Taxes on buying a property in Spain are more than double the European average, with no moral or economic justification. The stupidity of it.
I recently spotted an article in the Spanish daily El Mundo reporting that taxes you pay when buying a home in Spain are 7.9% on average, compared to a EU average of 4.5% (the source was a‘Doing Business’ report from the World Bank). The average for all OECD countries is 4.1%. I haven’t managed to find the source report to check the data, so I’m taking it at face value.
The best graphic I could find in a hurry was the one above, from the OECD for 2009, showing transaction costs for both buyer and seller (buyer in red). Back then Spain was already at the high end of the ranking, and it has since gone up.
The Spanish average disguises big differences between regions for the transfer tax on resale properties (ITP), from a high of 10% in regions like Catalonia and the Valencian Community, to a low of 6% in Madrid (and 3.1% in the city enclaves of Ceuta and Melilla, on the coast of Morocco). VAT on new homes is 10% in all regions except the Canaries, where it is 7%.
Then there are other transaction costs to bear in mind like notary fees, registry fees, stamp duty, banking fees, and legal fees. The transaction costs involved in buying a home in Spain often add up to more than 10%, especially if you use a mortgage, which most middle-class buyers need to do.
KILLING THE GOOSE
If such high taxes on property purchase meant increased tax revenues that would be one reason to justify them. However, they almost certainly mean less revenues as high tax rates lead to lower transaction volumes. High tax rates reduce the tax base when it comes to transactions that people can live without.
There is an optimum transaction tax rate on home purchase that brings in the most revenue for the state, and it is nowhere near 10%.
Regional governments, with the exception of Madrid and the Canaries, don’t seem to understand this, or simply don’t care about the consequences of their tax policies. This policy really hurts middle-class families buying homes. Do the politicians care?
The consequences of high transaction costs on property purchase are well known. When taxes are too high they:
- Lower tax revenues for the state
- Encourage people to pay in cash under the table
- Reduce labour mobility
- Suppress the positive economic impact that home sales can have on the economy
- Shut many families out of the housing market
- De-capitalise middle-class families just because they need to buy a home
- Reduce the quality of housing by forcing developers to lower the spec.
- Discourage foreigners from buying property in Spain
- Exacerbate a property crash with bitter consequences for everyone caught up in it
- Make people like me want to tear my hair out (what’s left of it, that is)
All this against the backdrop of a dramatic housing bust that has lasted for eight years. The least our enlightened leaders could have done was reduce transaction costs to give middle-class families a break. As it happens, they raised them in many areas.
Are there any good arguments for such high transaction costs on buying a home? Am I missing something?