One of the most debated topics recently is the planned fiscal reform, which is expected to be first approved by the Government, then adopted by Parliament, and to come into force next year. In this context, some speak of a possible explosion in prices and tariffs due to the cancellation of reduced VAT rates on certain goods and products and the introduction of the standard 20% VAT rate; others warn of the devastating impact on agriculture; while yet another group points to the consequences of annual excise increases. In the following lines, I will refer to the impact that the proposed reform could have on the real estate market and the construction sector — two areas of major importance for the national economy, including in terms of their share in the Gross Domestic Product.

It is no secret that the real estate market has been in free fall for two years. During this period, the market has lost practically four out of five buyers, and the situation continues to worsen. The construction sector, according to data from the National Bureau of Statistics, ended last year with growth of 32.2%, but in the first quarter of this year recorded a decline of 12%. Declines were registered across most relevant indicators — from new construction to major repair works. The situation is further aggravated by the significant decrease in the volume of housing space put into operation (in the first quarter of this year, this indicator fell 6.8 times compared to the same period last year). And this is happening while demand in the real estate market continues to exceed supply by more than 30%.

In this situation, many were awaiting the budgetary-fiscal policy for next year, which officials call a fiscal reform, given the radical changes it entails. And if there was some hope that the reform would unblock the real estate market and stop the decline in the construction sector, it is becoming increasingly clear that, if adopted in its current form, the situation in these two sectors could worsen even further. Here’s why: first, because VAT is to be introduced on the purchase of real estate from developers. This will automatically lead to a significant increase in the prices of new properties. Perhaps not by the full 20% as some claim (since part of the VAT can be deducted against transactions for construction materials), but the increase will still be substantial. Authorities say the new rules will not affect individuals who buy and sell properties among themselves, since VAT will apply only to purchases from developers. But no one can guarantee this will remain the case, as the market is a living organism — price increases in one segment usually trigger changes in others.

Experts also warn that starting next year, VAT will apply to rental properties. This could lead to higher rental prices, and as a result, this segment of the market could also enter decline, after the significant growth it has seen in recent years. It is not excluded that a large part of the rental market could return to the “shadow economy,” from which it was painstakingly brought out in recent years.

Another significant impact could come from the cancellation of capital gains tax exemptions in real estate transactions, and the introduction of a flat 15% tax, as provided in the draft fiscal reform. Authorities say this will not affect those selling the home they live in. However, it will discourage those who purchased properties for investment purposes — they simply will no longer want to sell. Especially since, after property evaluations and re-evaluations, cadastral values have increased two to three times, meaning capital gains tax will rise significantly. As a result, we could see a further reduction in the number of real estate transactions, which is already extremely low.

Of course, other provisions of the fiscal reform concept also deserve attention, but the points mentioned above are enough to deduce that its implementation could worsen the situation in the real estate and construction markets. Therefore, during the examination and adoption process, these aspects should be given special consideration, and perhaps some positions should even be revised. After all, we are talking about two sectors that together contribute about 13% to GDP.

Viorel Godea, General Director of “Lagmar” Company