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German Government Considers Lowering Incidental Acquisition Costs

Homeownership is becoming an ever more important topic for Germany’s grand coalition government. With the child tax credit for first-time home buyers, the Christian Democrat bloc and the Social Democrats already passed one measure to promote homeownership. Now, they are evidently considering additional ways to lower the incidental acquisition costs for home buyers. The Federal Minister of Justice, Katarina Barley (a Social Democrat), announced a review that is to clarify whether the so-called contracting-party-pays principle could be extended to the acquisition of real property.1

This would mean that the estate agent fee will be paid by whoever called in the estate agent—which is normally the seller. The contracting-party-pays principle has been in force for rental housing since 2015, and those who advocated its expansion as outlined above expect it to relieve the strain on property buyers. Another option the Federal Ministry of Justice is considering is to cap estate agent fees.2 Since the incidental acquisition costs are ineligible for financing via a real estate loan, they considerably increase the equity stake for buyers, and represent a formidable obstacle to homeownership.

A RETT Reform would Probably be more Efficient

As it is, however, estate agent fees tend to be split between buyer and seller anyway in most of the German Länder, so that they account for no more than 30 percent of the incidental acquisition costs.3 By contrast, the real estate transfer tax (RETT) is shouldered by the buyer alone in all of the Länder, and can go as high as 6.5 percent of the selling price. For an efficient reduction of the incidental acquisition costs and the necessary equity down-payment, a tax waiver would therefore make much more sense, and surveys on the subject suggest as much.4 If a waiver was granted to owner-occupiers, it would surely help to raise the homeownership rate.

In June, the Liberals’ parliamentary group petitioned that the real estate transfer tax be waived up to a purchase price of 500,000 euros, but the governing grand coalition denied the motion. The reasons quoted for the decision against the waiver seem contrived. The Christian Democrats argued that the Länder should be brought in on the decision, whereas the Social Democrats were concerned about the extra red tape this would cause.5

Contracting-Party-Pays Principle Not Part of Coalition Agreement

The deliberations by the Federal Government to shelve the reform of the real estate transfer tax and to reduce the estate agent fees for buyers instead has been met with scepticism among real estate associations but also among Christian Democrats themselves. “If the government wishes to lower the incidental acquisition costs, it should lead by example,” stated the Haus & Grund property owners’ association, for example. Jan-Marco Luczak, the deputy spokesman for legal policy of the Christian Democrat bloc’s parliamentary group, voiced a similar opinion in the Immobilien Zeitung trade paper. “I’m in favour of lowering the real estate transfer tax first, as agreed in the coalition agreement, or of introducing basic tax allowances. This would bring instant and direct relief to property buyers,” he said.

Extending the contracting-party-pays principle to sales property is advocated primarily by the Social Democrats, Greens and the Left Party. But the coalition agreement between Christian Democrat bloc and the Social Democrats does not even include the measure.