Cop Jobs Now

28 October 2008

Prison break

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Marbella Prices, Black Money and a 3 Billion Euro Bet

There are a couple of articles this week of particular interest, plus more observations on the problems caused by under-declaring the value of property transactions.

At the start of this month, the Kyero House Price Index was updated and I noted, with some surprise, that house prices in a handful of areas had actually increased. After ruling-out the obvious culprits, I really couldn’t come up with a feasible explanation. Today’s article: No Credit Crunch in Marbella may provide some of the answers.

It appears that sales of expensive properties are more buoyant than at the cheaper end and middle of the market. This price trend for Marbella shows that asking prices appear to have continued climbing this year, and this breakdown by size of property shows an upward trend across all sizes of property.

Part of the conundrum here will be due to the number of bedrooms not being strictly synonymous with property size or asking price (there are some very expensive two-bed penthouses in Marbella, for example).

Other factors obscuring the picture will be not knowing the actual sales prices, the actual property sizes, or how much cash is changing hands under the table.

Silkroad online

Despite this, the Marbella story rings true to me and certainly goes some way to explain our house price index numbers for Marbella, which seem at odds with general market trends.

I’m grateful to Louise at Miro Dali Properties for giving the black money problem serious consideration. She emailed with some thought-provoking points in response to my musings last week about how to solve the problems caused by a lack of reliable house price data.

The root of the problem, according to Louise, is the system of property taxation: “The buyer has to pay a transmission tax of 7% (resales) or VAT of 7% (new builds). The seller has to pay 18% capital gains tax. As a result, both parties benefit from lowering the declared price. Today, a house purchased for ?100,000 would need to be sold for at least ?107,000 tomorrow to break even. The only way to stop under declaring the actual price paid is to eliminate the transmission tax on resales and capital gains tax on a main residence.”

Louise makes a further point: The property market is not an isolated example of systematic tax evasion in Spain. Employers regularly under-declare salaries paid to employees, and businesses often operate two sets of books - one for the tax man and one reflecting the ‘real’ numbers.

The net effect of these, and other tax evasion tactics is a vicious cycle: Less money flowing through the Spanish system, causing less money to be available to fund the system, causing more aggressive taxation to recoup lost taxes.

I completely concur with Louise’s conclusions, and I think it’s worth bearing in mind that such ‘corrupt’ behaviour isn’t limited to the tax-paying public.

Cheerfully paying local taxes can be quite a challenge because of the blatant corruption on display in many Town Halls. It is a complete mystery to me how some of the country’s Mayors are still in power, rather than in prison.

I imagine most tax-payers in Spain - nationals and foreigners alike - find it difficult to respect its taxation laws when the country’s own officials do not do so.

A problem of this magnitude and scale can only be solved by government policy and control.

Finally, the story of debt renegotiation by Reyal Urbis is interesting because the schedule of payments has been published. This led me to speculate that their bankers are betting 3 billion euros on a recovery in the Spanish property market by 2010.

If that’s the case, the tricky part for property buyers will be knowing when the very bottom of the market will be - or has already been.

Martin Dell, Kyero.com

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