Prospective homebuyers are facing a number of adverse factors in the new year, notably the government’s scheduled increase of the so-called objective property prices for tax purposes, the introduction of value-added tax (VAT) on new buildings and higher mortgage rates. As regards mortgage rates, analysts argue that the hike of 25 basis points in the basic euro rate which the European Central Bank (ECB) decided on Thursday will have a very limited impact on housing costs and loan repayments. They also note that the ECB announcement was rather upbeat in the sense that it did not foresee another hike anytime soon. On the other hand, real estate pundits take the view that the projected fall in demand – after the surge in property transactions this year – and the excess supply of houses not subject to VAT will put downward pressure on prices. Such factors are expected to at least partly offset upward pressures. Bank of Greece analyst Theodoros Mitrakos argues that the significant rise in property prices this year is largely technical and due to the upheaval created by the announcements of the hike in objective prices and changes in taxation. ‘Price correction in next 2 years’ «On the basis of the available data, we estimate that the average increase in property prices this year will be slightly higher than 10 percent. In 2006, however, we expect a considerable slowdown in rising prices, chiefly due to the excessive supply of new homes – but I would not venture to say that prices will fall. Notwithstanding any surprises, I consider that the property market will undergo a correction in the next two years,» he said. As regards the increases in objective rates, which will pose the main burden on house buyers in 2006, Finance Ministry sources say they will not exceed 30 percent and it will be implemented in phases until 2008. Realty market players on the whole consider the introduction of VAT on new constructions, officially presented in a draft bill last week, a step in the right direction, but say the announcement of higher objective prices should not have preceded it. They also say that the bill is too complex. According to Technical Chamber of Greece (TEE) President Yiannis Alavanos, «the difficult and improperly prepared introduction of VAT should not have been burdened with this labyrinth of new taxes and arrangements.» He also blamed the government for its handling of the matter the last few months. «The prospect of homebuyers having to pay eight percentage points of additional tax in relation to that currently in force is no longer an issue since the way the introduction of VAT was announced has already pushed up prices by 20-30 percent in just six months,» he said. Tax specialist Orestis Seimenis argues in much the same spirit. «Speculation has dominated the market in the last three years, and, as a result, market prices have risen 150 percent without anyone protesting it. In a sense, after such a steep rise, the 19 percent VAT is no particular problem. However, I consider that with objective rates going up 30 percent, in combination with VAT, the net extra burden for a prospective homebuyer in 2006 will be about 13.5 percent,» he said. Construction firms satisfied In contrast, representatives of large construction companies seem satisfied, considering that the new tax regime will rationalize the housing market and will quell extensive tax evasion in the sector. At the same time, they take the view that an actual fall in housing prices cannot be ruled out since the new system tends to allow the incorporation of VAT into costs.