The effects of VAT reductions on newly built properties and constructions in Hungary

Abstract

Motives: This study was undertaken to determine the feasibility and macroeconomic impact of reduced VAT. As an EU Member State, Hungary may apply reduced tax rates in accordance with the Council Directive 112/2006/EC. In Hungary, due to the high general tax rate, the range of products and services with reduced tax rates plays a special role.Aim: In Hungary, a preferential VAT regime was introduced to reduce the increase in the price of new-build properties. The aim of this study was to examine whether reduced VAT had the desired effect. Therefore, the effect of 5% VAT on the Hungarian real estate price index was analysed based on the data provided by the Hungarian National Bank with the use of various statistical methods.Results: The study demonstrated that a reduced VAT rate on newly built properties that meet certain conditions in Hungary had an impact on the real estate market. The date of the building permit, which is a prerequisite for applying a reduced tax rate, increased real estate prices as an immediate effect, which was reduced somewhat by the final consumer price due to the reduced tax rate. This double effect stabilised the real estate market price index.