The transfer tax on resale properties in Catalonia and the Valencian Community has gone up from 8pc to 10pc this month – a move that will drive down asking prices, reduce sales, or increase undeclared payments in cash, or all three at once.
In just another mystifying move by the the Spanish administration – in this case the autonomous regional governments of Catalonia and Valencia – the tax on buying a resale property, known in Spain as the Impuesto sobre Transmisiones Patrimoniales, or ITP for short has gone up to 10pc this month.
This tax increase was announced several months ago in Catalonia, with delayed effect to the 1st of August. But in the Valencian Region it has just been announced, taking everyone by surprise, and will be effective as soon as it is published in the Valencian region’s official gazette.
At 10pc, the ITP on buying a resale property in Catalonia & Valencia is now the same rate as VAT on new homes, which the national Government in Madrid increased from 4pc to 10pc at the beginning of the year.
The Catalan Government hopes to raise an extra €50 million this year with the increased tax. The Valencian Government hopes to raise an extra €30 million this year, and €75 million next year.
Higher tax rates could mean lower tax revenues
In reality tax revenues could easily go down as a result of the higher ITP; the higher tax might discourage buyers completely, or encourage them to resort to under-the-table cash payments that are bad for the economy. Undeclared cash payments had been dying out in recent years, but higher taxes might bring them back into fashion.
To compensate for higher taxes, vendors will have to reduce their asking prices by a corresponding amount in order to make sales (or accept bigger cash payments). The way things are in Spain today, local buyers simply cannot afford to pay an extra 2pc in tax. So most of all, this is bad news for vendors, especially the banks.
Catalonia & the Valencian Region, like the rest of Spain, are going through a serious economic crisis, at the root of which lies a real estate crash, and they need higher transaction charges now like a hole in the head. Higher taxes are bad news for the housing market and the economy.
In a real estate crash of this magnitude, transaction costs of 10pc or more are a big part of the problem. What Spain needs now is lower taxes on property, to stimulate the market and encourage foreign investors. That would help reduce the housing glut, increase tax revenues through volume, shrink the black economy, and create wealth and employment.
By raising the ITP in Catalonia & Valencia from 8pc to 10pc, local politicians are doing their bit to delay a recovery in the housing market and the wider economy.