Transfer tax: where do we have to go with it?

The transfer tax is a tax that you pay whenever you buy a house, for example. If you sell your house to another within three years, then the buyer will also pay transfer tax again. For consumers this means that every relocation to a bought home will cost you extra money. Because only if you sell the house to another within twelve months, you will get the paid taxes returned (according to the current rules).

As a consumer the purchase of a private house, measured in euros, is the largest purchase in someone’s life. It is therefore not strange that the 6% of transfer tax that is raised on this makes for a substantial contribution to the financing of our state. According to the CBS in 2009 it totals 2,7 billion euro (see Revenue state taxes are almost 7 billion euro lower). In 2007, the revenue was a lot higher: in 2009 when compared to the year 2007 the revenue was almost halved because of a smaller amount of transaction and to a lesser degree the lowering prices of housing. The transfer tax has a fixed rate regardless of income, but does depend on the selling price of the property.

By the way, the Dutch government has temporarily decided to lower the 6% to 2% for certain types of property. This temporary measure applies to transfers that take place between 15 June 2011 and July 1, 2012.

6% transfer tax, is that a lot?

As a consumer you hope - and you were accustomed - that the increase of value of your private housing is greater than the transfer tax paid. In practice a Dutch citizen will live in a house for about 100 months; this varies greatly because of phase of life, personal circumstances and surroundings, but 100 months is a good average. But in practice, as a consumer it is easy to forget that your house should rise in value because of inflation anyway. The ECB aims for a stable inflation percentage of 2%, so you can safely assume that it will be around 2% in practice as well. And your house has to increase in value to compensate for the risk of devaluation. Until the start of the financial crisis it was not customary to assume a depreciation, but the risk was there at the time as well. My own father witnessed the housing market crisis of 1980-1982 as an entrepreneur in the construction industry. During this crisis the market prices halved, among others because of a dramatically increased interest and a declining demand because of structural unemployment. The lesson he taught me was: a depreciation will occasionally occur and to compensate for that a house will have to increase extra in value beyond the inflation. I am, by the way, assuming that a house is maintained normally, which does not increase of decrease its value.

The Land Registry helps you to determine what the long-term value development of houses is. You can find that in the Price Index of Existing Property For Sale. Over the period January 1995 to January 2011 this index went from 38.8 to 105.1. Houses over the whole of Netherlands have become 2,7 times as expensive in euros since the moment the measurement took place. If you calculate this to the long-term average value increase per year, then that is about 5.6%. Over the same period, inflation was about 1.7% per year according to CBS StatLine. So then the increase in value including risk premium is approximately 4% per year over the inflation rate.

Is 4% sufficient as rating for the risk of depreciation? I believe so. Over periods of dozens of measured years properties have developed positively so far. If there are a few unlucky years, then you can retain your house and eventually go for the ride on a rising market. That is different when it comes to shares of companies. Companies will sometimes simply go bankrupt; the risk that a residence (possibly with its underlying land) will not be worth anything, is relatively small when sufficiently insured. In my view it is not unreasonable within the current tax regime that the owner of a house will pay 6% of transfer tax over an average length of residence of 100 months.

Of course, you often hear that if the mortgage interest (which is quite a mouthful) is up for discussion or the ‘skewed housing’ is, then the entire housing market would need to be addressed to avoid an incomes policy by only taking on the ‘skewed housing’. That seems reasonable, but is unrelated to the following problem.

So what is the problem?

So what is the problem with the transfer tax then? The transfer tax in its current form is related to the transfer of a house. If the number of transactions falls, because of macro-economic developments for example, then it can be noticed in the household budget of the state right away. All the while the living comfort of the citizens does not change dramatically; they still live in the same houses. And on a micro level it means that a citizen will thing twice before buying a new house if he is not absolutely sure that he will live there for many years. A move over greater distance has a major social impact on a household anyway. So it is no surprise that the inclination to move over greater distances, from private housing to private housing, is minimal. We also prefer to avoid a new employer at a greater distance. And if it is at all possible then we will prefer to drive back and forth, with or without traffic jams. At the micro level this is quite justified, but for the Dutch economy this means that we are not able to get the right people at the right place very quickly; can you imagine someone from Limburg who knows a lot about ground subsidence by coal mining moving to Groningen to solve the effects of the ground subsidence there? At a macro level this means the performance of the economy is less optimal.

Regardless of the situation on the housing market I reckon it would be commendable for that reason to organize the transfer tax in a different way. From a transaction based solution that damages labor mobility and therefore the economy as well, to an arrangement in which you would pay a fixed percentage of your house value regardless of your buying frequency. This resembles the notional rental value (for the own home, there are different rules for a second home). The difference is that the applied percentage with the notional rental value is dependent on income. An arrangement that would be based not on a municipal, but on a national level where the WOZ valuation and a fixed percentage would be the starting point, would seem better to me. This could be done regardless of income for both citizen and government over longer periods of time. For example by including the value of private housing in box 3 of the income tax, possibly with a compensation depending on whether the home functions as own housing or not. And then also abolish the transfer tax. In this way the labor mobility will rise, allowing the economy to react faster to changes. And a flexible economy also has a direct effect on the reduced mobility in the housing market.