8 Nov 2011
Transfer tax cut!
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