Spain has a bad case of the coronavirus, and the economic cost will almost certainly be paid for by higher taxes on property and wealth, which the left wing in power are already pushing for with enthusiasm.
When seen in terms of cumulative confirmed cases of Covid-19 (though not other measures), Spain has one of the worst coronavirus cases in Europe, with France and the UK not far behind (chart above). Who knows what the virus picture will look like in six months time, but what is already clear is that the Spanish economy is one of the hardest hit in Europe, with a 13% decline in output forecast for 2020 (IMF).
All countries are struggling with the economic impact of Covid-19, but Spain’s shaky political and economic foundations will not help the country rise to meet the challenge. Politically, Spain is very fractured right now, and the Spanish economy, with its reliance on tourism, is particularly vulnerable to a shock like the coronavirus. If the Spanish government responds with more taxes and regulations, as is likely, the Spanish economy will struggle even further with the extra costs and bureaucracy. High costs and red tape partly explain why Spain has one of the highest unemployment rates in the West, even in good times.
The economic damage of C19 and lockdown is obviously bad news for the housing market, especially the second-home market in coastal areas that relies of foreign demand.
The international ratings agency S&P has just released a report forecasting and decline in Spanish property prices of 1.4% this year, second only to Ireland on -1.6%. S&P’s Spanish forecast looks deliriously optimistic compared to other recent forecasts like one from the Spanish bank Bankinter (-9%), property consultants Acuña & Asociados (-6.1%), and Gonzalo Bernardos (-16%). Whomever you choose to believe, all the Spanish housing market forecasts are negative for this year and next.
Higher taxes on property
Another threat to the Spanish property market is likely to come in the form of higher taxes on wealth and property in Spain. This has implications for foreigners owners of Spanish property, who might be facing higher costs if taxes go up.
Higher taxes are likely on the way to pay the coronavirus bill in many countries, but the left-wing coalition of Socialists and neo-Marxists currently running Spain would welcome them anyway.
As far as the hard-left Podemos faction of the government are concerned, private property and wealth are a curse to be minimised through higher taxes and repressive regulations on private enterprise, in particular the private rental market.
Podemos, led by Vice-President Pablo Iglesias, and his cabinet minister partner Irene Montero, are pushing hard for higher taxes and nationwide rent controls. Mr. Iglesias recently said, sarcastically, that rich property owners would welcome higher taxes.
Controversial new ‘reference value’ for property taxes
But Podemos are having some success. The government is already drafting changes to the wealth tax (Patrimonio), Inheritance and gift tax (Impuesto de Sucesiones y Donaciones), and property transfer tax (Impuesto de Transmisiones Patrimoniales), and stamp duty (Actos Jurídicos Documentados AJD). They are, however, still arguing about whether or not to introduce nationwide rent controls like Catalonia has done, at a time when rents are falling fast anyway.
At the heart of these changes is a controversial measure to introduce a new ‘reference value’ (valor de referencia) for calculating property taxes such as transfer tax, IHT and wealth tax. The Cadastre will be responsible for calculating the reference value, based on comparable sales values provided by notaries and registrars.
The problem with reference values when it comes to property, is that no two properties are exactly the same, for lots of different reasons. For example, it takes no account of the condition of a property, which might be renovated or dilapidated yet have the same reference value.
The corresponding change in taxable values could put a lot of properties into higher tax bands, and hit owners with bigger tax bills, especially when properties have been owned a long time, warn experts.
These changes are expected to be introduced in the first quarter of 2021, so get prepared.