Dominic Swire -

The Czech government will be watching the European Court of Human Rights nervously in the next few weeks as it is due to rule on a case that could cost it over €1.8 billion and turn the property market on its head.

A group of Czech landlords are suing the government for failing to deal with the longstanding problem of rent control. A hangover from Communism, rents have been artificially held down to a fraction of their true market value and landlords say the rules are losing them money unfairly.

The Czech government has been here before. In June 2000, the country's Constitutional Court ruled that controlled rent violates the Bill of Rights and gave the government 18 months to tackle the problem.

Five years later there was still no bill dealing with rent control and the lack of action prompted the landlords to seek justice in the courts in Strasbourg.

TOO LITTLE, TOO LATE

The government is now scrambling to head the case off and recently introduced a draft law that would raise rents gradually over the next four years. Radko Martinek, minister for regional development in the Czech Republic, says the bill is due to be passed soon, but the landlords say it is too little, too late.

While rent control is not exclusive to the Czech Republic (in New York apartments still go for half the market rate), critics argue the levels in the Czech Republic are so low they are hurting the economy. Tomas Simecek, president of the Association of House Owners, complains that landlords can't even cover basic maintenance costs.

“What we are suggesting,” says Simecek, “is that it's against the principle of fundamental human rights to regulate below the level of simple maintenance.”

Simecek says the landlord association went to the European Court because it was the next step after the government ignored the decision of the constitutional court, the highest court in the land.

A study by the Czech Republic's Institute of Judicial Assessment showed the minimum rent a landlord needs to charge in order to cover the basic upkeep of his apartment is 3% of the corresponding purchase price. In most other European countries rents average around 7% of the purchase price; in the Czech Republic rents are closer to 1.2%, according to official figures. And Simecek says the real figures are even lower, as the study is three years old. Controlled rents have fallen in real terms thanks to inflation, while rents on the open market have risen along with the ballooning cost of buying apartments.

The result is landlords are forced to contribute to the social safety net, which is the government's job, says Simecek.

“If rent is controlled below this level, it means you are effectively introducing a certain social allowance to be paid to the tenant by the landlord because he is losing on what he must spend on his property,” he says.

GRADUAL RISE

The government's new bill calls for a 24% hike in rents over four years (depending on location) starting in January 2007. Simecek is not impressed. At this rate of increase many rents will not even reach half of their market value by the end of the decade.

The Association of House Owners are pushing for an immediate hike in rent levels to 3% of the current market value, that will allow them to cover basic maintenance costs, followed by a gradual increase thereafter. But the government intends to put up a fight.

“The Ministry won't agree with this proposal,”

says Martinek tartly. “Firstly, after such a long period of 'doing nothing,' it is not possible to solve the problem overnight. Therefore, closing the gap will be spread out to four years.

Secondly, why should the Government guarantee all landlords a safe undertaking and enable them to cover costs regardless of the situation of the local market?”

It is not clear if the draft law will derail the Strasbourg ruling, but the Czech landlords are optimistic. In February 2002, the Polish house owner Maria Hutten Czepska was successful in a similar case brought against the Polish government, which was forced to raise rents and pay compensation to landlords.

Should the same happen in the Czech Republic, it is estimated that claims could amount to tens of billions of Czech koruna.

This figure would be made up of compensation claims from landlords dating back to June 2000, when the constitutional court made its original ruling that regulated rent was unfair.

However, until the European Court makes its decision the exact figure is up in the air.

Vaclav Verner, an economist at HVB Bank, calculates that landlords across the country could be losing around €700 million per year, although he thinks it highly unlikely the Czech government will be fined the full amount covering the six years since the 2000 decision, which would be a whopping €4.2 billion. Still, Simecek reckons it could be in the region of €1.8 billion, although the Czech Academy of Sciences predicts a more cautious €1.4 billion.

A DRAG ON THE ECONOMY

Landlords just want to be paid the market rate, but analysts say the problem of controlled rents causes wider economic problems.

They say it's responsible for decrepit buildings, artificially high unregulated rents, and being more of a boon for the rich rather than an aide to the poor. Rent control has spawned a black market as many nominal tenants make a little on the side by illegally sub-letting their apartments - income that is neither taxed nor gets into the GDP figures and is a billion-koruna business, according to a study by the Czech Academy of Sciences.

And some say rent controls cause unemployment and stymie regional development.

Pavel Sobisek, chief economist at HVB Bank, argues that rent control reduces the stock of apartments and so drives up the price of unregulated rents, which can make it prohibitively expensive for people to find work in the large cities. If regulated rent were abolished, uncontrolled rent could fall by as much as a half, reckons Sobisek.The problem works in reverse too: people are reluctant to give up apartments if the rent is controlled making the work force less mobile.

“If there was a difference in the cost of housing, many people who don't need to be near new jobs, for example pensioners, would definitely find more luxurious housing in North Bohemia. But it makes no sense for them to move now because they are paying the same price in Prague as they would be paying there,” says Simecek.

“The most vulnerable group - pensioners - are spending something like 12-13% [of disposable income on rent]. The average in Europe is expected to be around 30% so there's no problem increasing the rent, especially if you introduce some social allowances system,” he says.

Still, it is usually the rich who benefit most from rent control. Even Martinek concedes this point. “Unfortunately, it's true. It's a legacy of the past when rent regulation started to cover all rented dwellings regardless of the social status of tenants.”

Simecek goes further, claiming that the real reason for the Czech government's inability to deal with this problem is because many ministers - or the “Communist upperclass,”

as he puts it - are actually living in rent controlled accommodation themselves, a charge that Martinek denies. He says his apartment is not rent controlled, but added that he couldn't speak for his colleagues.