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Improving housing affordability through taxes

Posted on 21-12-2023

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Housing affordability has proven to be an increasingly detrimental problem for large sections of the European population. It increasingly affects not only low-income households, but also middle-income groups. In Western European countries, it has become an issue that is used to win elections and steer economic development. Housing is not a direct responsibility of the EU. Even though the housing market does not fall under the direct competence of the EU, it influences the supply of housing in the Member States indirectly through legal frameworks such as state aid, tax law and competition law. It is clear that the provision of housing should not be left entirely to the market, as the market creates an uneven distribution, and that some of the provision of housing should be better controlled, especially in the affordable housing segment.

Rising house prices are mainly due to low interest rates and low housing supply compared to market demand. The Covid pandemic played a role in shifting housing preferences and also contributed to higher housing prices (Frayne et al., 2023). The most important efforts to cool rising house prices are policy measures that target the supply or demand side of the housing market. For example, taxes can be used to influence both sides of the housing market. An article by the World Economic Forum (2022) explains that land value tax, could help to reduce property prices as it could represent an equitable distribution of wealth within the community. In this case, the land tax would incentivise the development of the land, as the land is taxed anyway. If the owner develops the land, he receives a return. This in turn would increase the supply of housing and lower property prices. Land tax is aimed at the capital gains of owners and could also serve to dampen prices. Transaction taxes could also be applied to reduce speculative investment in the housing market, which would reduce the volatility of house prices. Taxes on building materials could be reduced to incentivise the construction of social housing or public rental housing.

In countries with extremely high levels of home ownership, land and property are generally not taxed. Croatia, for example, promotes affordable home ownership largely through public support in the form of subsidised loans. However, there is a newly established housing allowance programme available for around 40 Croatian local authorities in 2023 (Central Office for Demography and Youth, 2023). The impact of this programme has yet to be assessed.

In terms of taxation, there is no property or land tax in Croatia (Crowe, 2023). Taxation of holiday homes and income from renting for tourism purposes is very low and close to symbolic prices, considering that assets are grossed up. A holiday home, for example, is taxed at between €0.66 and € 1.99 per square metre. The transfer of real estate for private individuals is set at 3 per cent of the market value, with some exceptions that can be applied. If taxation such as the land value tax is introduced, it must be phased in gradually and take into account mortgaged households.

The introduction of property taxation in Croatia could open up a new perspective and enable investment in securing affordable housing, especially in the social and public rental segment in large cities, where the housing price crisis is at its worst. However, the introduction of such tax in a country with super home- ownership is politically unpopular and it is unlikely to be introduced at a level where it could significantly influence rising prices.



Central Office for Demography and Young. (2023). Pilot project public call- local self-government units for financial support aimed at co-financing costs housing for young families and young people in 2023 address:, accessed on 12.10.2023.

Crowe. (2023). Wealth Management, Basics of property taxation in Croatia. Address: accessed on 20.12.2012

Frayne, C., Martins, V., Szczypińska, A. & Vašíček, B. (2023) Housing Market Developments. Thematic Note to Support In-Depth Reviews.  Institutional paper 197, European economy

World Economic Forum (2022). What is land value tax and could it fix the housing crisis?

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