Opinion Piece by Koen Hoste | VAT on projects: The Government’s Cash Cow

The recent decisions regarding VAT rates for new-build homes in Belgium involve a complex interplay of taxation, sustainability, and economic interests. In his opinion piece, Koen Hoste, strategic director and managing partner of Living Stone, takes a critical look at the consequences of these decisions and advocates for a review of real estate tax policy. He shares his vision on how a more balanced and equitable system can stabilize the real estate market and serve the interests of both first-time homebuyers and investors.

The announcement that the federal government would not extend the 6% VAT rate for demolition and reconstruction was met with considerable disbelief by both the real estate sector and consumers. After sky-high inflation and the sharp rise in interest rates over the past year and a half, this was the last thing we needed. The fact that, in times of extreme climate change, the most sustainable new-build homes are being taxed the highest is not the result of “non-believers” but of “no fiscal room.” At the same time, however, a savings bond is being launched that will drain several billion euros from our economy for at least a year and subsequently make the fiscal space for policy implementation even tighter, given the repayment of more than half a billion euros in interest. And all this just to make a statement.

If the goal was really to send a message to the banks, it might have been better to focus on withdrawing savings from the banks to stimulate the economy. It was recently reported that we Belgians are among the wealthiest people in the world, because we have the highest percentage of homeowners and, partly as a result, are able to build up a comfortable retirement.

On the other hand, this 6% VAT measure for “demolition and reconstruction” is nothing more than part of the fiscal shenanigans surrounding real estate that are staged as a sort of “good-news show” with every new coalition. And that’s not even mentioning the absurd fragmentation of policy across the various regions. How can you explain to any citizen with a shred of common sense that the taxation of existing homes through registration falls under regional jurisdiction, while VAT on projects is decided projects ? How can you then pursue a sensible and coherent policy? Isn’t it time for both politicians and real estate-related sectors to stop the endless lobbying and develop a less complex and more pragmatic long-term real estate policy? 

What have real estate tax policies of recent decades taught us?

• Subsidies haven’t so much benefited the average citizens who need them, but rather opportunistic entrepreneurs and businesses. Who can blame them? We all know them—the “sun kings” who’ve hit the jackpot thanks to green energy certificates.  Other subsidies haven’t lowered the cost of living, but have simply driven prices up. All these measures also create extra and unnecessary red tape, while the government is already living beyond its means.  

• The repeated temporary reductions and/or subsequent increases in VAT rates, registration fees, subsidy measures, etc., primarily lead to spikes in consumer demand that disrupt the balance between supply and demand in the market and, above all, drive up prices to a level where the benefit of the lower rates is completely offset. 

• Fortunately, mortgage interest rates as high as 13%, as seen in the 1980s, are a thing of the past, but interest rates of nearly 0%, as we’ve seen recently, have also disrupted the market. The government has less control over this, but it must take it into account. Current interest rates of around 4% are actually not too high and can provide a sense of stability in the market. They seem particularly high now mainly because we’re coming from rates of nearly 0% and because sky-high inflation has caused construction costs—and thus sales prices—to rise sharply. However, in the long run, they are a good guarantee that sales prices will not rise too drastically, thereby not jeopardizing affordability. It would be beneficial if we could continue to enjoy these average rates over the coming decades.

Precisely because the real estate sector plays a significant role in our citizens’ prosperity, it is important that real estate holdings—as part of one’s overall assets—do not lose their value, especially when it comes to primary residences. For most citizens, renting should be a temporary solution. To achieve this, a balanced and equitable tax system is needed. There is also a need for measures and taxes that are not called into question by every legislature, but rather provide citizens with reassuring certainty, thereby keeping supply and demand in the real estate market well balanced within a desired transaction level. 

For example, reducing the registration tax to 3% for the purchase of a first home is a good thing. Don’t change this anymore.  Furthermore, it is unacceptable that someone wishing to buy a new-construction home as their first home should have to pay 21% VAT on the construction and sometimes even on the entire purchase price. This is not only socially unacceptable but also disproportionate to the much lower registration fees for the purchase of an existing home.  

Personally, I therefore advocate a simple and transparent two-track tax system for the purchase of residential real estate. A policy for people buying their first and only home, and a policy aimed at people who buy a home as an investment—for example, as part of their retirement planning. Ensure that the purchase costs for existing homes and new-build homes are not too far apart, as is currently the case, especially when it comes to a first purchase. Also ensure that rates are reasonable. A 21% VAT rate is far too high for what are, after all, substantial investment amounts in real estate.  Avoid temporary tax breaks and instead ensure sustainable, fair rates. Also, implement lower VAT rates on products (insulation, solar panels, etc.) that enhance the sustainability of our homes, but stop subsidizing them under pressure from yet another lobby group.

My proposal

Here is a proposal that buyers of residential real estate would likely find quite fair:

First-time purchase of an existing home: 3% registration fee and 6% VAT on the renovation budget

First-time purchase of a new home: 6% VAT 

For the purchase of an existing home (second purchase or later): 12% registration tax, 12% VAT on the renovation budget

For projects second and projects purchases: 12% VAT

Elimination of all subsidies and other cost-cutting measures in exchange for these substantially lower purchase costs. 

If you don’t keep changing these rates all the time, the market will eventually stop reacting impulsively. This will provide greater certainty and better prospects for both young families and investors. 

Based on 35,000–40,000 new homes sold in Belgium in 2022 and an average construction cost of 200,000 euros (excluding land), this proposal would cost the state treasury up to 1 billion euros annually in lost VAT revenue.  On the one hand, this is offset by significant cost savings resulting from the elimination of subsidies and periodic tax measures, combined with reduced government involvement in managing all of this; on the other hand, it is offset by increased revenue from additional VAT revenue due to more new-home transactions and from higher corporate taxes resulting from increased profits in the construction sector and other real estate-related businesses. 

It is up to politicians to develop well-thought-out, straightforward, and sustainable measures that citizens can understand and that give them peace of mind. Tax policy should serve as a model in this regard, whereas in our country, taxation sometimes feels more like an exam for citizens, devised by “smart alecks” who are desperate to prove themselves.  

In conclusion, Koen Hoste emphasizes the need for a coherent, fair, and transparent real estate tax policy. He advocates for a simple two-track tax system that serves the interests of both first-time homebuyers and real estate investors. The goal is to create stability in the real estate market, ensure affordability, and reduce unnecessary administrative burdens and subsidies. Hoste’s proposal offers a clear vision of a future in which real estate ownership remains a solid pillar of the Belgian people’s well-being.