Land Transfer Tax lowers High Real Estate Prices

The land transfer tax is due when real estate changes hands. Since 2006, German federal states are allowed to determine the amount of the tax themselves. Most countries then increased the tax rate, which was previously standardised at 3.5 percent throughout Germany. Sometimes even more than once. Despite this, real estate buyers do not have to expect higher total costs. This is the conclusion of a recent study by the ifo Institute.

Only Bavaria and Saxony levy a land transfer tax of only 3.5 percent.

Since the turn of the millennium, real estate purchase prices have doubled or even tripled in many places. Not even the financial crisis of 2007 has slowed down the development of real estate prices in Germany. The real estate boom continues and there is no end in sight. Not only owners of real estate are happy about this. Federal states have also benefited from rising real estate prices in recent years. The growing popularity of real estate as a long-term investment is fuelling the real estate market. Every time a property changes hands, the so-called property tax is charged. In 2018, 13.8 billion euros flowed into the coffers of the federal states in this way, for residential real estate alone.

Real estate buyers fear higher costs when buying property

However, the steadily increasing revenues from the land transfer tax cannot only be explained by a higher number of real estate transactions. Since 2006, German federal states can set the prior homogenous tax rate of 3.5 percent themselves. As a result, most states have increased the land transfer tax, sometimes more than once. The highest taxes levy Thuringia, Schleswig-Holstein, the Saarland, North Rhine-Westphalia and Brandenburg with 6.5 percent of the purchase price. Potential homebuyers feel intimidated by the increased land transfer tax, as this increases the additional purchase costs immensely. Buyers fear that the rising tax rate, together with rising real estate prices, will drive up overall costs. But this fear is ill-founded stated the ifo Institute from Munich.

Higher tax rates inhibit price growth

For the now published study, nearly 18 million residential property sales were analysed over the period from 2005 to the end of 2018. The data was collected from online portals and newspapers. The researchers of the ifo Institute have surveyed the question of how the land transfer tax affects real estate prices. The surprising result: the higher the land transfer tax is set, the lower the price growth. “Since the land transfer tax is paid by the buyers of a property, their willingness to pay high real estate prices is reduced,” explains a spokesman of the research institute.

Real estate sellers are put at a disadvantage

Especially for properties with a relatively short holding period, only small surcharges could be made on resale. Critics of the land transfer tax increase have assumed so far that many potential homebuyers would be pushed out of the market. It was presumed they would not be able to raise enough equity to complete a real estate purchase. Usually, the additional purchase costs are not covered by bank financing, so that a higher land transfer tax would also result in a higher burden for the buyer. The study by the ifo Institute showed that the price growth of property for sale and a rising land transfer tax either balanced each other out or even led to a reduction in real estate price growth. Although buyers would actually have to raise more cash to buy a property, the overall burden would be equal or even lower than a lower tax. The ifo Institute therefore states that not the buyers but the sellers of a property are most likely to be disadvantaged by a rising land transfer tax.

The ifo Institute is a Munich-based research institution, which is partly financed by public funds. The non-profit association provides research results, data and information in the field of economics to the public. The institute is considered one of the most important German economic research institutes. The ifo Business Climate Index, published several times a year, is an important basis for politicians and the business community to recognise economic developments at an early stage.

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