The price of large homes could increase significantly next year Shutterstock

The government’s recent announcement of a one percent VAT increase next year, and possibly more hikes in the future, triggered a debate about the possible impact on the housing market. Could the tax increase send a ripple through the segment, changing the behavior of developers or buyers?

On the face of it, the hike should hardly be noticed by potential buyers. The base VAT rate is currently set at seven percent, and this will rise to eight percent. According to Paweł Sztejter, a partner at property market consultancy REAS, the price of the average apartment in the Warsaw market, which now costs from zł.300,000-400,000, will rise by zł.2,800-3,700.

In the case of the average mortgage, this translates into an zł.18 increase in monthly payments and the sum is also within the limits of rebates which are currently negotiated in the market, Mr Sztejter noted.

There is at least one major caveat, however, namely the possibility that net apartment prices may rise as well. A higher VAT rate will affect the price of construction materials and services, as well as the cost of buying land, and thus will influence overall development costs. Whether and to what extent this will translate into higher prices will probably depend on the cost structure of particular investments.

It can be expected that developers will strive to maintain their margins at the current level. These, according to real estate brokerage Home Broker, already decreased from 45 to 33 percent in the case of bourse-listed entities over the 2008-2009 period. In other words, any additional tax burden will be passed off onto customers in the end.

The psychological factor

Admittedly, another matter is the possible psychological consequences of the VAT increase. “It should be stressed that an increase in demand created by fear of the consequences of introducing the new VAT rate may have have much greater impact upon apartment prices than the tax hike itself,” Mr Sztejter commented.

Barbarek Jarząbek, a deputy director at developer AGRO-MAN, was of a similar opinion and said that the key question is whether the market will behave rationally. “Some developers and real estate agencies could use this moment of uncertainty to encourage quick decisions to buy before the higher VAT is introduced,” Ms Jarząbek said.

Luxury more expensive?

Meanwhile, it is extremely likely that the price of the largest apartments and houses will rise considerably next year due to a planned major increase in VAT on such projects.Today the preferential seven percent rate also applies to apartments and houses larger than 150 sqm and 300 sqm, respectively, which, technically speaking, do not qualify as “social housing.”

This will most probably change at the beginning of 2011, when interim Polish and EU provisions allowing for the preferential VAT rate expire. In all likelihood, the preferential tax will not be preserved and the basic tax rate of 23 percent will be applied to all space in excess of the above-mentioned 150 and 300 sqm thresholds.

According to Home Broker analysts, this could considerably affect the segment in which prices per sqm are already among the highest in the market, due to the projects in question usually being exclusive schemes in prime urban locations. Now the total price of such developments is expected to rise further, by tens or even hundreds of thousands of złoty.

This will certainly not help developers to find buyers for very large homes, the demand for which has been limited of late anyway. When the new regulations come into force, construction of such schemes may prove unprofitable, Home Broker has concluded.

Thus it’s too early to say for certain, but it looks the residential market could be in for an unexpected squeeze on the luxury market.