IMF asks VAT and tax on profits to skyrocket. What does this mean for the Real Estate market?

Did you read the news yesterday? The International Monetary Fund asks Romania to drastically increase the VAT tax, from 19% up to 25%. Also the tax on profit is proposed to rise from 16% to 20%. Nothing is sure yet but I guess that during May we will realize that 2010 will be more difficult than many (dreamers) expected.

To read more upon this, you can also check the following links:

• 1. "Reprezentantii FMI considera majorarea TVA masura cea mai sigura pentru a creste veniturile bugetare"

  2. FMI ar fi cerut TVA de 25%

  3. FMI, catre guvernanti: Majorati cota unica si TVA!

  4. FMI cere Guvernului majorarea cotei unice la 20% si a TVA la 25%

"But why is it still falling?"

After reading the bad news, many of you will question yourselves: "But why?" Just few days ago, I was explaining to you why theRomanian economy will continue being in crisis during 2010. Actually I am amazed that even until few days ago I kept on reading that the economy will rise. I had remained negative regarding this year and the reasons are very simple:

• The Romanian economy has still not started to absorb European Grants.
• European Grants are still not accessible by small and medium enterprises.
• The world economic crisis is still here.
• In the same time Europe is still suffering.
• Banks still don't lend.
• Or they lend with very high interest rates.
• We still have not witnessed any major economic reforms.
• Unemployment rate keeps on rising.
• Real Estate prices have risen, without any clients to follow!
• People's behavior remains the same

(To read the article with the title "Romanian economy keeps on falling, while dreamers keep on waiting millions to knock at their door" , press the link)

What is going to happen with Romanian economy?
As I had explained to you last week, this is a very difficult year for everyone in the world, Romania included. Things are complicated and in case the taxes will increase that much (25% VAT and 20% tax on profits), there is no doubt that the economy will lose ground during this year as well.

(My scenario for the Romanian economy, here)

VAT at 25%. What does it mean for the Real Estate market?
Let us assume that the VAT will rise to 25% and the tax on profit will climb to 20%. Now let us examine all the cases and you will decide by yourselves:

• The office rents will be charged with 25% VAT instead of 19%. Do you think that the tenants will be happy with this news? Isn't it probable that they will ask a lower rent? For the empty properties, doesn't this mean that their prices will freeze, or that they will slightly decrease?
• The industrial rents will feel the same impact. Isn't it normal for the prices to block in this segment too?
• The apartments with value over 385.000 ron (around 90.000 Euro) will be sold with VAT 25% and not 19%. So the clients will find it even more difficult to purchase an apartment except the ones under 385.000, which (hopefully) will continue being charged with 5% VAT.
• The price for an apartment of 100.000 Euro will rise from 119.000 to 125.000. An apartment of 200.000 Euro will cost 250.000 (including the new VAT) instead of 238.000 Euro today etc.
• No one will believe that "it is just a technical issue, as the VAT can be reimbursed". Unfortunately there are very big delays in this issue.
• The developers will face a dual shock: Higher VAT = more difficult sales and higher taxes = less profit = less money to return to the banks = more pressure.
• The owners who sell a property and pay 16% will have to pay 20%. So they will end up with less money in their pocket.
• The overall business environment will be damaged, as the country will become significantly more expensive.
• Isn't it obvious that the bankers will not be very happy to find out all these? It is. So, forget any discussion about injecting more loans to the market. They are reserved and they will remain like this.

Overall result: The market will freeze for good if 25% VAT will be charged on Real Estate transactions
We already had many problems with owners who were raising the prices without having any client to follow (!). (You can check my analysis on this, here)

Now things will worsen. VAT 25% will freeze the market for sure. At least until the end of the year, no one will be in a hurry to purchase a property under these conditions. The only possibility for him will be to invest if the price will be very low, not the seller's asking price.

I remind you that for every transaction concluded, there are too many people obtaining income and the State collects taxes from many indirect sources as well. 25% VAT on Real Estate transactions will cause several collateral damages. Let us wait and see what will finally happen…

PS.1 Don't forget that a possible VAT explosion will cause serious problems in the lives of millions of people. I hope they will be taken care of as well, as it will be too much for them…

PS.2. Once more, I declare that I am not involved into Romanian politics. I don't know any politician and I don't have any friends or enemies between them. The text above is just my personal approach, trying to avoid any political talk. Time will tell if my predictions are right or wrong. This does not mean that I am against or that I support the Government or anyone else.