The Government is praying the temporary measure will help mop up the glut of new homes for sale before the General Election in November.

VAT on new homes will be slashed from 8pc to 4pc for the rest of the year, José Blanco, Minister of Public Works and Housing (pictured above), announced this week.

The VAT reduction will only apply to sales of new homes that take place before 1 January 2012. Someone buying a new home for 200,000 Euros before the end of the year from a bank or developer will pay 8,000 Euros less in VAT.

Resale properties will not benefit because they do not incur VAT. Anyone buying a resale from a private vendor will continue to pay a transfer tax of 8pc, rather than VAT at 4pc.

However, at least one savings bank – Catalunya Caixa – has announced that it will also offer a 4pc discount on all its resales (repossessed homes) between now and the end of the year. Others banks are expected to follow suit.

Objective: Zap the Glut

The Government’s stated objectives with this latest measure are to help reduce the stock of new homes for sale, giving the construction sector a boost and stimulating employment.

According to José Luis Rodríguez Zapatero – the Prime Minister (pictured below) – “if it wasn’t for the construction sector, the Spanish economy would be growing at 2pc. All the jobs lost today are in construction.”

Elena Salgado, Minister of Finance, said the reduction in VAT will be “sufficient to reduce the stock of homes.”

As recently as July last year, the Government increased VAT on new homes from 7pc to 8pc in an attempt to increase revenues and reduce the budget deficit. This is a U-turn that hardly covers the Government in glory.

If the fall in VAT does anything to stimulate the market it will only benefit those with new homes for sale, principally developers. As a result, private vendors will find themselves under further pressure to reduce their asking prices.

The opposition Popular Party has promised to extend the rebate for an extra year if it wins the general election in November.