A little house in Luxembourg

Tageblatt, 17. Mai 2017

By Yves Greis

How the state can control the property market

A government can use its taxes to address a country’s concrete problems. For example, the property market can be controlled by taxation, as PwC’s Wim Piot explains.

To say that property prices in Luxembourg are too high would be stating the obvious. Even if “too high” is a very subjective amount, it speaks volumes that many people who work in Luxembourg, spend most of their day here and whose families have lived here for generations, travel across a border every evening to return home.
Government policy regularly addresses this problem. The current Government wrote the following in its programme: “The increase in property prices must be curbed so that our young citizens have access to affordable housing once more.”
Housing Minister Marc Hansen (Democratic Party, DP) spoke about the situation for young people at a recent round-table discussion. Hansen stated that young people wanted “decent” and affordable housing that offers the necessary quality of life and can be occupied in the long term. He added that young people didn’t have any “unrealistic expectations” of the most luxurious home possible, but that they above all wanted to lead their lives “in a respectable and correct manner”.
In his State of the Nation speech, Prime Minister Xavier Bettel (DP) indicated that some action had already been taken, but: “It’s just the beginning, and the path to bringing some fresh air into a stifling market is long and rocky.” He also stated that regional planning should be a factor here.

A whole series of problems

Alex Bodry (Luxembourg Socialist Workers’ Party, LSAP) brought new momentum to the debate shortly after Bettel’s speech, using the term “compulsory purchases”. This naturally led to furious reactions, despite Bodry reaffirming that this would only be a “last resort”. But we need to start thinking about all possible approaches to solutions. Wim Piot is also concerned about the housing-market problem and what approaches should be taken to resolve it. Piot is Managing Partner and Tax Leader at PwC – so in other words, a tax expert.
Piot believes that the situation in the housing market can be eased with the correct tax incentives. He also believes that the housing-market problem is linked to a whole series of problems which, if not resolved completely, can still be alleviated.
“In a great many countries – including Luxembourg, France and the Netherlands – we can see that there is a political will to facilitate access to housing,” Piot states. “There are many good reasons for this, which I have absolutely no intention of criticising.”
However, the tax expert sees a major problem with the politicians’ approach, such as the idea of reducing taxes to give more people the opportunity to become homeowners. “Unfortunately, we consider that these political measures are fuelling demand. But just because more people want to buy property, that doesn’t mean that the supply will increase.”
So the principles of supply and demand also play a role here. Increasing demand along with stagnant supply means that, if nothing else changes, prices will increase.
“If nothing is done to change this situation, property prices will increase, negating the advantages afforded to citizens though tax breaks,” says Piot. “In the Netherlands, this policy has created enormous problems. Demand for property ballooned and prices rose so much that a real-estate bubble occurred, and eventually burst.” Consequently, houses in the Netherlands lost value overnight. “Many people in the Netherlands now have to repay property loans that are higher than the value of their property. That is a big problem,” he concludes.
Therefore, Piot recommends exercising caution if a government wants to boost demand for property when supply isn’t increasing at the same rate.
He says that economists should keep an eye on the situation in Luxembourg and should examine whether such a problem could also arise here. Speaking here in his capacity as a tax expert, he is unwilling to make a judgement. One authority that would be able to carry out such analyses – and that already has done in the past – is the Central Bank of Luxembourg.
At PwC, the prevailing opinion is that property speculation must be combated as a priority. “Therefore, properties standing empty must be taxed”, says Piot.

Taxing empty plots

Speculators constantly let residences stand empty and wait for property prices to increase, so that they can make a profit from selling them. It’s hard to say how common this practice is in Luxembourg. “This poses a real economic problem. Our younger employees can barely afford to pay their rent or mortgage,” says Piot.
“So why shouldn’t unused plots be taxed after a certain period of time?” he continues. This would deter owners of such plots from letting land lie dormant and may lead them to sell. Furthermore, it would increase supply and (theoretically) prices would fall. Piot also says that property ownership could be taxed more, with the exception – naturally – of the main property in which the owner actually lives.
For the Government, property tax also brings with it the advantage of stable and highly predictable revenue.
Piot sees this control of the property market through taxation in a very wide social context. If more and more people can’t afford to buy in Luxembourg, this would jeopardise cohésion sociale (social cohesion), the tax expert claims. Furthermore, the high house prices contribute considerably to cross-border traffic and the associated congestion and pollution.
Finally, companies like PwC are always looking to hire people with specific expertise (such as the tax law of a particular country). But nowadays, these specialists are no longer looking at the salary alone: they research what the quality of life is like at their future work location. However, high property prices, traffic congestion and air pollution are far from ideal publicity for Luxembourg.
In addition, working from home helps only to a limited extent: according to Piot, it is only available to people who live in Luxembourg. Its neighbouring countries have rules whereby residents who work a certain number of days in that country must also pay tax there. This is disadvantageous for Luxembourg employers.
Thus, tax policy is not an end in itself; it can also be used as a taxation instrument for other policy areas, and that is indeed what happens. Housing policy is only one such area.

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