Home Buyers in New Construction Should Consider the Rising VAT Increase

VAT increase adds thousands of euros to new development purchase prices.

From June 1st of this year, the VAT rate will increase from the current 22 percent to 24 percent. For home buyers interested in new developments, this means a significant price increase, which is why it makes sense to purchase real estate before July.

From July 1st until December 31st, 2028, a new 24-percent VAT rate will apply. "From a home buyer's perspective, the change mainly affects new developments, whose purchase prices will have 2 percent higher VAT added compared to now. For example, in the case of a new apartment costing 300,000 euros, this means an additional cost of 6,000 euros," explained Anne Pärgma, head of residential lending at Swedbank.

The VAT increase also affects those who purchase real estate before July 1st that is completed later. In such cases, the old tax rate applies to the advance payment, but the new, higher VAT applies to the portion paid when the home is completed. This may ultimately mean additional costs for the buyer, which should be taken into account already now.

For used, or secondary market apartments, VAT does not apply, but ancillary costs associated with home purchase may increase. "For example, furniture and building material prices may rise, since VAT is a consumption tax and affects the final price of goods and services. Although not all service providers may adjust their prices immediately, the buyer may actually pay more in reality than today," said Pärgma.

Indrek Tarto, a member of the board of Merko Kodud, says that sales of new developments in Tallinn have been somewhat more active at the beginning of the year compared to the same period last year, but there has been no major jump. "After July 1st, we expect rather a 'gradual' price increase, where prices are adjusted step by step according to market demand. For example, the price of developments still under construction can be changed even at a later stage, which is why there may not be a sudden major price change in the market," explained Tarto.

Although VAT does not apply to secondary market apartments, price pressure will gradually transfer to this segment as well. "Secondary market prices generally move with new developments and depend, among other things, on the age and location of the apartment. If new developments become more expensive, secondary market prices will also grow over time. However, it is difficult to precisely estimate the impact of a 2-percent tax increase on the final price of any specific property," said Tarto.

According to Tarto, one should not expect extensive discounts in light of the tax increase. Discounts are made primarily based on market conditions and sales needs, not because of tax changes. "At the same time, developers often do not have the opportunity to significantly lower prices, as input prices are in a continued upward trend. This means that real estate prices are likely to continue growing in the future as well," he said.