Drop in taxes on property undervaluation confirms real estate decline

Additional taxation stemming from the under-evaluation of property sold has taken a plunge since 2010, when government architects levied €1.9 million in additional taxes payable on under-valued property.

The figure had been climbing since 2008 - an election year that produced a paltry €103,883 in this type of tax - ostensibly due to a go-slow directive from the government during the election year.

It then rose to normal levels of €1,241,899 in 2009, and to €1,924,243 in 2010.

However, for the first six months of 2011, the figure stood at €77,879, meaning that even if government income retains current trends, the annual figure looks set to stand at around only €150,000 , a considerable drop from last year’s €1.9 million.

The figures were tabled in parliament by Finance Minister Tonio Fenech in reply to a parliamentary question by Labour MP Joe Mizzi, who asked Fenech to reveal government’s income stemming from additional taxation on under-declared property values.

Additional taxation is charged on property that is under-declared by buyers, which is then valued by government architects.

If the property bought is found to be worth more than the buyer originally declares, the original taxation is then charged, along with additional fines relative to the property value.

Fenech also revealed that government’s income stemming from these relative fines, steadily increasing over the past three years,dropped significantly in 2011's first six months.

He said that while government’s income from these fines in 2008 stood at €51,275; in 2009 the figure stood €446,444, while in 2010, the figure stood at €583,668.

In sharp contrast, government’s income from relative fines during 2011’s first six months stood at only €21,068.

The sharply declining figure seemingly echoes warnings by the Central Bank earlier this year that the construction and property sectors are grossly underperforming.

The report had warned banks to remain vigilant on their exposure to high credit risk and the effects a decrease in property value could have on their collateral.

Michael Falzon, a former minister and now president of the Malta Developers Association, had also confirmed the decline and the correspondingly “exaggerated” trend of property disposal by barter.

“You get a plasterer to gypsum up a new block of apartments, and he doesn’t get paid in cash. You give him one of your unsold apartments. But eventually, this stock must get sold some time or other,” Falzon said.

Falzon says the excess stock eventually pushes real estate prices downwards, and warned of the danger this could have on the value of hypothecs.

True to his observations, the Central Bank warned that that sectors such as the construction business are experiencing a disparity between the supply and demand for property.