5% VAT for properties up to 450.000 Ron: A “life changing” decision for many buyers

90%+ of Romanians and foreigners who buy an apartment in the country, buy properties with value less than 90.000 Euro, less than 385.000 Ron (circa 85.500 Euro) to be more precise. This happened due to the fact that properties sold with a price up to this limit were taxed with 5% VAT. During the last 5 years, the whole Residential Real Estate sector in Romania was set to sell properties within this limit. Knowing that the clients would avoid the 24% VAT, the vast majority of residential developers designed, built and sold properties with 5% VAT.

A “game changer”

Very few people in the Romanian Real Estate sector paid attention to a major change that was introduced in the new Fiscal Code. Between several other modifications (which also need to be analyzed), the Romanian Parliament voted for a higher price limit for properties sold with 5% VAT. As of 01.01.2016, this amount becomes 450.000 Ron (circa 100.000 Euro), while properties priced more than this limit will be charged with VAT of 20%.

This is a “game changer” indeed and a clear proof that the decisions of the politicians clearly set the frame in which the market is evolving. “Why a modest increase of the limit is such an important one?” you may ask. Let’s see together…

The structure of the market

According to the statistics of www.imobiliare.ro which are published in the media from time to time, we can split the Romanian residential market in 4 categories:

1. Properties in poorer cities or at the outskirts of richer cities, where apartment prices don’t exceed 700 – 750 Euro / sq.m.
2. Properties in the big Romanian cities and the outskirts of Bucharest, where apartment prices don’t exceed 900 – 950 Euro / sq.m.
3. Properties in Bucharest and other big cities with prices ranging from 950 – 1.250 Euro / sq.m.
4. A small minority of properties sold at a higher price

So far, 385.000 Ron “roof” meant:

• Unlimited options for A category. Exceptions would be the villas with more than 170 – 200 sq.m. surface, but more or less the whole market has developed under this “roof”.
• Many options for B category. You can find even 4 rooms’ apartment with a price less than 385.000 Ron, while in villas the situation is similar with A.
• Properties of 1, 2 and 3 rooms inside the cities were the option for category C. 1 and 2 rooms almost anywhere, 3 rooms only in semicentral areas. Apartments of 4 rooms are very few, despite the fact that the needs of population are growing. Usually the developer’s solution is to offer a “3 to 4” rooms apartment with small surfaces.
• Part of the 1 and 2 rooms apartments of category D are sold with a price under 385.000 Ron. The other part + properties of 3 and 4 rooms exceed this price tag and they are addressed to the ones with increased purchasing power

The Romanian middle class is buying properties of the first 3 categories, while the 4^th category is addressed to the richer part of the society.

Add 14.500 Euro in the market’s “roof” and the situation changes!

The additional 65.000 Ron that is added on 01.01.2016 will really change the above mentioned structure. “Yeah, the developers will increase their prices” you might think. Maybe, but if the market does not follow, this kind of “irrational” actions are punished. If we think a bit more, the additional 14.500 Euro means that:

• You can add one more room in an apartment and still sell it with 5% VAT
• Clients who wish to buy a larger surface but so far they were limited due to VAT reasons, will have the chance to buy more rooms, avoiding the high VAT
• New projects will start including options of 4 rooms “with low VAT”.
• For the first time, there will be the possibility to find properties with larger surfaces which are situated closer to the center of the city and not only out of it.

In a market like the Romanian one, where the economy is healthy and the income of the middle class grows (and in the next years this will be even more visible), people with increased consumption power will be able to choose from more options for their future (because your dwelling represents big part of your future).

“Life changing” decision…

In the years to come, this VAT modification will be a factor that will change the lives of thousands of Romanians, offering them quality and comfort. They will be able to access properties that suit better to their housing needs, instead of feeling that “if you need one more room, you will pay too much and it does not worth it”.

While the online searches for properties in Romania are higher than ever (so the interest exists) and the mistakes of the past are avoided (when it comes to financing the investment), the change of the “roof” for the lower VAT charge is something that will change the Romanian market in the years to come.

We love to blame the politicians for their mistakes. In this case, they seem to have made the right choice. Many of us will feel the benefits in the years to come!

What is your opinion?