The Bahamas’ real estate sector has reacted cautiously to plans by the government to raise the stamp duty on property sales, with some concerned the additional charges could discourage investors.
In his budget address to parliament on May 27, Prime Minister Hubert Ingraham outlined a series of measures to rein in public spending and bolster state finances, with the real estate sector in line to be one of the industries called upon to help replenish the treasury’s coffers.
Among the steps the government intends to take to reduce the deficit, which Ingraham said reached 5.7% of GDP in fiscal year 2009/10, was an-across-the-board two percentage point increase on stamp duties for real estate transactions, except for those involving first-time homebuyers.
Under the new levy, due to come into effect as of July 1, stamp duties on property sales valued up to $20,000 will be increased from 2% to 4%; for those $20,000-$50,000, the rate rises to 6%; for transactions between $50,000 and $100,000, the duty payable will be 8%; for $100,000-$250,000 it will be 10%; and for sales of $250,000 and above the levy will be 12%.
The increased charges on the real estate sector, along with a range of price hikes and belt-tightening measures, were aimed at slashing state debt, Ingraham said.
“Our near-term objective is to get the ratio of recurrent revenue to GDP up to 19.7% in 2010/11, or $1.49bn, and then, at a minimum, to increase it to 20% of GDP in the years beyond 2010/11,” the prime minister told the parliament.
Analysts have warned that by raising the stamp duty the government could in effect reduce its revenues by sparking a slowing of the already sluggish real estate sector. According to state figures, last year saw a 16.4% drop in loans for new construction and building repairs, with sales of existing properties also well down.
Some in the real estate sector have called on the government to delay the implementation of the increase, or at least allow those transactions that were already in the process of being closed but which may not be concluded by July 1 to be assessed at the old rate.
According to Andrew O’Brien, the chairman of the real estate sector of the Bahamas Bar Association, some property deals could fall through if buyers were faced with extra costs.
“The most sensitive way to deal with this is to have a two-month window, have the Public Treasury recognise any deal completed and look at the date of the document,” he said in an interview with local press on June 1. “If they recognise the old rate for two to three months, that gives people time to clean up whatever is in process now. It gives people time to plan and prepare.”
Despite the criticism, any watering down or delaying of the new measure appears unlikely, with Zhivargo Laing, the minister of state for finance, saying that as long as the tax increases come into effect as scheduled, all real estate transactions that had not closed and had their conveyancings stamped would be subject to the new rates.
Perry Christie, the head of the opposition Progressive Liberal Party, warned that the measures outlined by the prime minister would do nothing to promote growth, employment and productivity in the real estate sector or the broader economy.
“The proposed increases in real estate taxes will further depress that market in addition to the construction industry,” he said in response to the premier’s budget speech.
However, Patty Birch, the head of the Bahamas Real Estate Association (BREA), played down the potential impact of the tax increases, saying that stamp duty had not been raised for the best part of a decade.
“It is not so bad that it will bring real estate to a standstill,” Birch told local media. “I don’t think this will affect real estate buying and selling. The government has been more than fair to the real estate market. If you take something that hasn’t changed for years and years, and won’t impact first-time homebuyers, it’s not that bad.”
While the government has moved to boost its revenue from property sales, it is also working to ensure that buyers are able to meet their financial commitments once they have a roof over their heads.
The economic downturn has seen a rise in the number of homeowners who are having trouble meeting mortgage payments, despite relatively low interest rates. This increase in late payments has prompted the government to reassess the criteria for those seeking support from the state mortgage corporation, according to the housing minister, Kenneth Russell.
There will be more in-depth checks to ensure the home purchase is sustainable for the buyer, Russell told the local press, adding that the move is an effort to decrease future repossessions after homeowners have already been in their low-cost homes for some time.
“If someone says they have two jobs, we will no longer take a letter from the second job as confirmation they have two jobs,” Russell said. “We will investigate further to make sure the information we have on them is accurate and that this second job is a sustainable one that can assist them in paying off their mortgage.”
It is too early to say whether the increase in stamp duty will have an impact on real estate sales. Of greater concern to the property sector will be the slower-than-anticipated return to economic health of the US, which is still recovering from the global financial crisis. With Americans among the leading investors in prime local real estate, continued economic ill health in the US does not bode well for realtors in the Bahamas.