OECD on Spanish property market

Sometimes one wonders if politicians listen to advice from outside of the country. A brief read of part of the OECD's March 2005 report on the Spanish economy - particularly the sector on the overheated housing market - suggests to me that they don't.

Okay, I don't study all the newspaper articles related to the housing market or economy, but before the Government goes ahead spending more of our money by creating tax incentives for people to rent properties, perhaps they should take a good read of the OECD's advice and ask themselves if they need to tackle the problem another way.

The media's take on the housing problems focused last week on the promotion of 30 square metre apartments for young people. The Minister for Housing quickly found herself in hot water when suggesting at Construmat (the biannual trade fair for the construction industry) that this was an excellent response to the needs of the market.

As the OECD points out (and has been pointing out for many years) the tax refund for people who buy houses distorts the market, making buying more attractive than renting (provided the price is right) and may add 20% or more to the selling price. The Government gets money upfront with the 7% transfer tax when a property is sold, but gives this back and more over the lifetime of the purchase (15-20%+ rebate on capital and interest).

The risk of removing this tax concession is the political backlash, so it may need to be done gradually. That said, an overnight decision to reduce the rebate to 10% would cool the housing market instantly - increasing the Government's tax take at the same time.

As for incentives to boost the rental market by encouraging owners to rent their empty flats (15% vacancy levels), it would make more sense to make the legal system more effective. It can take years for legal proceedings to be dealt with, so evicting tenants who don't pay is difficult at the best of times. The minimal length of a rental contract is 5 years - which is good as long as both parties keep to the agreement, but a deterrent for those thinking of selling the property in the future.

The property market may slow down by itself, but removing some of the stimulants to buy might save everyone money in the medium term.