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Transfer tax cut no use while house prices stay inflated

Despite the recession, house prices in Cyprus remain grossly inflated and it is highly unlikely that the suspension/reduction in Property Transfer Fees will have the desired effect until property prices fall to reasonable levels.

IN AN EFFORT to boost the sluggish property market, the legislature has approved a bill suspending the payment of transfer fees on new properties and reducing by 50 per cent the transfer fees on other property transactions.

Parties had been toying with this idea for some time, even though the government was opposed, because it would further reduce state revenue.

As a compromise, the law would have temporary effect, in the hope that it would kick-start a property market that has ground to a halt. The idea is that a revival of the property market, even with reduced or no transfer fees, might still generate more state revenue as well as helping the construction industry, which has been among the hardest hit by the recession, and creating jobs.

The law may seem like a good idea, but we very much doubt it will have the desired effect for one very simple reason – property prices, despite the recession, remain grossly inflated and without a significant reduction it is highly unlikely there would be much market activity. High bank interest rates, which are more likely to rise than fall, do not help things either.

It is true that flat and house prices in the coastal resorts, where there was glut, have tumbled but the pool of potential buyers has drastically contracted. In Nicosia, however, there have been small price decreases for apartments and small houses in the suburbs, while in the centre prices remain almost at pre-recession levels.

Developers admit that nothing is being sold, but at the same time refuse to offer the kind of discounts that would attract buyers.

There is another matter that the new law will not address. Potential buyers know that the economy is in a dismal state and, understandably, expect property prices, like rents, to come down. This is what happens in all economies during an extended recession. But here we are defying the laws of the market, owners maintaining inflated prices at which there is zero demand. And a rational buyer will not part with his money, simply because there would be a lower transfer tax, when his perception is that property prices were inflated.

Banks, which contributed to the problem by over-valuing properties, could now put pressure on developers to bring down prices in order to start selling and generating cash. This is a possible scenario now that banks are going on a re-capitalisation path, and would want to limit non-performing loans. Whether the banks could persuade developers and property sellers to obey the laws of the markets remains to be seen.

One thing is certain though. Unless property prices fall to reasonable levels the property market will not move.

Readers' comments

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  • pollymarples says:

    Not looking for sympathy but in the North the transfer fee has just been effectively increased on first purchase, used to have 50% discount (once only) for all purchasers, the discount has been abolished for all foreign purchasers but remains for Turkish Cypriots. Not the slightest bit racist then. So it is 6% of the Contract price or the current value whichever is greater, except of course for TC’s who pay 3%. Novel way to stimulate the property market.

  • Costas Apacket says:

    Ye Liz, for those of us who were / still are avid watchers of ‘Only Fools and Horses’ there’s a strange sense of Deja Vu whenever certain Cypriot Ministers speak………….” Never mind Rodney, this time next year we’ll all be millionaires”!

  • Liz says:

    Anyone still remember the grand promises which the Minister of the Inferior has made in the past? – such as these, for example.

    Title Deed problems resolved by new bills

    Title Deed reforms worth millions next year

  • out of the frying pan into the fire says:

    Robert Briggs is right. But he missed out honest lawyers, banks, developers etc etc.

    The government will put it’s head back in the sand and everything will be OK. Problem? What problem?

  • mb eyes says:

    Ahhhhhhhhhh. Thanks for making that clear. Really good wheeze, isn’t it?

  • @mb eyes – If you have bought a property from a developer – when its Title Deeds is issued, it will be issued in his name (or the name of his company).

    It will remain in his name – and ownership of the property cannot be transferred to you until his outstanding taxes have been paid and any claims lodged against the title (such as a mortgage) have been removed.

    Once title to the property is clear, you pay the Property Transfer Fees (the Cyprus equivalent of the ‘Stamp Duty Land Tax’ [SDLT] that you would pay in the UK) to have title (ownership) of the property transferred to your name.

    Once the property is yours, by virtue of the transfer, you are impervious to any claims made by the developer’s bank or anyone else who has a claim against him.

    I must stress that you are NOT the owner of a property until its title has been transferred to you and it has been registered in your name.

  • mb eyes says:

    Much has been said about obtaining title deeds, obviously. Excuse me if I’m showing my ignorance, but when title deeds are issued, presumably making the ‘owner’ officially the Owner, does that make them impervious to claims from the developer’s bank for any outstanding developer mortgages there may be?

    If so, then that would really put a dampener on issuing title deeds for the last five or so years of sales.

  • andyp says:

    The Cunning Plan Department of The Cyprus Finance Ministry better have another meeting.

    No one is paying up. I wonder why!

  • Robert Briggs says:

    Also required, full and genuine Title Deeds at point of sale, end of story!

  • Mike says:

    Sooner or later, the issue of non-performing loans will have to be dealt with, whether this means a write downs of bank loans or bank foreclosures. In a small economy such as Cyprus with limited buyers any action by the banks will mean the collapse of property prices similar to or worse than the US has seen in Florida.

    Cyprus is competing for buyers with Spain amongst other countries and we are all aware of the housing situation there. The Greek debt crisis does not help the situation either as Cyprus banks have exposure there too. The collapse is inevitable, it is just a matter of time, unless the government has the means to step in and rescue the banks which will have to write off non-performing loans; nevertheless, market forces will have to prevail in order to rejuvenate and rebuild the construction industry.

    Maintaining high prices will simply stagnate the construction industry until such time when pricing is attractive again to bring in foreign buyers.

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