French tax changes to bring liquidity in the French property market

Costs for housing in France now represent 22% of the budget of French people in 2012, against 18% in 2004. Recognizing this, the Council of Economic Assistance in France (CEA), presented a report on how to lower prices to Prime Minister Jean-Marc Ayrault on Valentines day. The proposals put forward in the report are not completely in sync with the current government policy.

Stop government support

To lower property prices, the CEA proposes to “put an end to government aid to the construction industry.” The phasing out of the tax exemptions such as the Scellier law, and now the Duflot law,  for purchasing new build property is one of the measures proposed as these incentives to purchase property are criticized as having an inflationary effect.  A further criticism of these laws is that the government money is “partly captured by the suppliers form of higher prices,” according to the agency. A stop in these programs would therefore mechanically lower prices, though would also cause a decrease to available stock.

The incentive to become a property owner for low-income households, with the zero percent loans( PTZ +), is also covered for the same reasons. The best  solution now  being seen as a  “rent to buy” scheme for such households. After 10 years of renting, the buyer would have an option to purchase. The value of the 10-year lease would then be deducted from the price of the property.

In total, the government spend on these two incentives was 4 billion euros in 2012 which tend to support higher property prices.

Increase liquidity in the market

To relieve financial burden of buying, the report proposes to “tax the detention of the property rather than the transaction.” The idea is to reduce the stamp duty rate from the current amount of nearly 5.09% of the amount of a real estate transaction. To compensate for the shortfall in state income that this move would create, the state property tax would be increased. The new property tax would be based on the market value of  property and not on the cadastral rental value as it is currently. This system would allow owners to deduct outstanding loans for the purchase of property in order to benefit from a progressive land tax for owners.

Reduce construction costs

Since 2000, construction costs have increased by 48% in France against only 23% in Germany. This additional  increase is attributed to the multiplicity of construction standards. For CEA, the simplification of these standards and would limit the price increase as it would become easier to build.

The government, it must be noted, has no obligation to follow these recommendations. Indeed, proposals and CEA report are only informative and intended to bring more liquidity to the market.