Fiscal solutions lean on crucial residential housing industry

The Greek economy cannot expect much of a boost from a key sector in the months ahead, increasing the likelihood it will shrink for a second consecutive year. The residential real estate market has experienced a milder recession in Greece than in other EU countries, such as the UK, Ireland or Spain, but it risks entering a protracted downward cycle sponsored by the state. Pressed to close the budget gap to 9.1 percent of gross domestic product in 2010 from a projected 12.7 percent of GDP this year, the government has made it clear it will tax real estate property heavier than before in a bid to raise more revenues and achieve a more equitable burden. A look at the 2010 budget confirms it. The government expects to collect 293 million euros from the transaction tax next year compared to the 353 million seen in 2009 and 534 million in 2008. In other words, the state expects fewer real estate transactions to take place in 2010 compared to this year. Moreover, the state is looking to collect 861 million euros from the new property tax in addition to 350 million from the current tax, known as ETAK, for 2008 and 2009, which has yet to be collected. Of course, the latter raises a serious issue. Should this delay in the collection of overdue taxes be attributed to the incompetence of the relevant tax authorities or the political will by the new government to show a larger budget deficit in 2009 and a smaller one in 2010 to take the credit for lowering it as conservative opposition politicians charge? No one knows for sure. It may be both. The state is also counting on getting another 180 million euros from the one-off extra charge on properties worth more than 400,000 euros each. In other words, the government is aiming to collect some 1.4 billion euros from the general tax on property alone. Since this is a major source of revenues for the budget and the government will aim for even more revenues in 2011 and beyond, it is easy to conclude it is likely to tax property more heavily in the years ahead. So, the new tax regime on property, including the reimposition of the inheritance tax and the transaction tax, along with a likely hike in objective property value used to tax properties, will work more as a drag than a boost for the sector. Unfortunately, this is not the only negative effect to hit the local residential real estate sector. The expected increase in unemployment, uncertainty about the economic outlook and the planned increase in effective tax rates on personal and corporate incomes are going to hurt households’ purchasing power and therefore demand for housing. The fact that interest rates on new mortgages are generally low and banks are more willing to finance a larger chunk of a home’s market value should be considered a positive factor. However, a lot depends on the banks’ own access to fresh funds in the world capital markets as the European Central Bank (ECB) unwinds its special operations for providing liquidity and the domestic deposit base grows at a slower pace due to recession and stagnation of disposable incomes. So, demand for new houses and apartments should be subdued but the sharp drop in permits issued to build new houses and the subsequent fall in aggregate residential investment, albeit at a lower rate than the 19 percent drop posted in the first three quarters of 2009, should keep the stock of unsold, newly built houses relatively steady. One may say this is explained by the new government’s policy decision to divert precious resources from the real estate industry to other sectors, comprising the so-called green economy, and may be right. One could also mention that to tax the country’s major source of household wealth more heavily during times of fiscal distress may also be correct. We should remember that real estate holdings account for close to 80 percent or more of Greek households’ total wealth, according to some studies. Whatever the reason, this is not a policy that is consistent with the pre-election promise made by the newly elected Socialist government and repeated since then – that is, to achieve fiscal consolidation without hurting the economy’s prospects in 2010 much. By taking measures that are clearly a drag on an important sector, the government risks missing one of its targets – perhaps both of them.

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