ECONOMY

Property market further upset by prospect of VAT

The confusion prevailing over the government’s intentions as regards property taxes is casting a heavy cloud of uncertainty over the market. According to Economy and Finance Ministry sources, the property values officially determined for tax purposes according to area – otherwise known as «objective» – which are revised every two to three years, will go up again in 2005. As objective values are as a rule lower than market values, a revision is considered bound to drive prices still higher and cause a further drop in the already weak buying interest. The flagging interest is evidenced by the proliferation of sale or rental notices throughout the Attica region. Newly built apartments are not exempt from the trend, but as developers still appear reluctant to bring prices down, a great number of these remain empty. The situation is not seen as changing materially, even if the government proceeds in the new year to reduce the property transfer tax and raise the tax-exemption ceilings, as the benefits would wither under the revision of objective values. On the whole, the Economy Ministry is under strong pressure from business and construction interests to adopt measures that will revive the flagging housing market. However, the government is currently anxious to replenish state coffers and eager to tap the source of taxes on property transfers, inheritances and parental donations. VAT Other ministry sources take the view that the new objective values will be announced next year but will take effect in 2006, simultaneously with the introduction on January 1 of that year of value-added tax (VAT) on new buildings, which Economy and Finance Minister Giorgos Alogoskoufis announced on Saturday. They argue that postponing the date of introduction of objective values would be an evident boost to the housing market by encouraging people to buy before they come into effect. Opinion among developers seems to be divided over VAT. The majority of small and medium-sized firms, which account for the biggest part of the market, take the view that the imposition of VAT will create a huge tax burden, making house prices out of reach for a large segment of the population. On the other hand, the proponents of VAT argue that it will help rationalize the market although most of them seem to doubt the wisdom of setting it at 18 percent. At the same time, the idea of reducing the property transfer tax to 9 percent is regarded as inadequate, as it will remain among the highest in Europe. «In a sensitive period for the realty market, after the Olympic Games, what we need is tranquillity rather than statements that cause an upheaval,» says the president of the Constructors’ Association of Greece, Dimitris Kapsimalis. «The introduction of VAT virtually abolished the tax-free regime for first-time home buyers, while the imposition of the tax on market values essentially drives up the cost of the property by between 22 percent and 30 percent. Given the current level of prices, this will lead the property market to deep recession, along with at least 10 sectors that are directly related to construction,» Kapsimalis adds. He also describes as impermissible the combined revision of objective prices in 2005 and the introduction of VAT in 2006, as this would create «two waves» of price rises. By contrast, Antonis Leousis, director of real estate firm Alpha Astika Akinita, takes the view that VAT will rationalize the housing construction sector as it will create equal terms for all, regardless of the size of the construction firm. «I believe that initially it will be the subcontractors who will face the biggest problem, as they have been used to working without invoices and that’s where the biggest source of tax evasion in housing is located. The market must be legalized; we cannot go on protecting those working illegally for ever. Over and above that, if VAT was lower than 18 percent, it would be better,» he says. Cybarco Realty Development’s managing director, Akis Kyratzis, concurs. «Eighteen percent is too high and it must be clarified whether it will be charged to the developer who buys the land. If so, I believe it will not have a negative effect on the price of the final product. Otherwise, the hike will be significant for the buyer. According to our calculations, if VAT is set at 6-8 percent and the property transfer tax is reduced by 50 percent, there could even be a fall in property prices, with a parallel growth in public revenues. I believe the introduction of VAT will help rationalize the sector, but the impact on prices will depend on how it is applied,» he says. Concern over the future of the property market has been heightened by recent Bank of Greece reports which show a significant drop in property prices, with a corresponding fall in the disbursement of mortgage loans. The situation is expected to worsen next month, when 3,500 new homes and a considerable amount of office space are expected to come onto the market. According to data of the National Statistics Service, in the first five months of the year new construction in the country as a whole declined 9.1 percent in terms of volume, 7.1 percent in terms of area and 2.7 percent in terms of the number of licenses. The biggest drop was recorded in the Attica region, 26.9 percent.