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
