Land, subsidized housing and fiscal policies

Manuel Romera. Professor. Instituto de Empresa

24 March 2004

Spain is different from its neighbors in town-planning legislation. Its autonomous regions (ARs) and local corporations are responsible for regulating land use. Recently, the government has tried to increase the amount of land on offer, but has had a hard time implementing changes.

Of the several modifications carried out, two deserve attention. In 1996, land classification was simplified to urban, developable and non-developable land. This eliminated the scheduled and unscheduled developable categories. The percentage of land that development companies have to forsake to city councils was reduced from 15 percent to 10 percent. This proportion could be further trimmed by the ARs if they so decide. The possibility of private initiative promoting transformation of developable land into urban land was introduced in 2000, lowering the number of administrative steps required, once again if the AR in question so determined.

Another innovation was creation of the controversial figure known as the “developer agent” that has been causing Spanish courts so many headaches. These agents, with consent of the local council, can undertake urban development work on other people's land within a period of between one and three years. They can receive compensation at a later date for their services, in the form of, among other things, developed land.

These changes have been insufficient, since the process is still slow, complex and uncertain. This latter aspect, together with a steeply rising demand for real estate, has resulted in the cost of land accounting for half the final house price in some areas like Madrid. The percentage has doubled in just one decade.

Remember also what has happened with stipulated reserves of land for the so-called VPO (regulated-price subsidized housing), also regulated by local councils and ARs, as well as the obligatory levels of residential land given over to VPO. These figures have dropped dramatically in recent times, plummeting from 60 percent of all houses built in the early 1980s to just under 10 percent in the last two years. This has come about principally as a result of the diminished profitability of investing in construction of VPO at a time when market prices are soaring. This catch-22 situation severely hinders chances of the lower economic groups getting onto the housing ladder.

Tax breaks

The final piece in this real-estate puzzle is the fiscal question. It must be stated that house buying is being promoted in a tremendously aggressive manner. This has come to the detriment of the rental sector, since tenants enjoy no fiscal deductions for renting their residence. A deduction did exist between 1993 and 1998 for those with a taxable income of less than 3.5 million pesetas (21,000 euros). House buyers, on the other hand, can deduct on the basis of the integral installment – i.e., the full amount to be paid – between 15 percent and 25 percent of the amortization and interest payments on the mortgage loan, up to 9,000 euros a year.

Purchase of one’s residence is thus one of the investments with the most favorable fiscal benefits within the Spanish tax system. All this makes Spain the European country with the greatest proportion of homeowners. The figure exceeds 90 percent of the total. Compare this to neighboring countries, such as Germany, where homeowners account for only 40 percent of the market, with the majority renting.

To sum up: Restrictive land-use policy, with speculation by local councils and ARs, has released land on a limited basis, thus reaping benefits of steep rises produced. Add low VPO promotion, thanks to scant interest compared to higher prices for houses on the open market, plus fiscal benefits for home buyers that are more beneficial than tax treatment of tenants, and you have the bottom line: A home has become a luxury item for the average Spanish citizen.

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