Scrap the Rent Tax and Maintain the Real Estate Sales Tax in Ghana

After over 3 decades of policy vacuum, characterized by piece-meal attempts to recognize housing in some policy documents by succeeding Governments, a new National Housing Policy was promulgated in 2015. This article argues that the 8% existing Rent Tax should be scrapped while the VAT on real estate sales maintained for reasons discussed below. The new Housing Policy is premised on pro-market principles aimed at creating and encouraging private sector leadership in housing delivery. This view is crystalized in objectives 1 and 2 of the new National Housing Policy as:

1.     To promote greater private sector participation in housing delivery;

2.     To create an environment conducive to investment in housing for rental purposes.

Policy initiatives to achieve these objectives include:

1.     Providing fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code;

2.     Reviewing the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners.

However, Government fiscal policy appears to stand in direct contradiction to the ideals espoused by the new housing policy. Lets consider these contradiction below:

Rent Taxation

The introduction of the rent tax in the same year 2015, when the new Housing Policy with a beautiful vision was promulgated is a policy worth considering in terms of its potential effect on real estate investments in general and housing delivery in particular. The Income Tax Act, 2015 (ACT 896) was passed to introduce a Rent Tax - 8% in the case of residential premises and 15% in respect of commercial premises of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors’ cashflow and increases the risk of profitability, which could make investment in private rented housing relatively unattractive and thus render the vision of the policy elusive.

Most private rented housing in Ghana were constructed with private equity. In the strict sense of corporate finance, equity financing does not provide any tax deductibility advantage as using debt. Look at it this way. Interest payments on debt are considered a cost in the production of goods and services. So, most countries including Ghana allow investors to deduct interest payments from revenues before paying tax. Therefore, the capital structure of an investment matters, and using debt financing provides a tax saving advantage over equity. The effect is that the tax savings increase the cash flow to equity shareholders and thus increase the value of the investment, as per the popular Modigliani and Miller theorem. Therefore, given that most private rented housing is equity financed, most landlords would pay more in taxes compared to the case of using debt financing, which is simply unavailable or available at a extreme high cost to investor.

Coupled with low rent levels in Ghana, landlords are more likely to pass the tax to tenants in the form of high rents, if enforcement is effective. This effect would increase housing cost and thus the cost of living of most low- and middle-income households and reduce their standard of living, ceteris paribus. Considering the capital structure of real estate investments, particularly housing in the light of the 1.7 million housing deficits, it is first and foremost, welfare maximizing and secondly, a possible stimulant of new housing investments to scrap the 8% rent tax.

Nevertheless, I argue that the VAT on real estate sales should be maintained against the backdrop of calls by the Ghana Real Estate Developers Association (GREDA) to scrap it. Two principal arguments could be advanced in this regard. First and most factual, most houses constructed by the GREDA are already out of the reach of the median income household, below which we find the masses, even most middle income households. With average prices around US$100,000, and priced in dollars in the face of an incessant depreciation of the cedi, their clientele is cut in high-income households, expatriates, foreigners and residents living abroad, who earn superior incomes and currencies. A survey shows that more than 50 per cent of the clients of GREDA are foreigners and residents living abroad. Thus, this tax has little to no adverse effect on the ability of low and middle-income households (who constitute the majority of the populace) to afford their houses. It will serve government well to continue with this tax. In other words, the target clientele of GREDA are more likely to afford the additional 8% VAT on real estate. Thus, the government would benefit if it maintains the tax.

Should there be a need to review the VAT on real estate, it should not be an exemption for all real estate developers. Policy provides an indispensable avenue to promote affordable housing development to reduce the huge housing deficit. In this regard, affordable housing developers should be exempted from the VAT, but not luxury home developers. I must say that implementing such a policy requires a proper definition of affordable housing in Ghana and mechanisms put in place to monitor delivery. In Ghana, almost all real estate developers claim to be developing affordable homes although their prices a way above the median house price. The new Housing Policy defines affordable housing as:

“The ability of a household to spend up to thirty percent (30%) of its gross annual income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities. When the annual carrying cost of a home exceeds thirty percent (30%) of household income, then it is considered unaffordable for that household” (Ministry of Water Resources, Works and Housing, 2015).

However, this definition only measures the “housing affordability” concept in affordable housing. It therefore says little about the definition of affordable housing and it is fraught with challenges especially because it contradicts the practice in the banking and finance industry, where 40% (maximum) of household income is considered a measure of affordability. Lets consider this situation for instance; would houses priced at US$100,000 be considered affordable housing (given the income levels in Ghana) just because someone can afford it? Certainly no!

The old Planning Policy Statement 3 of the United Kingdom (UK) acknowledging the conceptual difference between “affordable housing” and “housing affordability” defines the former as particular products outside the main housing market; and the latter as a measure of whether housing may be afforded by certain groups of households. These particular housing products according to the UK National Planning Policy Framework (2012) is the sum of affordable rent, social rent, intermediate rent and affordable home ownership provided to specific eligible households whose needs are not met by the market (Woo and Mangin, 2009); subject to rent controls that require a rent of up to 80 per cent of the local market rent (including service charges, where applicable). Eligibility depends on local authority allocation policies, local incomes and local house prices depending on the type of affordable housing. Also, Peter O’Brien of the Royal Town Planning Institute (RTPI) in the UK provides a quantitative benchmark, making reference to past EU definitions that equate what is affordable as 75 to 80% of the market price or rent.

Notwithstanding that affordable housing is priced below the market house price, the material quality and quantity of rooms and services are specified. According to the National Affordable Housing Summit Group in Australia, two main concepts in this regard: (1) "reasonable adequacy” in standard and location, and (2) “sustainability” are worth considering. The KPMG (2010) reveals that reasonable adequacy means a 300 – 1200 Sq. Ft. house in Indian, which varies in other countries. There is also the agreement on quality design standards as one of the chief measuring tools, although it makes affordable housing expensive (Quigley and Raphael, 2004). What then is the value of design in so basic the need as housing? A common view is that good design costs more, and that while architects add value and quality to buildings, they rarely add economy (Davis, n.d). Housing is not merely shelter, or basic protection from the elements; it must also bestow on its inhabitants a sense of dignity. To ignore this aspect of housing or to consider it a perquisite for those who can afford market-based rate housing is to invite both social and financial disaster.

Moreover, those who can afford these skyrocketing house prices are those who finance them with mortgages. They then enjoy the tax deductions on the repayment of their mortgage interests, which can be considered as government subsidizing housing for the rich and high-income households, rather than the low and middle-income households, who need it the most. Therefore, the VAT on real estate somehow offsets the interest deductions allowed if they use a mortgage. Again, this interest rate subsidy provides an avenue for government to use policy to promote mortgage financing for the burgeoning middle-income class in particular and raking in some more revenue if properly targeted and aligned.

In summary, I wish to propose to the incoming government that a comprehensive study of the fiscal policy on real estate investment and development be done for efficient taxation and efficient delivery of real estate in Ghana. On the surface, it appears that scrapping the rent tax and maintaining the VAT on real estate sales would be prudent policy. I also propose for a review of the definition of affordable housing in the National Housing Policy so as to ensure that standards are met and delivery easily monitored. Last but not the least, another study should be conducted to properly target and align interest rate subsidies in Ghana.

Kenneth A. Donkor-Hyiaman

Finance and Real Estate Economists

Property & Planning Institute of Technology

Housing Policy Reversionism and Contradictions in Ghana?

Housing Policy development can be traced as far back as the 1920s when the Dispossessed Person’s Housing Scheme was operationalized to provide some compensation to people whose houses were compulsorily acquired in the so-called public interest. After over 3 decades of policy vacuum, characterised by piece-meal attempts to recognise housing in some policy documents by succeeding Governments, a new National Housing Policy was promulgated in 2015. This brief article raises two main issues - policy reversionism and policy contradictions - for further consideration; shows their interconnectedness and how they combine to contradict the spirit of the current housing policy.

Housing Policy Reversionism

First, the issue of policy reversionism becomes clear after a review of housing policy change in Ghana from 1920 to 2015 (see Kugbega, 2015; Arku, 2009). Reversionism is the principle of reverting to the conditions, customs, ideals of an earlier era. This process is similar to reversionism and recidivism in theology and criminal justice theories respectively (Sarfoh, 2010).  In theology, reversionism is viewed as the process of a Christian backsliding after having been reformed. In criminal justice, recidivism entails the process of “reversion of an individual to criminal behaviour after he or she has been convicted of a prior offense, sentenced, and (presumably) corrected” (Malt, 2001:1).

So, what is the evidence of reversionism in housing policy development in Ghana? Between 1920 and 1984, housing delivery was largely state-led. However, the period was also characterised by reversionism. The Military Government led by the National Liberation Council (NLC) and the first civilian Government (Progress Party) after the overthrow of Nkrumah, liberalized housing policy through privatization, deregulation and non-budgetary allocations to subvented state enterprises. The idea was to encourage a private sector-led delivery of housing due to inadequate state resources. Privatization of state assets was however alien and unfavoured by the populace. Thus, coupled with economic hardship, ripe conditions returned the Military to power, led by the National Redemption Council (NRC) and subsequently the Supreme Military Council (SMC) I & II. It is believed that for populist reasons as a way of legitimizing their actions, these military governments reverted to state-led housing delivery in a grand style, despite inadequate state resources.

Secondly, during the Armed Forces Revolutionary Council (AFRC) regime (another military government in 1979), price, rent and exchange rate controls were stringently reinforced without recourse to legal systems (Jeffries, 1982). These draconian approaches and populism were meted out as punished to so-called economic saboteurs – essentially targeted at the rich, landlords and traders who were not necessarily rich (Sarfoh, 2010) - in the name of probity and accountability. Further, the Rent Act, 1963 (Act 220) forbade rent advance payments exceeding 6 months. Fast forward 2015, history is repeating itself. The Rent Act is currently under review. The Draft Rent Bill seeks to reform the existing rent regulations, remove inherent constraints on housing supply, while maintaining the protection it offers low-income and vulnerable tenants from abuse and arbitrary actions by landlords. One of its propositions according to the Deputy Minister for Housing, Mr Sampson Ahi, is to control rent advance period by reducing the rent advance period from 6 months to 1 month. This is a clear instance of housing policy reversionism to an ideal – rent control - established as debilitating to housing market development (cf Malpezzi et al, 1990; Willis & Tipple, 1991).

Housing Policy Contradictions?

Objective 1 and 2 of the new National Housing Policy are:

1.      To promote greater private sector participation in housing delivery;

2.      To create an environment conducive to investment in housing
for rental purposes.

Policy initiatives to achieve the objectives include:

1.      Provide fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code;

2.      Review the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners.

However, Government fiscal policy appear to stand in contradiction to the ideals espoused by the new housing policy. Two of such government actions are identified below:

Rent Tax

In the same year - 2015 - when the new Housing Policy with a beautiful vision was promulgated, the Income Tax Act, 2015 (ACT 896) was also passed to introduce a Rent Tax - 8% in the case of residential premises and 15% in respect of commercial premises of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors cashflow and increases the risk of profitability, which could make housing investment relatively unattractive and thus render the vision of the policy elusive.

Rent Advance Payment Reduction

As indicated earlier, there is a proposal to reduce the rent advance payment period from 6 months to 1 month. Already, most landlords require on average 2 years rent advance in the major cities because the 6 month rent advance may not be worth their investment. From an investment perspective, rent advance is a mechanism to reduce investors' risk and increase their initial yield, to help them recoup upfront some portion of the substantial investment they have made in housing. A reduction in the rent advance period increases investors' risk and reduces their initial yield, which make housing investment relatively unattractive. Empirical evidence shows that as rent control laws became restrictive, availability of rental accommodation declined with house owners unwilling to be subjected to excessive control over rent pricing (Sarfoh, 2010; Malpezzi et al, 1990; Willis & Tipple, 1991). Rent controls were historically adopted as political instruments whenever governments (the Socialist and Marxist political administrations- PNDC) wanted to garner support of the masses to legitimise their stay (Sarfoh, 2010). It appears the socialists and Marxists are back with a policy reversionism tactic in rent control, perhaps for the sheer populism to garner electoral votes since the polls are about two weeks away. A few important questions arise.

Pertinent Questions

1.      Now, in spite of the need to rake in more revenue for Government, how and in what ways does a rent tax and a reduction in the rent advance period help to achieve the policy objectives of the new National Housing Policy?

2.      Is the reversion to rent control an exercise of populism against the economic saboteurs – landlords and investors - or an act of exercise justice for poor tenants in a corrupt housing market?

3.      Was the new National Housing Policy dead on arrival?

Kenneth A. Donkor-Hyiaman, MPhil (Cantab)

Doctoral Researcher (Real Estate and Planning)

Managing Partner, MeTis Brokers (Private Equity Real Estate Investment Firm)

Housing Policy Contradictions in Ghana?

In 2015, a new National Housing Policy was promulgated after over 3 decades of policy vacuum (since the 1970s despite piece-meal attempts to recognise housing in some policy documents by succeeding Governments). Two of the policy objectives are:

1. To promote greater private sector participation in housing delivery;

2. To create an environment conducive to investment in housing
for rental purposes.

Policy initiatives to achieve the objectives include:

1. Provide fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code.

2. Review the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners. 

While the Government has embarked on some laudable housing projects in some respect directly and in partnership with the private sector, the effect of two major Government actions on the nation's ability to achieve these objectives require some careful analysis.

1. RENT TAX

The Income Tax Act, 2015 (ACT 896) introduces a RENT TAX - 8% in the case of RESIDENTIAL PREMISES and 15% in respect of COMMERCIAL PREMISES of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors cashflow and increases risk, which could make housing investment relatively unattractive.

2. REVIEW OF RENT ACT, 1963, (ACT 220)

There is a move to review the Rent Act in recent times. One of its propositions according to the Deputy Minister for Housing, Mr Sampson Ahi, is the reduction in the rent advance period from 6 months to 1 month. Already, most landlords require on average 2 years rent advance in the major cities because the 6 month rent advance may not be worth their investment. From an investment perspective, rent advance is a mechanism to reduce investors' risk and increase their initial yield, to help them recoup upfront some portion of the substantial investment they have made in housing. A reduction in the rent advance period increases investors' risk and reduces their initial yield, which make housing investment relatively unattractive.

Now, in spite of the need to rake in more revenue for Government, how and in what ways does a rent tax and a reduction in the rent advance period help to achieve the policy objectives of the new National Housing Policy?

Is the new National Housing Policy dead on arrival?

Review of the Rent Act must be Evidence-based and not driven by mere sentiments 

At the maiden Youth in Construction Conference held at the La Palm Royal Beach in Accra, Mr Kenneth Donkor-Hyiaman, a Research Fellow of the Property & Planning Institute of Technology (PPIT) speaking on “The need for research impact in the construction and real estate industries in Ghana” questioned the basis for the proposal to reduce the rent advance payment period from six months to one month. He challenged the Deputy Minister for Water Resources, Works and Housing, Mr. Sampson Ahi to produce the evidence-based (data and research) that supported this eminent policy change.

Mr Kenneth Donkor-Hyiaman acknowledged the need to update some portions of the rent act to reflect current circumstances but bemoaned the possibility that the basis for a theory of change appears to be informed more by sentiments than data and research.  It is a fact that some landlords take more than six month’s rent advance from prospective tenants amidst increasing rents. This situation has made it difficult for some people to secure decent accommodation or lose their accommodation to the highest bidders. He argued that this situation is fundamentally a result of the huge housing deficits in Ghana and the best solution is to increase housing supply and not to legislate the problem away.  This latter he christened as “picking the low hanging fruits” – the easy but less effective approach.

The Youth in Construction Conference was organized by the Global Communities as part of the Youth Inclusive Entrepreneurial Development Initiative for Employment (YIEDIE) project on August 10, 2016. Referring to the extant literature, the PPIT Research Fellow expressed doubt about the successful implementation of this proposal when passed into law without dealing with the housing supply constraints. He indicated that the history of rent controls in Ghana and other parts of the world is debilitating and has often worsened housing conditions wherever they were implemented. On a practical side, the PPIT predicts that such a law and policy is most likely to starve the housing market of the needed future investments since investors may not achieve their expected returns given this legal restriction and risk. Rational investors will begin to reallocate their resources to other investment assets like stocks, bonds and infrastructure, beside others that provide better returns with less or the same risk. 

The PPIT is of the view that the prolonged culture of policy making without robust data and research might be the natural outcome of the lack of research in general and research impact in the real estate and construction industries to be specific, beyond academic impact – where research findings are published in academic journals. Making reference to previous and established definitions of research impact as the: outcomes, benefit, payback, translation, transfer, uptake and utilisation (Beacham et al, 2005; Carden, 2004; Flint, 1998), he therefore presented a framework for evaluating research impact in the construction and real estate industries in Ghana. He highlighted the need for more research of the pertinent and rising issues in the construction and real estate industries, but research that demonstrates change either real or potential beyond the research process and its primary outputs.

The Property & Planning Institute of Technology, a research Institute focused on real estate, construction, and infrastructure planning and policy research is leading an advocacy to maximize the impact of research in the real estate and construction industries in Ghana. The PPIT seeks to lead demand-driven impact research for evidence-based policy making in the management of real estate, construction industry and environmental resources in Ghana. He called on private and public institutions to use the services of the Institute.