New VAT regime for new-developments as vehicle to bring down property prices

Although the 6 per cent VAT on housing is not immediate, experts believe that the wait will be worth it. But they point to challenges.

Applause echoed through the construction and property sectors as soon as Montenegro's government announced that it was going to cut VAT on new construction from 23% to 6%. This is the measure in the Construir Portugal package that will have "the greatest impact" on resolving the housing crisis in Portugal, agree several experts interviewed by idealista/news. This is because they believe that by lowering the tax burden on construction it will be possible to build more houses, both to buy and to rent, and even at more affordable prices that are compatible with family salaries.

It was on 10 May that the government led by Luís Montenegro announced the plan "Construir Portugal: Nova Estratégia para a Habitação" (Building Portugal: New Strategy for Housing). And one of the measures that immediately caught the eye was the reduction in VAT on new construction and refurbishment from 23% to 6%, a tax relief that had long been demanded by the various property players. As it happens, this reduction in the tax burden on housebuilding came about without a set date, since the government only committed to putting the measure into effect by the end of the legislature, in other words, within the next four years.

"We want this VAT gain to actually be passed on in lower prices for those who buy" Miguel Pinto Luz, Minister of Infrastructure and Housing

And there's a simple justification for the fact that the measure won't apply immediately. As Finance Minister Miranda Sarmento explained at the beginning of July, "lowering VAT on housing is an objective of the government, but it's a difficult measure to model, because it has to have an effective impact on housing prices".
Although today it feels that the uncertainty over the date of application of VAT at 6 per cent is already putting the brakes on new construction projects, market experts believe that the wait will be worth it. There is no doubt among the construction and real estate professionals interviewed by idealista/news that, in the future, this tax relief will boost housing construction and may even help to bring more affordable homes onto the market.

VAT at 6% is applauded and will boost house building (and more)
The high tax burden applied to construction in Portugal is one of the main factors that has held back the development of more homes (and at affordable prices) in recent years. So much so that the lack of housing on the market (to buy or rent) continues to worsen. "To correct the housing shortage in Portugal, estimates point to the need to build around 45,000 homes a year," Manuel Reis Campos, president of the Association of Civil Construction and Public Works Industrialists (AICCOPN), told idealista/news.

"If the national objective is to make more homes available for purchase or rent on the market, it is essential to act on the tax burden on construction and real estate, namely by immediately applying the reduced VAT rate on the construction and rehabilitation of homes," Manuel Reis Campos also emphasised. That's why the president of AICCOPN believes that lowering VAT to 6 per cent on construction and refurbishment "is the measure that will have the greatest impact on resolving the housing market crisis". It should be remembered that until now this reduced VAT rate was only applied to Urban Rehabilitation Areas (ARU).

The same goes for Hugo Santos Ferreira, president of the Portuguese Association of Property Developers and Investors (APPII): "The immediate implementation of the measure stipulating a VAT rate of 6% for the construction of new housing is the measure that could have the most direct impact on resolving the current housing problem," because "it will really 'move the dial' on access to more homes that the Portuguese can afford."

How we at Westmark feel about this news?

The housing market has always been a matter of demand vs. available product, and for many decades the market decided prices. In some other European countries such as The Netherlands we discovered that the local Government can intervene in the market by adjusting taxes. 

However, zooming in on this Portuguese VAT tax relief for new construction, we don´t think it will solve the Portuguese Housing crisis. In order to understand why this is not a solution, you need to understand what actually is causing the problem. 

It´s not the lack of new constructions or new houses which is causing the problems in the Portuguese housing market, but it´s ht e lack of ´affordable housing for locals´. Tough it may seem the same, there is a huge difference. 

What´s the problem?

Due to several years of huge increase in demand for Portuguese properties, mainly by foreigners, the prices of Portuguese property have gone through the roof. Increases of value like we have seen in Portugal in the recent year, we have never experienced before. Anywere in the world. 

Foreigner investors, making money elsewhere in the world, were looking for cheap properties to buy since Real Estate investments have always proved to be a safe investment haven. 

The Portuguese Governmental treasurer seized the oportunity to attract all this foreign money and came up with several Tax Releaf systems to make investing in the country even more attractive for foreigners. Take the Golden Visa scheme, NHR scheme and even the latest Digital Nomad Visa as an example. 

Focussing on bringing in external capital into the country and increas the income of Property Transfer tax, called IMT, the Portugues Government have been stimulating foreigners to invest for years. Never there was an intention nor a vision in using that money to create houses for the local Portuguese society. 

It´s only now, after many years of enriching the natioanl Treasurer, that the Portugese Government cannot hide anymore and needs to face this problem. Is VAT tax decreasing in New construction going to solve the problem? 

Not the right solution!

a big NO is the right answer.

The first important thing to understand is that new developments are only available to purchase for people who earn above the avergae income. Construction costs, material and labour have gone through the roof recent years. All the big construction companies are privately held comapnies, aiming to make a profit for their shareholders. So they will never sell the properties below the cost price. 

We predict that the level of housing prices will stay the same and only the nett profit of the construction and property sectors will come up. Approximately by 17%. 

What is the right solution?

The only solution for the shortage of housing is the Portuguese Government taking responsibility and take an active role in solving the problem right in the heart. Built and develop big Social Housing project, just outside the big metropolitan areas of Lisbon, Porto and the Algarve.

Social Housing that only comes available for people who can proof that they are a Portuguese citizen, with an income that not exceeds the average income and no possibility to save money. 

From these Social Housing hubs the Government needs to supply enough and liable free public transport services into the metropolitan areas. Direct connections from the Social Housing hubs towards the city and back. This creates jobs, keeps unneccesary traffic out of the cities and is sustainable for nature. 

Another thing that will contribute to solve the problem: There are many old buildings in the heart of the big cities, industrial or commercial which are completely empty and abandoned at the moment. Reposes these building and develop them into small affordable studio apartments with low fixed rents, for young professionals who are making carreer in the city. The perfect place to start your life, find a partner and move out as soon as you star having children. 

This will not only solve the housing issue, but also keepos high profile professionals into the city and into the country. The future economy of Portugal will be needing brains and knowledge, because tourism income will drop in a few decades from now.