Cyprus Government Attacks Property Owners
Monday, January 04, 2010

Faced with a gaping hole in its finances this year, the Cyprus government has announced a savage increase in the annual tax levied on real estate. Although the rates of tax will not change, the valuation basis will be updated. Since the current valuations are based on 1980 levels, this could mean an increase of up to 20 times in the tax.

Properties valued up to EUR170,860 are exempted; values from EUR170,860 to EUR427,150 are charged 2.5%; values from EUR427,150 to EUR854,301 are charged at 3.5%; higher values pay 4%. Evidently, few people pay significant amounts of tax at present; if current valuations were to apply, many house owners would be hit hard.

Cyprus Finance Minister Charilaos Stavrakis admitted that he was looking at an unfinanced EUR500m deficit, equivalent to 3% of GDP. After denying the scale of the downturn all year, the government now admits that it expects the public deficit to hit 4.5% of GDP this year; but the Commission expects 5.7% of GDP.

Opposition spokesman Averof Neophytou called the measure a a “tax-raid” by the government against 90% of citizens, saying that the government was engaged in a class struggle. “This policy will not only hit 90% of Cypriot citizens, since first of all it will hit the employees in the construction industry," he said.

It's a fact that the island's woes are largely due to a collapse in the real estate sector, and more taxes are hardly the medicine one would prescribe. The government hasn't helped by insouciantly ignoring the warning signs, continuing to splash around largesse in all directions as if money was going out of fashion, and ignoring a title deed scandal, which was putting off foreign buyers, until the eleventh hour, when it was forced to act only under compulsion from the British government and the EU Commission.

Statistics for 2009 show that more real estate owners sold up and left than the number buying, adding to the already massive overhang of unsold properties which are now coming onto the market after having been begun in 2007 and 2008, while the boom was continuing. Developers are now caught in a classical debt squeeze, worsened by measures to unscramble the title deeds mess; but the banks are still pretending that everything will be OK, rescheduling loans in order to avoid the 'non-performing' label - something of which the Central Bank is highly critical.

Anecdotally, average property values are down about 25% from the peak, although there are no reliable indicators following suspension of the 'Buy/Sell' index. According to Sotos Lois, the Chairman of the Cyprus Contractors Federation, the slowdown in construction has already cost 2,500 job losses, and he fears that the number may rise to 20,000 in the year ahead. In a survey of the construction sector carried out by Stockwatch, 40% of companies said they would be reducing their payrolls, citing bureaucracy and lack of liquidity as the main problems. Needless to say, the rentals market is flat on its back.

With the all-important UK market facing another year of struggle, it is hard to see how the Cyprus property market can do anything but fall further during 2010. The last thing it needs is a swingeing tax increase.