The increase in property values officially determined for tax purposes according to area – also known as «objective values» – from next January will bring considerable rises in prices in at least 31 areas of the capital, where objective and market prices diverge by at least 85 percent. The chart shows this massive difference, measured by using data on newly built first-floor apartments. The emerging pattern is that the cheaper the area, the greater the divergence becomes. This margin of difference is attributed to the lack of determination by the previous government during the last readjustment of objective values in March 2001. For its part, the Economy and Finance Ministry is examining a readjustment of objective values by taking the average price in a given area to prevent prices from shooting up; at the same time, the imminent imposition of value-added tax (VAT) on the construction of new buildings aims at rationalizing the market and limiting tax evasion in construction. Furthermore, owners of property that has been transferred at least once will obtain a considerable competitive advantage in transferring their real estate as they will not have to pay VAT. Market insiders appear sanguine and acknowledge the imposition of VAT as a measure in the right direction, while the end-result will be determined by the way the law will be enforced. After the initial shock, they say, the market will regain its balance, while transparency in transactions may boost competition, benefiting the consumer. Nikos Yianoullelis, a real estate consultant, says «imposing VAT the right way will not lead to price increases, but prospective house-buyers should be particularly careful until the market has stabilized again.» Other market observers specifically refer to the scaremongering about the market crumbling after the Olympics which never proved true, as the housing market recorded a limited and almost uniform slowdown and is now headed toward stabilization. Nikos Hadzitsolis, CEO of the «Axies» chartered surveyors (a member of the Lambert Smith Hampton group), applauds the imposition of VAT because «it brings the Greek market closer to international standards and facilitates the attraction of foreign investors by simplifying the tax system – provided that the transference tax is abolished, otherwise it will have a negative effect on prices.» Financial analysts say values may be able to stay at current levels with indications of a bubble disappearing. The market is adapting, guided by the law of supply and demand, which now appears at more rational levels compared to the recent past, while construction activity is limited, responding to shrinking demand. Antonis Leousis, general director of Alpha City Estates says: «The timing is good as subcontractors’ projects have begun to come under pressure. For the proper enforcement of the measure, though, the new objective values should approach real prices, but without meeting them.» In this climate, the recent references by Economy Minister Giorgos Alogoskoufis to forthcoming changes in property taxation through the readjustment of objective values and the imposition of VAT (probably 18 percent) were a good pretext for the market to start developing disaster scenarios. Dimitris Kapsimalis, president of the Building Constructors Association, suggests that «in a period when the market is in equilibrium, some measures, such as raising prices by more than 30 percent are promoted, upsetting the sector. Greeks will have to live in worse houses in the future, as their salaries will never increase by as much.» Yet although the buyers’ tax burden after the readjustment will be substantial in some areas, the government’s economists decided that the state’s loss of revenue cannot continue to the benefit of certain professional groups. Repeated delays in property taxation reform have offered contractors scope for huge profits, often through extensive tax evasion. The great demand after the drop in interest rates took prices to unprecedented levels through the excuse of expensive land. Especially in exclusively residential areas, contractors are today in a strong position to determine prices, as many of them develop buildings with their own capital, securing stronger resistance at times of a fall in demand. Protecting the sector This March, the government is expected to present in Parliament the bill aimed at fighting tax evasion in the property market, spurred by the fact that, in the last few years, evasion has grown out of control. Apart from VAT, the bill will include the abolition of Property Transfer Tax and raises in tax exemption rates in a number of transactions. VAT on new properties has for years been a bone of contention between Greece and the EU as the previous government lacked the boldness to harmonize with the EU directive and kept delaying its implementation. Smaller contractors – the majority in the sector – were reacting angrily to any such reform, yet many, via undervaluation and the purchases of materials without receipts, reduced their costs significantly but still put very high price tags on houses, particularly during the stock market rise. Tax evasion, mainly by a section of contractors, reached tens of millions of euros, with construction firms having the worst evasion cases, according to recent financial crimes squad (SDOE) data. The government is now looking at ways to ease the added burden on property buyers. Economy Ministry agencies recommend a 30 percent medium-term increase in objective prices for old buildings’ transfers and the creation of an objective system to define the value of new buildings, effectively bridging the gap between the current objective and real prices. In practice, the tax authorities will from the new year (2006) use two prices in property sales: The new objective values for old properties and the added objective values for the newly built ones. Finally, the prospect of changes in the market is also expected to create a technical surge in property demand by the end of 2005, bringing millions of euros in the state coffers, at a time when they are much needed. The new objective values will be announced by this summer, Alogoskoufis has stated.