Survey: Reforming Germany’s Real Estate Transfer Tax Preferable to Child Tax Credit for First-Time Home Buyers
Germany’s new government has set itself the goal to support families in the acquisition or construction of family homes, and thereby to boost homeownership in general. One key measure that the Grand Coalition seeks to introduce before the end of the year is the so-called child tax credit for first-time home buyers (“Baukindergeld”). However, a survey compiled by the IW Economic Institute in Cologne just presented a highly critical assessment of the child tax credit and elaborated what sort of alternative would be more effective in promoting homeownership.1
Child Tax Credit for First-Time Home Buyers Could Cause Prices to Rise in Germany’s Metropolises
According to the researchers of the IW Economic Institute, the child tax credit for first-time home buyers would create the wrong kind of incentive. Since the child tax credit is a fixed sum—1,200 euros per child and year over a ten-year period—it will have a greater impact among home buyers and builders in rural regions with low property prices than in urban regions where real estate is pricier. The IW survey therefore warns that the child tax credit, not unlike the homeownership subsidy rescinded in 2006, would boost housing construction in regions that do not actually need any new-build homes, so that vacancy issues might be created.
The problem is exacerbated, according to the survey, by the fact that the child tax credit would cause further price growth in regions with strained housing markets. Wherever demand exceeds supply considerably, property developers might actually factor the child tax credit into their selling prices. Another thing criticised are the looming deadweight effects because the child tax credit will probably subsidise those households that would go ahead and buy or build residential property with or without state aid. So, the child tax credit would also miss its objective of significantly raising the homeownership rate among young families.
Incidental Acquisition Costs should be Lowered
Yet the child tax credit for first-time home buyers would have a massive impact on the federal budget, according to the IW Economic Institute, Cologne. The researchers determined that the child tax credit would cost the government at least 3.6 billion euros through the end of 2021, possibly up to five billion euros even. But the amount earmarked in the coalition agreement of Christian Democrats and Social Democrats for the child tax credit, a special depreciation allowance for rental housing construction, and allowances for the energy conservation upgrades of buildings is a mere two billion euros.
That being said, the IW survey does not find fault with the federal government’s effort to promote homeownership as such. Quite on the contrary, the researchers embrace the goal to boost property ownership. But instead of the child tax credit, they consider it far more sensible to reform the real estate transfer tax, so as to lower the incidental acquisition costs for home buyers and to reduce the equity capital amount they require. Their proposal envisions a progressive allowance of the real estate transfer tax depending on the selling price.2