No, only a reservation is required. In fact, it is recommended you do not pay for your ticket (or hotel) until after your visa is secured.
I do not know how hostels operate as I have never stayed in one (except boarding school), but for hotels you generally reserve (with your credit card) and then pay when you check-in.
To do this you must book at the hotel's website and not some third party travel service (like expedia/travelocity/hotels.com) because these properties have pre-booked the rooms and need to sell them to you outright.
For a definitive source on this, you can visit the embassy/foreign mission website of any Schengen member state, or a generic site like schengenvisainfo.com.
Here is a snippet from the Netherlands Embassy in Kuwait (pdf link, relevant info pasted here, with my emphasis):
APPLICATION REQUIREMENTS FOR TOURIST VISA
- Duly filled application form with 1 recent photograph (NOT OLDER THEN 6 MONTHS) with white or grey background color passport size.
- Passport valid at least 3 months after expiry date of the visa.
- Copy of holder page travel document.
- Copy of ID card if applicable.
- Previous passport if any.
- Copy of flight reservation and hotel booking for the entire period of stay in Schengen Area.
- Copy of travel insurance, minimum coverage €30,000 (thirty thousand) valid for Schengen Area for the duration of your stay.
- The visa fee equivalent of €60.00 (sixty) in KWD, cash only.
- Letter from the employer/sponsor stating how long you have been working for the company, what is your designation (position) and how
much is your monthly salary (Kuwaiti nationals exempted).
- Valid Kuwaiti residence permit endorsed in passport.
- Proof of social/ economic ties; original bank statements of the last 6 months (Kuwaiti nationals exempted).
Note that this only applies for tourist visas, for business visas you don't need to show a hotel reservation.