figure 2: Share of households in public and private rental in different income deciles (Source:
Székely, 2011)
14
As a result of the financial disadvantages and legal uncertainties outlined above, the private rental
sector is highly prone to landlord-tenant conflicts, where the risks involved in the contract have to be
managed by the parties for lack of a more comprehensive legal framework and more efficient conflict
resolution instruments. In the next chapter we will overview the most important risk factors, and
evaluate their effects.
3.2
Conflicts between the landlord and tenants
3.2.1 Determination of the rent, duration and prolongation of the tenancy agreement
The rent is unregulated, and it is on the parties’ agreement. The same applies to any changes in the
agreed amount of the rent. This results in a very flexible market, but depending on the market
situation, the incomes or the costs related the tenancy are very unpredictable. This is more critical
for the tenants, whose transaction cost (the cost of moving apartment) may be substantial, and it in
itself would decrease the demand for private rental.
In order to safeguard the interests of the tenant, general civil law instruments allow civil courts to
declare the agreement invalid and lower the rent in case of striking disproportionality (20-25% above
the market rent). However, such cases are not typical as in practice the tenant would not enter into
the tenancy agreement without an agreement on the price.
As regards the landlord’s interests to provide for gradual increases corresponding to the inflation
rate, no solutions are provided. The Housing Act foresees that if the parties cannot agree on the
amount of the rent or the amount of the change, they may request the court to determine the
amount. However, taking into account the uncertainties regarding the length of the court procedure,
this possibility cannot be regarded as an adequate means to ensure a well-functioning tenancy
relationship. In such case, it is more likely for the tenant to terminate the tenancy agreement in case
of unilateral rent increase and disagreement.
The unpredictability of the future rent may thus affect the stability of tenancy relationships. We
would not argue for rent regulation (like in the “first generation of rent regulation”), but some
intervention, for instance regarding the indexation of the rent, may contribute to the predictability of
the future rent and favour longer-term tenancy relationships.
Parties are also entirely free to decide on the duration and on any possible prolongation of the
tenancy contract. The Housing Act merely provides that tenancy contracts may be concluded for a
determined period, up to the occurrence of a specific condition, or for an undetermined period. The
main difference between determined and undetermined contracts lays in the possibilities for
termination foreseen by law. Whereas in the case of tenancy contracts concluded for undetermined
period, the Housing Act and the new Civil Code provide for the right for both parties to terminate the
contract with an appropriate notice,12 this option is not foreseen in the case of contracts concluded
for a determined period. As mentioned above, this may not hinder the parties to provide for such a
possibility in tenancy contracts concluded for determined period too, thanks to the dispositive nature
of the pertaining regulations.
12
The Housing Act proposes 3 months for the landlord, and 15 days from the last day of the month for the
tenant; the new Civil Code, foreseen to enter into force on 15 March 2014, proposes a 45 day notice to be
presented by the 15th day of the month, for both parties.
15
For reasons explained below, the enforcement of the termination of contracts for an undetermined
period may entail significant risks for the landlord. Therefore they typically prefer to conclude short
term tenancy contracts, usually for one year. This way, they minimize the risks arising from lengthy
legal proceedings to terminate the contract and evict the tenant in the case of non-compliance.
However, this means that the interest of long-term tenants to have a multi-year contract cannot be
asserted. Indeed, on the side of the tenant, the practice of short-term tenancy contracts implies a
considerable uncertainty and an impossibility to consider tenancy as a stable and reliable housing
option for a mid- to long-term perspective.
3.2.2 Enforcement of termination, emptying of the dwelling
In principle, the cases of termination of the tenancy relationship by the landlord are adequately
addressed by the pertaining legislation; however, as demonstrated below, rightful conflict resolution
is lengthy and expensive to the extent that it discourages parties from following the legally
appropriate procedure.
The tenancy relationship may be terminated for several reasons, but from a practical perspective, the
most important cause is the case of non-compliance. The difficulties of enforcement and eviction
procedures represent a great risk for the landlord in particular in case the tenant refuses to pay the
rent or damages the dwelling.
The Housing Act provides that as a matter of principle, the landlord has the right to terminate the
contract in case the tenant refuses to pay the rent, behaves in an intolerable way or otherwise
breaches the contractual obligations. However, this right only gains practical effect if the landlord is
in a position to enforce his right to evict the tenant after the tenancy agreement was terminated.
Under Hungarian law, the tenant is entitled to the protection of his possession against everybody,
including the landlord. Consequently, the landlord is not entitled to take direct action, and risks being
convicted for vigilantism if they attempt to assert their right to their property. The landlord may only
rightfully enforce the emptying of the dwelling by means of judicial procedures and faces
imprisonment of 1 to 5 years in case of using any form of force or threat.
The rightful way of enforcing the termination of a tenancy agreement is by means of judicial
procedures. In case of tenancy contracts concluded for a determined period, the procedure is in
principle swift.13 There are however two eventualities possibly delaying eviction even in such
straight-forward cases: execution may be suspended one time, upon request of the tenant, for up to
6 months; and in the period between 1 December and 1 March, as a general rule, natural persons
may not be evicted.
In all other cases of termination of the tenancy relationship, such as the rightful termination by the
landlord of a tenancy contract because of the lack of rent payment, or damages to the dwelling by
the tenant, judicial execution needs to be preceded by civil litigation. Once the validity of the
termination was confirmed by the final verdict of the civil court, the landlord may initiate the non-
13
Within 60 days from the expiry of the contract, the landlord may ask for the emptying of the dwelling at the
local court by means of a non-litigious procedure. In this case, the local court decides upon the request within 5
days, requesting the executor to initiate the eviction within 3 days from the advancing of the costs. The
executor calls upon the emptying of the dwelling within 2 days and in case of disobedience, executes the
eviction on that day.
16
litigious execution procedure referred to above. This may however take months or even years (see
under 3.3.1), and the provision of the Housing Act foreseeing the payment of a “fee for the use of the
dwelling”, equal to the amount of rent, in case of the continued use of the flat without legal title,
gives little consolation to landlords in such cases.
This explains why – despite the risks of criminal behaviour as mentioned above – landlords often
choose to use direct or indirect forms of threat to convince their tenants to leave the dwelling (like
discontinuing the utility services, removing the door or windows etc.). A more rightful and elegant
solution is the conclusion of the tenancy contract in front of a notary public, including an explicit
undertaking on the side of the tenant to empty the dwelling in case the contract is terminated. Acts
prepared by notaries public are directly enforceable, so the enforcement procedure may be launched
without the lengthy civil litigation. The services of notaries public are however expensive, and the
costs of this solution prevent their application on a large scale.
Furthermore, in this case, the solution for the landlord may create new problems for the tenant. If
such clauses are adopted in contracts concluded before a notary public, the tenant effectively loses
its right to contest the validity of the termination by the landlord. Therefore, the tenant may end up
in a situation that is even more uncertain than short-term tenancy agreements.
3.2.3
Tax evasion
The vulnerability of tenancy relations is further underlined by the high level of tax evasion in this
field. In Hungary, there is no obligation to register tenancy agreements. According to the legal
provisions in force, the income from renting is subject to the general personal income tax (16%).
Furthermore, above a yearly income of HUF 1 million (approximately EUR 3,450), the landlord is
bound to pay a health security contribution of 14%. To a large extent, however, these rules remain
theoretical as the large majority of landlords avoid tax payment. In certain cases, they do so despite
the conclusion of a tenancy contract, in other cases by pretending that they are transferring the use
of their apartment for free. Both options entail high risks in case of a dispute among the parties.
In case a tenancy contract is concluded, tenants or even neighbours might denounce the landlord at
the tax authorities as a threat in conflict situations. The landlord therefore runs this additional risk in
order to improve his margin, and also compensates for the higher user cost of the PRS as a whole. In
the case of “free” use of dwellings, the rights and obligations of the parties are completely
unregulated, which puts them in an even more unsecure situation than in the case of tenancy
agreements. In case conflicts over the “free” use of dwellings end up in legal disputes, lengthy
procedures can be expected. At the end, the dissimulated tenancy agreement will be considered
according to its intended purpose, and the landlord may face criminal procedures for tax fraud.
3.2.4
Utility payments
The issue of the payment of utilities in the case of a tenancy relationship is not addressed in the
Housing Act. In practice, however, responsibility for utility arrears (namely delays in the payment of
electricity, gas, heating, water service fees) is a crucial element of the tenancy relationship.
The basic dilemma for the parties is who will have a contractual relationship with the service provider
(see Figure 3: Utility payment options). The party to the contract could be the condominium (in case
of a multi-apartment building); the landlord; or directly the tenant. In the first case, the
17
condominium bears the responsibility of payment towards the provider; the owner collects the
service fee from the tenant, and pays its costs to the condominium. In the second case, the landlord
and tenant agree to establish direct contract between the tenant and the service provider, which
could ease the responsibility on the landlord-owner. Very often, however, the landlord will end up
having secondary liability for the payment of the utility costs. And finally (in most cases in our
experience) the landlord will be in direct contractual contact with the service provider, and will also
have to arrange collection of fees with the tenant. In either of these cases, the final liability will most
likely fall on the owner of the apartment.
Figure 3: Utility payment options
service provider
contract
Condominium
cost sharing
arrangement
owner
owner
A option
owner
collection of fee
tenant
service provider
Condominium
Final
responsibility
owner
contract
owner
owner
B option
tenant
Condominium
service provider
contract
owner
C option
owner
collection of fee
tenant
18
owner
Among the different utility areas, the legislation concerning heating service explicitly provides for
secondary liability on the side of the owner (the only, recently introduced exception being the State
or municipalities in connection with the provision of housing for those having lost their home due to
their mortgage agreement). Furthermore, the legislation concerning the management of waste
specifically refers to the owner of the dwelling as the person entering into contract with the service
provider, which in practice would have a similar effect. In addition, although the legislation on the
provision of water services does not provide for such rules, a similar practice may be induced from
the recent amendment explicitly excluding the secondary liability of the state and the municipalities
in the cases relating to credit agreements mentioned above. Finally, although the legislation on
electricity and gas are silent on this issue, the practice of service providers would be to enforce
payment from the owner. This may even be done without explicit contractual provision, for instance
if the service provider refuses to make a change in the position of the user (i.e. to recognize the
owner as the user) as long as the arrears remain unpaid.
By way of conclusion, changing the contracts with the service provider may entail more risks than
advantages for the landlord. This way, the landlord loses control over the regularity of the payment
by the tenant, while maintaining secondary liability in the case of non-payment. (See options on
Error! Reference source not found..)
3.2.5
Residence
Under Hungarian law, as a matter of principle, registration of a new address (permanent address or
place of residence) is compulsory within three days of moving to a new place. Registration does not
entail new rights or affect existing ones regarding the use of the dwelling; instead, the address card
issued by the local authorities is necessary for handling the majority of the tenant’s administrative
issues, including the request of allowances or local services. For example, the inscription of children
in local nurseries and schools is only possible with a local address card.
The general practice of landlords has been, however, not to support the registration of tenants, for
multiple reasons. First, widespread tax evasion leads to landlords trying to avoid any form of formal
declaration of the tenancy relationship to local authorities. Second, landlords are afraid of the
administrative proceedings that might ensue if the tenant refuses to change registered address once
the tenancy contract is terminated.14 In view of the legal obligation of the tenant to register, and his
rightful interests to use local services, the denial of the landlord’s agreement to the registration
represents a misuse of right and could as such be attacked before the civil courts. This is however a
merely theoretical option, not only because of the length of procedures, but because the tenant may
be afraid of retaliation in the form of termination of the contract or rent increase. It is more common
for the tenant to enforce the landlord’s agreement by envisaging a declaration to the tax authorities.
As of the beginning of 2013, the rules regarding registration were amended, addressing these
problems as well. The new rules foresee that the agreement of the landlord is not necessary if the
tenant can prove by means of an appropriate act that he is entitled to the use of the dwelling. The
14
Indeed, the burden of proof imposed on the owner of the dwelling in order to cancel a fictive registration on
his address was subject to an examination of the ombudsman in 2010, concluding that a more effective system
of protection of owners was needed. In addition to the administrative difficulties and even more importantly,
probably due to the relevance of address registration in the socialist era, there is a general misbelief that
registration may in itself entitle the tenant to use or enter the dwelling.
19
modifications also foresee that the registered address is invalid if the right to use the dwelling no
longer exists by virtue of the relevant agreement, thereby easing the burden of proof of landlords in
case of expiry or termination of the tenancy agreement. In case of a valid tenancy contract, these
amendments certainly represent a positive step to resolve the conflicts over the registration of
tenants, even if their practical effect remains to be seen.
3.2.6
Damages by the tenant and, the landlord’s lack of compliance
A further considerable risk factor on the landlord’s side is the possible damages to the property
because of the misuse of the apartment by the tenant. This is particularly problematic in view of the
difficulties to enforce the termination of the tenancy contract as described above (under 3.2.2).
Although the Housing Act foresees the right of the landlord to terminate the contract in such cases,
the need for a civil litigation confirming the validity of the termination before the eviction procedure
may be initiated means that the tenant may remain in the dwelling for the entire duration of the
litigation, possibly for several years- continuing the misuse of the apartment and accumulating
further costs to the landlord.
However, lack of compliance with the terms of the contract and inappropriate behaviour may
only be a risk factor for the landlord. Typical problems include the deception of the tenant by
landlord regarding the characteristics of the dwelling; the landlord avoiding responsibility
maintaining the adequate quality of the dwelling; and frequent controls of the dwelling by
landlord, disrupting the undisturbed use of the dwelling by the tenant.
not
the
for
the
The Housing Act does not provide for a straightforward right of the tenant to terminate the contract
in case of lack of compliance or inappropriate behaviour of the landlord. The provisions of the
Housing Act obliging the landlord to warrant the fulfilment of legal and contractual obligations in
accordance with the rules of the Civil Code further underline the importance of the individual
contract’s content.
3.3
Managing the risks
The consequence of the under-regulation is that there is a broad range of possible disputes between
the landlords and the tenants. It would be the task of the court system to arrange the conflicts, but if
it does not work efficiently, the parties of the dispute will turn towards other solutions, introducing
other intermediary actors (like real estate agents, debt-collection companies, etc.)
3.3.1
Handling of legal disputes
Disputes arising from tenancy contracts are handled by the civil courts according to the general rules
of civil procedures. Despite the legislative efforts to limit the possibilities to unduly prolong such
procedures, their length is still not predictable for the parties and may take several years.15 This
15
As a matter of fact, a large number of cases lodged against Hungary before the European Court of Human
Rights concern the violation of the right to trial within reasonable time (part of the right of fair trial, Article 6,
§1 of the European Convention of Human Rights). In 2010, from the 66 cases pending, 46 concerned excess of
the reasonable time. In 2012, the European Court of Human rights ruled against Hungary in 9 cases concerning
the undue prolongation of judicial procedures, involving a compensation of HUF 132 million (approximately
EUR 460,000) for the parties affected.
20
general phenomenon affects tenancy relationships as well. In 2010, the European Court of Human
Rights confirmed the violation of the right to trial within reasonable time in a case brought against
Hungary by a landlord concerning proceedings initiated in 1992, in order to declare the invalidity of a
contract and carry out an eviction procedure.16 In this case, the final decision rejecting the applicant’s
claim was taken by the Hungarian Supreme Court in 2006, nearly 14 years after the initiation of the
proceedings.
Under these circumstances, the dispute-handling mechanisms cannot be considered effective
enough to compensate for the under-regulation of tenancy regulations and favouring long-term
tenancy agreements. Indeed, the areas where swift and effective judicial and enforcement
procedures would be most needed are the enforcement of the termination of the agreement and the
subsequent eviction procedures.
As long as such mechanisms are not available, both the tenants and the landlord try to manage the
risk involved in the rental contracts by other, often informal means, but the solutions developed in
practice cannot override the negative effects of under-regulation.
3.3.2
Real estate agents and other informal solution
Real estate agents are important actors in the market. In the beginning they were present in the
high-end market (typically for foreigners), but their role seems to have expanded. (Though there is
no reliable information available on their weight in the market.)
Based on interviews with real estate agents, we can conclude that they typically do not take formal
responsibility for the risks entailed to tenant selection. Therefore if the selected tenant does not pay
under a contract of one year, they do not compensate the landlord. They could, nonetheless, feel a
kind of personal responsibility (although strictly on an informal level), and might consequently offer a
new tenant without compensation.
There were several attempts on behalf of real estate agency organisations to introduce a blacklist of
“bad tenants”, but as it violates the privacy law, this kind of list remains informal, limited to a
number of agents that share their negative experience regarding a set of former tenants. A typical
risk management strategy of accidental landlords is to rent the apartment to people within their
personal network – after a friend or relative gives some sort of a good reference) at below-market
rent level (See Erdősi, et al 2000).
Pre-paid rent guarantee is generally used by the landlords against the non-payment, generally at the
amount of 1 to 3 months’ rent. This acts as a filter for the possible the tenants, as the poorest
household are not able to pay the 2 or 3 month rent in advance. Multinational companies contract to
real estate agents (companies) to manage their rental contracts, and in this case they guarantee the
rent payment which makes rent guarantee payment unnecessary.
Regular control of the tenant’s behaviour (related to payment and state of the dwelling) is another
important part of risk-management, which is not easy to manage for accidental landlords. However,
in the case of a professional investor (who currently manages more than 160 units in Nyiregyhaza,
Eastern Hungary) it is crucial to employ full-time staff to collect rent, regularly control due payment
16
Case No. 39382/06., see the Information Bulletin of the International Relations and European Law Office of
the Hungarian Supreme Court, I./7. p. 28.
21
of utility, and ensure the proper use of the apartments. These enforcement mechanisms, however,
are often doubtful as they may involve the use of physical force or threats.
4. Conclusion
Private rental sector has been a neglected area of the housing policy. The international experiences
proved that a well-regulated PRS could contribute to the financial and allocative efficiency of the
housing sector, and even may help to manage the problems of socially needy households (like social
rental agencies). The paper developed an explanation of the limited role of the PRS, and presented
the typical conflicts that further impede its development.
The two main factors (financial/fiscal instruments and the legal under-regulation) were
demonstrated. We can conclude that the PRS represents both a market failure and a policy failure.
On the one hand, no efficient institutions were developed (within the notably liberal legal regulation)
to manage the most typically surfacing risks of the market. On the other hand, a similarly liberal
approach can be tracked on the tax/subsidy policy, which provides generous support to ownership,
some level of social housing, but virtually no financial help for market rent: it seems as if policy
makers still considered private rental as a high-end market good that needs no further subvention,
instead of a possible means to alleviate the situation of moderate income households with no
available social housing. Even when we consider the financial side of PRS that is independent of
subsidization policy, the costs related to legal conflict management and slow procedure make private
rental a more expensive tenure choice, thus excluding the social groups that face difficulties
financing their own property.
Regarding the legal side, we do accept the arguments of those who warn about the risks of overregulation. While under-regulation leads to the conflicts described above, over-regulation could be
just as harmful – if not more so – to the sector. Instead, we support the solution of gradually
introducing dispositive rules that address the typical conflict situations that would apply in lack of a
different agreement between the parties. Moreover, as tenancy regulation has been a neglected
area of legal research in Hungary to date, we encourage critical academic analysis of the functioning
of the rules, and in particular, a comparative analysis of possible models used in other EU member
states. It would therefore be advisable to foster research into these areas and carry out careful
impact assessment before initiating legislative changes. In the meantime, a more favourable
environment should be created by clarifying the existing rules, making them available to the public in
a user-friendly manner, and providing legal assistance to potential landlords and tenants.
Based on the cases examined in this paper, it seems that on many account politics have been familiar
with the problems and conflicts within the PRS; however, no clear political or institutional interest
can be detected to undertake comprehensive changes. There is, in turn, a certain level of interest for
the conservation of the current state. While the social groups with the strongest influence on the
institutional setup – namely the middle and higher income classes – have not faced remarkable
difficulties stemming from the lack of varied tenure choices, vulnerable groups would clearly profit
from an affordable and reliable rental sector, but have limited means to assert their interests. On the
other hand, a number of institutional actors within the housing framework – interest groups
representing notaries public, bailiffs or factoring companies – have vested interest in maintaining the
22
current status quo. This keeps discouraging potential tenants and landlords, who seek safer solutions
(even if their legality is unclear) and raise the expenses of the procedures pertaining to tenancy
relations; thus limiting the development of the PRS.
In order to support the development of the PRS towards a more flexible and reliable setup, we
propose the introduction of a tenure neutral housing tax and subsidy system, that does not
discriminate to the advantage of ownership against the rental tenure. This policy could hurt middle
class interests, and this is the reason decision makers are often reluctant to move in this direction. In
Hungary, it would mean either the introduction of imputed rent, that is, taxing owner occupation
(placing a burden on the middle class); or using tax revenue to compensate the actors in the rental
sector for their over-burden.
23
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