The pandemic has changed the outlook for individuals and businesses around the world. Most spheres of life are concerned by the “pre” and “post” Covid situation. In Spain as elsewhere, thousands of individuals, including expatriates, have been moving to large city outskirts, or, if they have the budget, to buy in a second home. Sometimes fearing new lockdowns, new buyers are seizing opportunities to enjoy life in a different way. However, a new tax reform introduced in July by the Spanish government could be a game-changer.
What is changing in 2022
Law 11/2021 includes a series of measures to counter tax fraud. It results from a European directive of July 2016 which establishes rules against tax evasion. This law will come into force on January 1, 2022, and aims to integrate European measures and strengthen tax audits. The law specifies that efforts should particularly focus on the control of taxpayers having significant assets and their social and family environment so that they can fulfil their tax obligations properly. A central coordination unit will be created to control these actions.
The main change is as follows: there will be a new calculation method applying to all real estate transactions, including inheritances or donations. This calculation method is based on a new tool: the reference value, which will be determined by the General Directorate of Spanish Cadastre. The prices of all sales of real estate transactions made before a notary will be analysed on the basis of the cadastral characteristics of each property. The reference value has a direct impact on taxes. It affects old real estate (Patrimonial Transition Tax - ITP), Patrimony tax (wealth tax), inheritance, and donation. If the reference value is higher than the buying price, the tax rate will increase -- which is bad news for future buyers at a time when the market is recovering from the tumultuous year 2020.
The Spanish property market at a glance
The Spanish real estate market has been flourishing since 2013 with regular price rises. The most significant price rise, up to 7%, occurred in 2018. This has been particularly felt in tourist and expat hotspots such as Valencia, Barcelona, and Madrid which is one of Europe's most expensive cities. But the trend slowed down in 2019. Prices are stagnant, and growth has slowed down. Catalonia's political crisis, which somehow accounts for this situation, has affected the rest of the country. With job insecurity, unemployment, integration issues, many young Spaniards -- unable to buy property -- talk about the abuse.
The global health crisis made things worse. According to the local newspaper El País in April 2020, there was a record property price drop (-6%) between February 2019 and February 2020. Apartments were mostly concerned by this price drop, and this resulted in -7.4% of sales compared to 2019, compared to -0.7% for individual houses. The second-hand property market suffered heavier losses (-6.3%) compared to newly-built housing units (-2.4%). With the pandemic, real estate transactions were put on pause, not only in Spain but in most parts of the world. Buy following the first lockdown (March 2020) and the following ones, both Spaniards and expatriates were keener on investing in property for different reasons. Still, most of them were drifting away from neighbourhoods and apartments to settle on the outskirts -- with individual houses, or at least, accommodation with balconies being essential criteria. In 2020, the Spanish real estate market became steady, and a new rise was recorded in early 2021. In a single year (from April 2020 to April2021), the price of single-family homes rose by 6%. At the same time, there was a significant drop in apartment prices (-0.5%). This price drop mainly concerns small dwellings. Prices of large apartments,n especially those with a balcony, remained unchanged, according to figures from Arkadia (a real estate agency). The Covid-19 pandemic had an impact on buyers' expectations, with most of them seeking proper living space, a safe neighbourhood, and proximity to nature. Meanwhile, low student mobility in Spain accounts for the prices of small accommodation. Studios and other two-room apartments are usually rented to students, and it's clear that the lockdowns and restrictions adding to the pandemic slowed down student mobility. The gradual reopening of borders and GDP growth (6.8% this year, 6.6% expected in 2022, according to the OECD) looking promising for all sectors, including real estate. There are hopes that Spain will return to its pre-Covid level as early as 2022.
Spanish real estate: a market that still attracts so much
As a popular tourist hotspot, Spain has a wide range of choices regarding housing. Over the past year, the pandemic increased its attractiveness in the eyes of foreign investors and expatriates. There is currently a greater demand for the Mediterranean coast, and Andalusia are still in demand. Compared to many other European countries, Spain can boast its sunshine almost all year round, a beautiful coastline with amazing beaches, a relaxed lifestyle and a lower cost of living. Spain also benefits from its ideal location, close to Portugal and France, a few hours from the United Kingdom, Italy, Germany and North Africa.
Will the new tax measures discourage buyers?
Many potential investors and buyers are looking to conclude their property transactions before 2022 -- most of them considering new housing units. In fact, the new tax measures are likely to have a more significant impact on second-hand property. However, it's clear that the Spanish tax authorities stand to gain from this new calculation method, even though observers fear a drop in foreign investment. According to them, this method does not reflect the real value of the property, taking into account eventual repairs or renovation, noise proofing, and the condition of the neighbourhood. Still, the reference value is going to affect the actual price of the property. For instance, there are differences in the prices of poorly insulated accommodation situated on the ground floor and upstairs if the latter are renovated and insulated according to new environmental standards. However, there is a risk that both types of accommodation get the same reference value.
Spain residents are yet to see the result of these measures. In their opinion, foreign investors are responsible for the rise in real estate prices. The Covid-19 pandemic had a major impact on neighbourhoods in popular tourist hotspots like Madrid, Barcelona, Seville, etc. While growth has become steady in the past few months, the locals demand a stricter framework for real estate sales transactions, especially relating to second homes.
For the Spanish government, the new challenge is to preserve a proper living environment for the locals (equally popular with tourists and expatriates) by enhancing their access to property while promoting foreign investment. Rising prices seem indisputable, but the government is laying emphasis on greater security and control on real estate transactions and more transparency so that buyers can have peace of mind.
