Linas Jegelevičius for BNN
Both builders, landlords, real estate buyers and tenants are anxious in Lithuania.
Coupled with the war, record-high inflation and, mostly recently, the spat over transit goods to Kaliningrad, the proposals of the Lithuanian Ministry of Finance and the Central Bank (LCB) to impose a universal real estate tax on all property owners could become a game-changer for many.
But real estate brokers, at least on the Lithuanian seaside, do not ring alarm bells yet.
«Even amid the adversities, the local real estate market remains bubbly. I believe real estate tax could be, in a way, even beneficial to all if it used properly – to improve the local infrastructure,» Romas Perminas, a real estate broker in Klaipėda, Lithuania’s third-largest city, told BNN.
Ministry of Finance to propose an all-embracing real estate tax to be set by each municipality and which would not be pegged on the total value of all residential properties.
But citing cause of «social justice», the LCB insists that, while supporting the intention to expand the tax base, it recommends calculating the tax based on the total value of a person’s real estate.
According to the central bank, universal tax rates should be the same across the country, increasing progressively. Thus, for a 60-thousand-euro flat, the person would pay an annual fee of 95 euros. If the value were 150 thousand euros, the annual fee would increase to 415 euros. And if the value is over 300 thousand euros, it would come at 1 165 euros.
«If universal real estate tax is imposed, the state budget would be replenished by almost 100 million euro,» Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, has said.
However, some say that such a tax serves only the interests of the Lithuanian Conservative-Liberal government, which is scrambling to find ways to fill up the shallow coffers.
The LCB suggests that properties under 10 thousand euros would be exempted from the tax liability.
«If a person has very little property, that tax would be collected very little or would have a zero rate. Continuing growth in the value of assets would lead to progressiveness,» explained G. Šimkus.
In the bank’s estimation, a quarter of the country’s real estate would fall in the category.
Assessing the proposed real estate tax project, the Bank of Lithuania also proposes that the amount payable should be calculated by the State Tax Inspectorate, and property values should be recalculated more often, including unfinished construction objects in the tax base.
However, the central bank also warns that a variety of tariffs and exemptions may pose tax management efficiency risks.
Swedbank economist Nerijus Mačiulis says that such a tax is basically not bad.
«A feature of a good real estate tax is its broad tax base and universal application, and we see that,» he said.
The Cabinet says the new tax aims at the strengthening of municipal finances. Meanwhile, the LCB believes that the new scheme could be the start of other changes, such as the reduction of personal income tax, PIT.
Until now, the main income of municipalities from the population registered in them is collected through the PIT, therefore, according to Mačiulis, by reducing PIT, the income of municipalities could be compensated by real estate taxes.
In its latest Financial Stability Review, the Bank of Lithuania has identified three main risks to the country’s financial system and one of them is overheating of the real estate market.
«As housing prices, which have risen rapidly during the pandemic, begin to deviate from fundamentals, there are more and more signs of unsustainable real estate market development, ultimately leading to the increase in the risk of falling prices and consequent growth of losses,» the bank expressed the caveat.
Other risks stem from Russia’s war against Ukraine, risks from prolonged high inflation, and an increase in interest rates.
According to the LCB estimate, housing prices in Lithuania currently exceed the value by about 9 percent. They have been soaring at a record pace – they are around 20 percent up from where they were a year ago.
Before the 2008 economic crisis, housing was overvalued by 50%, so the current situation is still quite rational, the Bank of Lithuania says.
The rapid price growth is mainly driven by a widening gap between housing demand and supply.
During the pandemic, demand for housing increased significantly, while the supply of new housing remained almost unchanged and has even been falling recently.
Furthermore, in the short term, the supply of new housing may be constrained by the increase in construction prices reflecting the rise in raw material prices, and by the possibility of building permits being granted, the bank says.
Having assessed the potential risks, the LCB has already taken precautionary measures and tightened the down payment requirement for the second and subsequent housing loans and introduced the capital requirement of 2 percent for housing loan portfolios of banks.
The bank says such measures should «cool down» the market.
Before the war, the housing loan portfolio of Lithuania’s banks grew at a much faster pace than in any other eurozone country this year, which, again, could be the signal that the country’s booming real estate market may be overheating.
The bad news for all tenants is that, with the influx of over 60 thousand Ukrainian refugees in the country, the supply of rents in the largest Lithuanian cities has shrunk significantly.
Meanwhile, prices have increased by almost a third due to high demand and inflation, especially so in Vilnius.
If such tendencies continue, more people will be forced to share living space, experts say.
The number of apartments available for rent in the Lithuanian capital used to be between 2 000 and 2 500. Now, only around 400 offers can be found now.
The latest figures on RE sales from the national Registry could perhaps prompt the LCB, the watchdog of the country’s financial system, heave a sigh of relief, at least for now.
In May, the sales were down by an average of 20-25 percent from a year ago.
But does it mean a stabilisation and more normalcy in the market?