Raid & Co: VAT Increase Leaves Apartment Prices Unchanged
From July, Estonia will be hit by the next tax increase, including a rise in value added tax. From the perspective of the residential property market, the tax increase could push up prices of new apartments, since the prices of new developments include VAT. However, fierce competition keeps apartment prices under control. Talk of price increases is not expected anytime soon.
The supply of new apartments is large and competition among developers is intense. Every potential home buyer is fought for tooth and nail. To achieve a deal, new home buyers are offered all kinds of incentives – free kitchen furniture and storage or parking spaces, perhaps even additional cash discounts. Or perhaps a whole package of discounts at once.
This competitive situation means that most sellers of new apartments must swallow the bitter pill of the tax increase and absorb it into their costs. By asking a higher price from home buyers, the apartment-interested customer will go look at a neighboring project, because the choice is wide. No real estate seller wants to risk losing a customer.
We can talk about price increases in the residential property market when the price reductions and incentives offered on the goods on the new apartment market first begin to diminish. For secondary market apartments, the foundation stone of price increases is a more stable and predictable economic direction. The ongoing battles in Ukraine, turbulence and turmoil on the stock exchanges, and trade wars mean that we unfortunately have a lot of uncertainty. The spring sun has brought warmth, but not improved predictability and greater confidence.
The residential property market has weathered the long-lasting and perhaps now past economic recession very well. Deals are being made and quite actively at that. The price curve for apartment transactions has remained on roughly the same horizontal line for a year and even longer.
Home buyers' purchasing intention is quietly increasing. Interest in buying cheaper apartments in Tallinn's outer districts has grown. The volume of transactions for apartments purchased as investments is low, but those who renovate old apartments have found their own niche. A correctly priced apartment reaches a transaction within weeks or even just days.
The expectation for the near future is that it would be good if the transaction level remains stable. The risk of price decline is not very likely, but due to global economic confusion, it cannot be ruled out. Market participants would need greater confidence that the economy has weathered the downturn and turned toward growth.
Residential property prices remain near their current level, both in the newer and older apartment markets. There is no room to raise prices due to competition. Looking to the future, one should be optimistic. In the longer term, a home purchase plan is not a bad idea, because real estate purchased as one's own home creates security and is a good hedge against inflation. The choice available to today's buyer is wide, and so everyone can find a new home that suits them.
