THE GOVERNMENT is facing a backlash from Cyprus property developers and estate agents over plans to introduce a 15% VAT charge on land purchases from July 1, with many saying the regulations are not clear.
One estate agent said local buyers may now be priced out of the market while the Association of Land Developers said the addition of VAT would increase prices by an average of 10%.
President Lakis Tofarides added the value of land had now surpassed the spending power of the average consumer.
The introduction of VAT on land is an EU requirement. It had been due to come into force on January 1, but the government managed to secure a delay so it would not coincide with the introduction of the euro. At present, VAT on land purchases is zero-rated.
Demetris Rigas, Cyprus Country Manager of Century 21, one of the world’s leading estate agents, said the situation would make it very difficult for locals to buy property, with a negative impact on the economy.
The real estate and construction industry has now overtaken tourism as Cyprus’ top money-earner, accounting for one-fifth of the economy. Seventy per cent of Cypriots own their own homes.
Rigas also warned that foreign buyers – who represent 20 per cent of the market – would look elsewhere: “Many of our neighbouring countries do not have both of these taxes and I fear foreign investors will look at other destinations.”
The problem is compounded by confusion on exactly how the VAT will be levied and what it will cover.
One leading property valuer yesterday called on the government to come clean on the issue.
“Nobody knows whether it will be implemented on building plots or on development or agricultural land,” said Antonis Loizou, adding that he had been informed by the VAT Services that the charge would only be paid by developers or estate agents.
“I forecast there will be a fall in demand within 18 months and the extra VAT will be passed on to the consumer as costs increase.”
Loizou said suggestions had been made to increase taxation on the rich who own several plots of land and who don’t have a need to sell, in order to stabilise prices by increasing supply.
“Land is getting more and more expensive and this is yet another measure which will hinder those trying to get on the property-ladder and the financially weak.”
Loizou also drew attention to the fact that developers may now attempt to build outside development areas “on agricultural land on which, I presume, no VAT will exist. Such a thing could prove to be disastrous in terms of town planning controls.”
Finance Minister Charilaos Stavrakis said on Tuesday he would be sitting down with the Central Bank Governor in an effort to make changes to the regulations governing loans in an effort to offset the impact of VAT on first-time buyers.
The Central Bank last year imposed curbs on mortgages, amid fears a market flush with credit was stoking house prices and could impact on inflation. These specify that banks should not lend more than 60 per cent of the value of a property.
The Finance Minister added that such regulations may in any case be ineffective, “since banks can hand out loans from offshore subsidiary companies that are not subject to the same regulations.”
“We respect the autonomy of the Central Bank but feel that we must find a correct solution so we don’t strangle the building industry.”
Stavrakis added the current situation was very difficult due to the slowdown in growth of the land and construction markets.
“As these sectors have brought in a lot of money, it would be suicide to kill the goose that lays the golden egg.”
But leading economist Doctor Stelios Platis was confident the market could withstand the pressure, explaining that most of the effects of VAT had “already been factored into today’s land and house prices”.
According to Platis, house prices rose by 19.2 per cent last year.
“The end consumer will of course be affected over the next two years or so, with many already buying in anticipation of VAT, especially over the last quarter of 2007.”
“Despite all this, I do not expect a crash or reduction in prices.”
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