Housing plays an important role in our lives. Access to shelter is a basic human need and an important factor in personal well-being. Home ownership is also considered a fundamental value, as is access to health care, education and employment opportunities. Additionally, post-Covid-19, housing may not be a critical issue from a family life perspective, as the home increasingly takes over the role of the workplace, with the spread of home office and remote work.
All we have is our apartment
Housing and real estate ownership is a lifelong investment of families and a large part of their wealth, although its importance varies from country to country. Additionally, it is an important tool for wealth accumulation, an important tool for middle-class families. Real estate accounts for an average of fifty percent of the total wealth of the citizens of OECD member countries, and for the middle class, this proportion is more than sixty percent.
However, the importance of property rights varies greatly from country to country. The proportion of homeowners is 44 percent (Germany) and 93 percent centenary (Lithuania) moving between housing assets (including owner-occupied and secondary housing, e.g. purchased for investment purposes) is at least eighty percent of total housing assets centenaryIn Chile, Latvia, Lithuania and Greece, but less than forty centenaryA in America and New Zealand.
In OECD countries, housing is the largest expenditure item on average across all income groups, and has been an increasing share of all household expenditure in recent years.
Lots of money, lots of house, lots of debt
Although the dispersion is smaller in the case of home ownership than in other assets, ownership of real estate(s) is still concentrated among high-income, high-wealth and – and importantly – older households. High-net-worth households, and to a lesser extent high-income households, hold a proportionally larger share of owner-occupied housing, as well as a large proportion of secondary housing for rent.
Besides owning real estate, high-income households have a disproportionately higher share of household debt, but their burden is also high. Low-income households with mortgages face higher relative debt burdens.
Rising house prices have left young people desperate
Home ownership and home equity are strongly associated with age. It is natural for older families to own more real estate. At the same time, it contributes greatly to the disparity of wealth situation between generations. Compared to the price level of 2015, the price for apartments in Hungary was 2.1 times higher at the end of last year, which is the highest value among the EU countries.
Housing affordability is a particular challenge for younger households, according to OECD findings. For the above reasons, we should not be surprised that the proportion of young homeowners has declined over time. This is especially true for low-income youth.
In Hungary, they are trying to reduce this disadvantage. One of the most important components of the family protection program is measures to ensure housing. Additionally, despite the tough economic environment, the government has already announced that the two iconic elements of chocolate and papavaro will be with us in 2023..
At the same time, it is important to see that the number of potential recipients is decreasing – only newly formed families are available, mainly in recent months, due to the increase in market interest rates, even those who do not. Previously resorted to clumsy application of grants. The other drawback of the solutions was that the amount of subsidies quickly integrated with real estate prices, which also triggered the above-mentioned market price increase. In other words, the grants are not helping as much as they were originally intended – helping young people get their first home.
Due to global market conditions that make restarting after the coronavirus pandemic difficult, economic problems caused by the Russian-Ukrainian war and persistent inflation, a significant number of governments have been forced to organize their public finances.
Tax hikes and new taxes are on the agenda in many places. In this situation, many governments are under increasing pressure to somehow reduce the growing inequality in the real estate market. According to many, property taxes can address real estate market dynamics and, in parallel, the inequalities mentioned above.
A stable, efficiently levied real estate tax would be attractive to governments. The question is to what extent it is possible to create a fair system according to social interests.
Could a property tax be a solution?
Housing taxation already plays an important role – real estate is routinely taxed in all OECD countries. At the same time, in many places it functions only as a local tax, and its introduction and status may vary within the country.
Owners of rental properties are taxed on their rental income, and in a minority of countries, the owner-occupant’s tax base is also the imputed (predicted) rent. A transaction tax or tax is levied on the purchase of a home, and there are cases where personal income tax and/or capital gains tax is payable after selling the home. (True, the key to this in many countries is zero percent.) Additionally, inheritance and gift taxes are common when it comes to real estate.
At the same time, the OECD report on this subject states that in many countries the tax base is not updated with the increase in the market value of the property, which significantly reduces the income potential. The majority of countries fully exempt owners from tax on the property they live in. While such an approach may be justified for those with more serious affordability problems, an unconstrained exemption provides significantly greater benefits to wealthier households and further skews the distribution of savings in favor of owner-occupied housing.
Other forms of tax relief for owner-occupied housing, particularly mortgage interest relief, have proven regressive and ineffective in increasing homeownership rates. In some countries, rental income tax and inheritance tax rules on housing also reduce growth and income potential. Although property taxes are more difficult to evade and evade than other types of taxes, tax systems often allow such behavior to occur, reducing the effectiveness, fairness and revenue of property taxes, the assessment also shows.
Taxation can be a double-edged sword
According to the OECD, various real estate tax policies can help address the current housing market challenges, however, tax policy is not always the most effective tool and may even be counterproductive in some situations. This is especially true when the tax break serves to promote home ownership, as it can contribute to increasing home prices and reinforcing it among existing homeowners. redistribution of wealth and Makes it more difficult Involvement of new actors – youth.
These rules are recommended by the OECD
The OECD study suggests several reform options that countries can consider to simultaneously increase the efficiency, equity and revenue potential of property taxes. The report discusses a wide range of reform options to help improve the design, operation and impact of property taxes, including:
- Strengthening the role of regular property taxes, especially by levying them on regularly updated property values. At the same time, reducing taxes and levies on the sale and purchase of flats will increase housing market dynamics and improve fairness.
- Consideration of a cap on capital gains tax exemption on sale of houses used as family residences to ensure that only high value gains are taxed. This will strengthen progressivism and reduce pressure on house prices.
- Phasing out or capping mortgage interest relief for self-owned homes would have a positive impact on progress, tax revenues and housing affordability.
- Tax credits for energy-efficient home renovations should be targeted to make them available to low-income households. This will contribute to greater emission reductions and increase the fairness of tax incentive systems.
- Be careful about tax incentives that encourage home buying. According to OECD experts, expansion of housing and more efficient use of existing housing stock through taxation and other measures will yield more beneficial results in terms of housing affordability.
Strengthened reporting requirements related to real estate ownership, including reporting to tax authorities of third parties (tenants) and international exchange of information for tax purposes, draw the attention of experts of the economic system. Real estate tax.
Taxation is not unfair
Interactions between different property tax policies should be carefully evaluated. For example, residential mobility is affected directly by transaction and capital gains taxes, and indirectly by regular taxes on real estate. Reforms aimed at increasing mobility should take all three lines into account. A careful assessment of the interactions between taxes can help identify cases where countries may consider reforming the design of existing household taxes before introducing new tax instruments. For example, if short-term capital gains are properly taxed, special taxes may be needed to reduce speculation. Similarly, a tax on real estate based on constantly updated market values would reduce the need for tax instruments (such as an infrastructure tax) aimed at capturing real estate value growth as a result of local public investments.
There may be cases where tax policy is ineffective and other measures may be better alternatives. This is especially true if the goal is to improve housing affordability.
Reforms can also bring economic change
Real estate tax reforms require careful timing, considering their impact on different households before they are introduced. The reforms could have a significant impact on house price developments – for example through supply effects – as well as wider financial and economic effects.
Gradual implementation of reforms helps prevent the development of negative macroeconomic shocks, while at the same time, at least in the short term, it can also reduce the negative effects of reforms on certain groups. Implementing property tax reforms together with other tax or transfer measures can help mitigate the effects of some reforms on the most vulnerable and increase the social acceptability and political feasibility of policy changes. Governments considering real estate tax reform should keep in mind the evolving macroeconomic environment, particularly regarding changes in interest rates and their potential effects on housing markets and households, the OECD study concludes.