Can a tax cut breathe life into the Spanish property market?

An emergency meeting of Spanish government ministers announced a cut in the rate of IVA (Spanish VAT) on new build houses from 8% to 4%. The tax had only been raised from 7% thirteen months ago. The abrupt change of policy is aimed at reviving the housing market.

Something certainly needs to be done if Spain is to start to grow its economy. Before the crash the construction sector accounted for more than 15% of economic output; now it seems to be dead on its feet. Recent figures showed Spanish construction activity fell 43% in the year to June, a steeper fall than anywhere else in Europe. Will the tax cut help?

The idea is that this will help banks and property developers offload a lot of the new build properties that have lain empty since the housing crash hit hard in 2008. Estimates vary but their could be up to a million empty and unsold units weighing down on the whole market. New building will remain depressed until the backlog is at least partly cleared.

4% is a chunky reduction - around €5-8,000 off the purchase price for an average property. The reduction is temporary - just until the end of the current year - which may have the effect of bringing forward some activity and creating some momentum.

But there are doubts - transfer tax on existing home sales remains at 7-8% (depending on the area). Furthermore house prices still appear high in relation to incomes; "stratospherically" so according to one economist who produced a graph showing that average prices are more than 6 times annual average incomes in Spain; much higher than the UK and US: Spanish house prices still high

Banks don't have much of an incentive to shift properties while they hold them on their books at cost; selling them at current market prices would crystalise their losses and actually make their balance sheets look worse.

The tax cut may be helpful to those with property deals in the pipeline but don't expect it to trigger a wider revival in the Spanish property market.

Related on our website:

Capital Gains Tax on Spanish Property Sales

Ten Reasons Spanish Property Prices Will Stay Depressed

The next thing to hit Spanish property?

I posted back in January about the outlook for Spanish property prices in 2010 and made the point that there was a threat from the banks. Not just a continuing reluctance to lend on favourable terms, even though that is a big factor which I have seen first hand throughout the year so far. But also because the banks are getting more aggressive at getting rid of the mountain of properties they have been forced to take onto their books.

Previously they had been sitting on unsold properties because if they sold them at heavy discounts that would involve taking a loss. The Bank of Spain had changed the rules to discourage this by asking them to value their property portfolios more realistically. The fear was they would sell at any price. A client told me of a 50% reduction he got on a villa he is buying from the banks so maybe this is being borne out.

Now I read on a forum that the Bank of Spain has also told the construction companies and property developers something similar. To quote:

"The Bank of Spain (that regulates Spanish banking) has told the banks and construction companies that they must value unsold property at 60% of its official valuation (tasacion). This is important because these companies have been unwilling to sell property as discounted rates over the past few years because they have been able to put 100% of the official valuation onto their books. i.e. their unsold properties are worth more to them unsold, than if they actually sell them.

Now they have to value at 60% tasacion, this should incentivise them to lower the prices of their property and actually get them sold. Therefore hopefully (or not depending on your situation) we'll be seeing big drops in Spanish property prices in the next 12 months."

This together with the austerity measures announced and turmoil in the Cajas and the markets (Spanish stock market down 11% in May), suggests things might be dificult in the property market for the rest of the year. The austerity measures include a rise in VAT on new properties and possibly a rise in transfer tax from 7% to 8% in most areas for second-hand sales (see explanation of how IVA is charged on Spanish property on our website IVA on property sales).

Related posts and articles:

Why Spanish Property Prices Will Stay Depressed

Spain's economic crisis turns nasty

2010 Spanish property market outlook

New Year - fresh dawn of optimism on the Spanish property front? I have posted on Spanish property prices a couple of times mainly to update readers on my downbeat August article "Ten Reasons Why Spanish Property Prices Will Stay Depressed". The ten reasons basically hold but I was hoping for some reasons for cheer by now. Perhaps some sign of prices stabilising with Euro interest rates set to remain low and economic recovery elsewhere in Europe under way.

Instead the New Year has bought bad news with a depressing ring of familiarity to it. First up we have news that several more British owned properties in Almeria are to be demolished as they are illegal builds. The attendant publicity in The Telegraph, Sun, Mail etc could hardly be a worse start to 2010 for those charged with persuading Brits that buying Spanish property is safe. "Happy New Year - We're Going to Bulldoze your homes" was the Mail headline.

http://www.dailymail.co.uk/news/worldnews/article-1239219/Bulldozer-threat-Britons-villas-Expats-Spain-fight-save-homes.html

Secondly came headlines about a tidal wave of repossessions and banks dumping their property portfolios onto the market as a result of changes to accounting rules. The respected website spanishpropertyinsight has the full story:

http://www.spanishpropertyinsight.com/buff/2010/01/11/tidal-wave-of-repossessions-in-2010/

Where does this leave us? With many of my 10 reasons why property prices will remain depressed still in place (particularly the surplus of properties on the market and sterling weakness) 2010 doesn't look to clever. BBVA said in December they expected a further 12% fall in 2010 - worse than the 9% seen in 2009. Let's hope things are better than that.