Spanish transaction costs are double the European average

Transaction costs on property, Spain and other OECD countries.

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?

Comments

comments

6 thoughts on “Spanish transaction costs are double the European average”

  1. Profile photo of rojoybagorojoybago

    Mark, these taxes are quite ridiculous and a huge impediment to increasing residential and commercial property transactions. What about the Plus Valia tax you get hit with when you sell?, not to mention the capital gains tax on main residences if don’t reinvest proceeds in another similarly priced property?

    They love sitting targets here; another one is taxes on the nautical world which are at least ten times higher than any other Euro country…. the sea is reserved for the rich here, unlike other countries which encourage youngsters to sail etc..

    If it wasn’t for the sun and good life we’d leave them to it?

    happy weekend !

  2. Profile photo of Chris NationChris Nation

    I’ve said it before and I’ll say it again. The Spanish are delightful people until they take up politics or local government. Then they turn into bandits or buffoons.

    As the ex-owner of a boatyard in Devon I hoped I might run a little tub out of the King Juan Carlos marina here in Valencia. After a close investigation of the rules, regs, ‘docamenti’ and taxes of keeping even the most modest of vessels in a Valencian facility, I gave that idea up. They even tax the tender to a larger boat as a separate vessel! And the companies running marinas in Valencia province have persuaded local government to forbid owners of boats from working on the interior of a vessel.

    Property tax is a joke in this country. A very bad joke. The idea that local government can fund its expenditure from property transactions tax falls flat on its face when there are no sales. And then, in the middle of a property market meltdown, Valencia went and raised it from 8% to 10%!

    My flat, way down the low end of the market, has a safe built into a wall. This tells you all you need to know about the reluctance of locals to be good fiscal citizens.

    So property transaction revenue has collapsed. Local governments all over Spain are bust and running on the smell of an oily rag and handouts, to be paid for by the next generation, who are 50% unemployed.

    The Spanish have not twigged that revenue from people who are living in their properties, not buying or selling them, ie the vast majority, produces a consistent income stream, even in a property bust. I have to admit that the present dotty system benefits me well. My IBI is 1/12 the Council Tax I was paying in Bristol 4 years ago.

    This bizarre way with raising revenue occurs in big business, too. When the Spanish were offered a way out of paying over the odds for texts by the advent of WhatsApp, instead of protecting their core business – phone contacts, broadband, TV packages – by offering thousands of texts in a phone deal, like in UK, they jammed the price of texts up more. My Spanish friends have been wittering at me to use Whazzzzzapp for ages. Having been rushed 50€ in two weeks for texts to UK, it’s adios Orange, hola WhatsApp.

    The only memorable thing, for me, to come out of a spell with a ‘personal development’ (navel gazing) group was the assertion by our guru that “intelligence is knowing your situation”. I firmly believe this is so. In which case Spanish governance and some corporations are indeed in the hands of fools.

  3. Profile photo of GarySFBCNGarySFBCN

    To be fair, it would be apt to add together all taxes over the lifetime of a property and then compare to other countries.

    I’m too lazy to do the research, but it seems that annual property taxes (IBI) are quite low, especially when compared to the UK.

    Also, blaming Spain for Orange charges text is ridiculous. Many companies in other countries do the EXACT same thing, hence the global popularity of WhatsApp.

    It’s probably a safe bet that taxes are going to increase, given the recent news about how Spain’s debt now exceeds its GDP and the EU delaying any action until the June election (which seems to be an unethical favor to the current ruling party). I’d expect those with second homes and income property to be hit harder than people who haven’t been able to get jobs or are losing their homes and lives to a global economic meltdown that they had no part in creating.

  4. Profile photo of Martin SMartin S

    I have to concur with the article, I spent many hundreds of hours doing the research (And visiting 50+ properties in Madrid) but in the end, despite being really keen to do so from a cultural perspective, did not buy a flat in Madrid last year simply because the taxes are too high (And I chose Madrid partly because of the lower fees). Transaction costs are very high but in addition on going taxes and fees are also high – particularly income tax on any rental income. So in answer to Gary above, it should be a safe bet that these taxes would be l.o.w.e.r.e.d, because so little revenue is generated currently, but the govt doesn’t seem to understand how these things work. Spain is an attractive market from a sales price, culture & lifestyle perspective, but the govt’s policies mean that lots of other territories become comparatively more attractive instead.

  5. Profile photo of Chris NationChris Nation

    Gary, I do not blame ‘Spain’. My point is that, public or private sector, the Spanish reaction to a fall in revenue seems not to be to adjust to a change in the market to compete with new players or balance their charges across their ‘product’ but simply raise the price. This is exemplified by the Valencian reaction to a collapse in income from property transactions. And as Mark and others have said, high ‘entry charges’ whether taxes or agency fees, simply chokes off the market.

    It’s true that once you’re in, annual taxes are much lower than, for example, UK. In my case, ‘council tax’ (IBI) is 1/12 of my last UK property’s rate – and that was a house one up from the lowest charge band. The way things are looking, the market looks like it will cover my 12% ‘entry fee’s (tax and fees) ere long. I don’t claim to be clever -just lucky.

    Another good example of the way the Spanish seem to do exactly the opposite of a sensible move when in a fix is the news I read in El País that PSOE intends to hire another 20000 public servants! As if Spain didn’t have a thundering great surplus already. The French are out on the street because Hollande is determined to reduce the public sector. Sensible fellow. There’s just so many unproductive pen pushers a country can afford.
    .

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