My head is hurting today. It has been for two days to tell the truth. It’s not hurting because I have a headache it’s been hurting because I have spent the last two days banging my head against a brick wall not believing how stupid the Valencian government has been. (What? I hear you ask. A government being stupid!! Never)
So what am I talking about? Well the Valencian government and the Catalan government have both increased the tax on property purchase from 8% to 10%. At first glance this seems very bad news for property buyers because they need to pay more in tax when they buy. Well the truth is it is bad news from property buyers but not as bad as you may think to start with. And in the end it will be extremely bad news for the respective governments.
Let me explain why.
There are three possible scenarios now this law has been passed.
The first possible scenario for me is the worst because as a buyer you decide not to buy. Okay, your prerogative, but in the end that possibly not the best way if you really want a property in Valencia or Catalunya.
The second scenario is much more likely to happen. This is that the owners will have to drop their price to compensate for the increased tax so the government gets the money in still but the owner has to sell for less. This is very unfortunate and really unfair but what can you do about it as an owner? At the moment nothing.
The third scenario is also very likely and will probably be combined with the second. This is that the declared price of the property will be lower than the actual sale price. Now I hear you asking Graham, are you telling us to do something illegal? The answer is no but it will inevitably happen if the price of a property is €200,000 then it is very likely that 20,000 or maybe 30,000 will not be declared because the owner and the buyer will come to an arrangement to pay for the furniture. In this scenario government income remains roughly similar to what it would have been at 8%. Therefore there is no point in raising the tax rate.
So in all three scenarios the government loses out either they get no money in because no sale is agreed, they get a lesser amount in because an agreement is made to lower the price by the owner or between the parties to buy furniture.
In this post we won’t go into all of the other lost revenues such as associated spending on furniture, services, living costs etc over the years as we may just start despairing!!
This all comes down to a basic economic theory known as the Laffer curve. Now you would imagine that somebody in government would appreciate basic economic theory but it seems not. Obviously basic economic theory is not the strong point of government ministers when they are just trying to get their snouts in the trough and see what is in it for themselves.
What they should have done is to actually reduce the tax that you pay on buying a property in order to stimulate demand. this would also bring in investors who haven’t been overburdened by a huge tax bill on purchase. (However, we do know a way of getting around this for investors where they purchase an option to buy a property rather than the property itself. For more information just ask.)
Reducing the tax bill would also put Valencia and Catalunya at an advantage against other regions of Spain meaning that people looking to purchase will be more likely to purchase in these areas. This would probably be quickly offset by the other areas also dropping the tax rate but in the end it all helps to stimulate demand in all areas. At the moment the two regions are at a competitive disadvantage with areas such as Malaga or Murcia where currently the tax rate remains the same.
If just 20% of people who were thinking of buying property in Valencia or Catalunya decide not to purchase as a result of the tax rate and then the government will get less money in than they would have done previously. As far as I see it this is already happening. However when you take the other two scenarios of under declaration and lower sale prices into account then the government is going to lose out. In other words the measure they have taken will be totally counter productive.
If any government minister would like a quick lesson on how the Laffer curve works I will be happy to give it to them. I would also be happy to smack them around the head while shouting “get some common sense in your corrupt and inept head“.
You never know one day we may get rid of these idiots in power in Spain and many other countries and get a government that actually knows what it is doing. Nevertheless I am not holding my breath for that moment.
However there is also some good news for potential property investors in Spain. The new law of residency looks as if it may be set at the ridiculously high figure of €500,000 still. However, that money can be split between various properties meaning you could buy a property portfolio giving a very good return and live off that money even though you are not allowed to work as there is no work permit included in the residency. We will see what the final result of the law is when it is passed in September but at the moment it is looking that way.
Also this has been the busiest summer for both visits and sales since 2002. You must bear in mind that prices now are similar when adjusted for inflation to what they were between 2000 and 2002. Obviously I am referring to properties that have sold not the ridiculous asking prices of some properties which you will never see on my site. If they managed to get on my site they have usually done something well, like put a very good price on it, which is very competitive in the market.
So to sum up, despite the worst efforts of the government, people not only are still buying property in Spain and Valencia but they are buying property in greater numbers than we have seen since 2002. In the end that is good news However much the government tries to sabotage those extra sales with this ridiculously thought out increased tax rate.
If you want to hear this in a rant just click below.