Spain’s property taxes are among the highest in Europe and are making the country’s housing crisis worse by discouraging investment and the construction of affordable homes, leading economists have warned.

The claims were made during a housing conference organised by the Foundation for Applied Economic Studies (Fedea), the Cambra de la Propietat Urbana de Barcelona and Spain’s Confederation of Urban Property Chambers.

Experts argued that the country’s tax system is driving up housing costs while restricting supply.

A study presented by economist Jaume Menendez found that taxes can account for up to 62% of a property’s purchase price over its lifetime, once levies on buying, owning and selling a home are taken into account.

The report also found that housing taxes account for 6.9% of Spain’s total tax revenue, making it the fourth-highest in the EU behind Luxembourg, France and Belgium.

Economists say the cumulative effect of taxes such as VAT, property transfer tax (ITP), council tax (IBI), capital gains tax and income tax is discouraging investment in new housing and making it harder to increase supply.

‘It’s very difficult to build affordable housing when costs are so high,’ said Angel de la Fuente, executive director of Fedea.

Julian Salcedo, president of the Real Estate Economists Forum at Madrid’s College of Economists, agreed, saying Spain’s property taxation is ‘excessive and needs to be reduced.’

Tax reform proposals

The report recommends a series of tax reforms designed to increase housing supply and improve affordability.

Among the proposals are:

• reducing non-deductible VAT costs;
• scrapping VAT for developers building affordable rental housing;
• introducing a temporary 0% VAT rate for energy-efficiency renovation works;
• applying a reduced 4% VAT rate to first-time home purchases regardless of the buyer’s age.

The report also argues that Spain’s property transfer tax (ITP) should be overhauled to prevent what it describes as a ‘cascade effect’, where the tax repeatedly increases the cost of second-hand homes each time they are sold.

It also criticises the wide differences between Spain’s autonomous regions, where ITP rates range from 6% in Madrid and Navarra to as much as 13% on some transactions in Catalonia.

According to the report, these differences unnecessarily increase the cost of moving home and discourage labour mobility.

Other recommendations include:

• abolishing the taxation of notional income on empty second homes;
• reforming inheritance tax by introducing a single rate of between 5% and 15% with a tax-free allowance;
• increasing the wealth tax exemption threshold from €700,000 to €1 million;
• doubling the exemption on a main residence from €300,000 to €600,000.

The study also calls for tax incentives to encourage long-term investment and attract more international capital into Spain’s housing market.

Legal uncertainty also blamed

The economists stressed that taxation is only one of several obstacles limiting new housing supply.

They also pointed to planning regulations, lengthy licensing procedures, labour shortages in construction and what they described as growing legal uncertainty.

‘There is enormous concern about the current situation,’ said Josep Maria Font, president of Spain’s Confederation of Urban Property Chambers.

‘There is not enough housing supply, prices continue to rise and construction costs are still increasing. Young people and vulnerable groups are finding it increasingly difficult to access housing, and these problems are being made worse by serious legal uncertainty.’

The experts also renewed calls for Spain to approve long-delayed planning reforms, speed up building permits and make it easier to redevelop unused urban land.

Several speakers criticised rent controls, arguing they reduce investment and ultimately shrink the supply of rental housing.

Valenti Pich, another economist speaking at the event, said: ‘Less market freedom discourages investment.’

The economists concluded that Spain’s housing policy should focus on increasing supply rather than placing additional tax burdens on homeowners and investors, arguing that the current system ‘acts as a regulatory punishment that slows the creation of affordable housing’ instead of encouraging new homes to come onto the market.