Planned increase in VAT to 23% and its impact on real estate market.

The proposed VAT increase to 23% sparks critical questions about its influence on the property market. What can we anticipate? This adjustment will directly impact newly-constructed properties sold after January 1, 2025. That said, we do not predict that the full burden of this VAT hike will be universally passed on to buyers of all projects. This is because current prices for new apartments are already at their peak, and any further increase could significantly hinder affordability and reduce overall demand.

The precise effect on pricing is layered and complex. As one expert explains, "The ability to pass on the cost of the VAT increase depends on the specific project. While it may be reflected in price lists, the actual sale prices could very well tell a different story."

A surge in real estate transactions is anticipated ahead of the VAT increase, as buyers may rush to complete acquisitions before higher costs set in. Developers are likely to capitalize on this urgency through focused marketing efforts. However, experts caution against the long-term fallout: the more properties are sold in advance, the more challenging the market will become post-2025.

What category of real estate will feel the impact most? Quite simply—every sector. Although the VAT hike specifically targets new builds, its ripples will be felt across the entire property market. This change will not only weaken market confidence but also erode the actual purchasing power of households, casting a broader shadow over the real estate landscape. 

Availability of housing in Košice

Housing affordability remains a challenging issue. Yet, a combination of reduced interest rates and stagnant property prices may offer some relief, ensuring there won't likely be a significant decline in access to housing. That said, the situation is far from ideal, and improvement is needed.

From an investor's perspective, the outlook for real estate stays promising. Real estate continues to be a reliable, long-term asset that retains its appeal. However, we anticipate a subtle shift in preference toward second-hand property transactions, as certain market dynamics evolve.

Price increases, if they occur, are expected to remain modest and primarily concentrated in high-demand locations that draw in new residents. Bratislava, for instance, seems well-positioned to maintain its stability. On the other hand, it's crucial to recognize the long-term challenges posed by Slovakia's unfavorable demographic trends, which could cast a shadow over less central and peripheral regions.

For prospective buyers, we strongly recommend resisting the urge to make impulsive decisions driven by the latest headlines. Instead, consulting with a knowledgeable expert can provide a clear, unbiased understanding of opportunities and help craft a sound purchasing strategy.

Above all, taking a long-term approach to real estate investment is essential. Factors such as demographic trends, regional economic health, and planned infrastructure developments must be carefully evaluated to inform wise decisions that stand the test of time.

Change is also expected in the real estate rental market

Here's what you should anticipate in terms of rental market pricing trends. A modest rise in rental prices is expected—primarily driven by landlords leveraging the opportunity to justify increases. While there are limited tangible factors to validate such hikes, the consistently high demand presents landlords with an incentive to test the limits. Unfortunately, this could also see the resurgence of unofficial payment practices.

The already strained demand, weakened by fluctuating interest rates, faces yet another challenge. In the short term, this scenario will likely empower the rental market to capitalize on current dynamics, nudging prices upward slightly.

Slovakia's real estate market is poised to feel the far-reaching effects of the VAT hike. The repercussions will be multifaceted, impacting various sectors of the property landscape in unique ways.

As we move forward, closely tracking price shifts, housing accessibility, and evolving investor behavior will be essential. For prospective buyers, maintaining a level-headed approach will be critical. Focus on long-term trends, conduct thorough research, and seek professional advice to make informed, strategic decisions.

How will the increased VAT affect real estate prices?

The increase in VAT, and therefore value added tax, is a topic that resonates across many sectors of the economy, but perhaps the most visible impact is on the real estate market. This market is very sensitive to any changes in legislation that may affect the costs of building, selling or renting real estate. Understanding how a VAT increase can affect real estate prices requires not only knowledge of economic principles, but also the ability to predict the behavior of the market and its participants.

The first and most obvious effect of the VAT increase can be a direct increase in real estate prices. If VAT is increased on construction materials and services, the developer faces higher costs for his projects. As an example, we can imagine a construction company that plans to build a new apartment block. Materials such as concrete, steel or wood now cost more. Increased costs are often passed on to the final consumer - the buyer. In this case, it is very likely that the final prices of apartments will increase so that the developers can maintain their profitability.

However, price increases may result in reduced demand. Not every buyer is willing or able to pay a higher price for a property. Families already teetering on the brink of their budgets may be forced to put their plans to buy a property on hold. This can slow down market activity, leading to stagnation or even a drop in prices if developers decide to sell excess properties even at lower prices.

On the other hand, expectations and speculations can temporarily disturb these assumptions. If it is announced that VAT will increase in the near future, this may motivate buyers and investors to speed up their purchases to avoid higher prices. This increase in demand may temporarily put pressure on property prices, which could rise, but only until the VAT increase actually takes effect.

The impact on rents is another aspect that cannot be ignored. If property owners face increased costs, they may decide to pass those costs on to tenants in the form of higher rents. This can result in increased financial pressure on tenants, especially in cities where rents are already high.

An interesting question is how the VAT increase will affect older properties. These properties, which have already passed the construction and sale phase, may be less affected by increased construction costs. They can thus represent an attractive choice for buyers looking for more favorable alternatives. Increased interest in older properties could, paradoxically, increase their prices, which would equalize the market.

The overall economic situation and the purchasing power of the population also play an extremely important role. In times of economic uncertainty, the impact of a VAT increase can be even more pronounced, as people are more cautious in their investment decisions. On the other hand, during periods of economic growth, the market may be more flexible and able to absorb increased costs without major shocks.

It is clear that the VAT increase is more than just a number on paper. It is a complex economic tool that can have different effects on the real estate market, depending on many factors. If we imagine the market as a living organism, then an increase in VAT is like a change in its diet that can affect its health and vitality. It is important to understand that each market has its own specifics and that these changes may have different impacts depending on local conditions and dynamics.

Housing construction is included in the highest rate, i.e. 23 percent, which in practice means a further increase in the price of housing construction, and therefore an increase in the unavailability of housing

The decline of the business environment, stagnation of the construction industry, uncertainty and the increase in the price of housing construction - these are just some of the consequences that will be caused by the introduction of the consolidation package. Employers associated in the Association of Construction Entrepreneurs of Slovakia (ZSPS) emphasize that consolidation is necessary. However, they would expect significantly more cuts on the expenditure side of the budget.

From the point of view of the overall setting of the consolidation package, according to the ZSPS, the government focused insufficiently on reducing expenses, especially redistributed flat benefits to citizens. As for the measures related to the business environment, the increase in the value added tax is evaluated positively by the employers associated in the ZSPS.

Positive with reservations

It is certainly a better solution than introducing a drastic increase in the tax-deductible burden of value creation, i.e. taxation of labor and the management of entrepreneurs. However, we are significantly more critical of the introduction of a tax on financial transactions, which will distort a fair business environment, as those who find better ways to circumvent the measure will gain a competitive advantage.

From the point of view of VAT rate changes, the government came up with a whole range of exceptions included in the lower rate. However, housing construction is included in the highest rate, i.e. 23 percent, which in practice means a further increase in the price of housing construction, and thus a further increase in the unavailability of housing, which is not good news for citizens and the construction industry. In most states of the Union, a reduced VAT rate applies to housing construction and repairs, including the Czech Republic. Individual countries are aware that it is an investment in housing, and therefore an activity in the interest of the state, which needs to be supported and not limited by an increased tax burden.

Negative effects of VAT increase

According to him, the increase in VAT on apartments also comes shortly after the European Commission did not recognize the inclusion of construction work in the preparation of rental apartments of the State-supported Rental Housing Program in the five percent VAT rate. He points out that the negative effects of the 23 percent tax will be fundamental for Slovakia and its inhabitants.

The unaffordability of housing for young families, teachers, policemen will increase, the migration of the labor force necessary for the development of the economy will be more complicated. Citizens who currently have signed reservation and mortgage contracts for the construction of an apartment will find themselves in a problematic situation. This will increase the price of the apartment by a few thousand euros, which can be a difficult problem to solve. 

An even greater slowdown in housing construction will not increase the total VAT collection in practice, but on the contrary, will decrease it even more. From the point of view of the long-term interests of the state, a reduced VAT rate of five percent for investments in apartments would certainly be more significant than a reduced rate for services that we literally receive in a restaurant.