Europe’s governments inflate housing prices with huge tax privileges for real estate

Credit: Alexia Barakou

The colourful facades of the post-war buildings in Neukölln can be seen from far away, shining in bright pink, apple green and sunny yellow against overcast autumn skies. The idea of former owner Harry Gerlach, he wanted to make Berlin a “little more colourful and friendly”, believing that “you should always smile when you come home”.

But for residents living in Neukölln today there is little to cheer. Last Spring, they learned that their homes were to be sold to notorious real estate investor, Mähren AG. Residents now fear sharp rent increases amid a deepening cost of living crisis, but the seller of the apartments, Harry Gerlach’s son, is likely still smiling at the deal he struck.

Under German law, if more than 300 flats are inherited as part of a housing company, an heir does not have to pay tax if the properties are held for a five-year period. For the properties inherited by Harry Gerlach’s son following his father’s death, this period ended in early 2021. Since then, two other blocks he received were sold to Mähren for a combined €43 million. He did not respond to questions about his taxation dealings for the apartments. 

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Across Berlin, the real estate entrepreneur Harry Gerlach had houses painted in bright colours.

The favourable policies enjoyed by Berlin’s real estate inheritors are far from unique, nor is the shaky ground that residents find themselves now living on.

On the outskirts of Milan, Gianfranco Cerlienco and his wife Nunzia sit at the kitchen table in their small flat. “I am now afraid, we are terrified, that they will send us away,” Gianfranco says of the building they have called home for 50 years. Three buildings on their street are now controlled by US asset management giant Apollo. The flats are an attractive investment, especially as Apollo does not have to pay any profit tax in Italy. 

“Last June, our neighbours, without being notified of the sale, began receiving letters canceling their contracts,” the retired factory worker says. “As the leases expire, they are not renewed.” Out of the 140 flats, more than half have already received the letter. “Our contract expires in 2024, I will be 81-years-old, where do you want me to go at that age?” Gianfranco questions.

Apollo’s reach stretches to Portugal where they purchased 271 properties in Lisbon and Porto in 2018. By setting up local real estate companies, the US fund, as a private buyer, was able to avoid paying any property transfer tax. Apollo saved an estimated €36 million. Soon after, eviction letters starting landing through tenants’ doors. Some homes, though, were later sold to insurance firm AXA – another fillip for Apollo who paid zero capital gains tax on the deal.  

A high-rise of tax benefits

From Berlin to Paris and from London to Athens, residents are at the mercy of opaque real estate owners, whose profiteering ambitions continue to help push up prices and price out citizens. House prices in the EU jumped almost 40% between 2010 and 2021 and the search for affordable housing is now an unenviable, sometimes desperate task for many. 

Credit: Investigate Europe
Gianfranco Cerlienco and his wife Nunzia are fearful of losing their apartment in Milan.

Europe’s cities are transitioning at breakneck speed, undergoing facelifts from the foundations up, as once shunned neighbourhoods take on shiny veneers. Such transformations, increasingly led by real estate conglomerates and institutional investors, are made possible in large part thanks to advantageous taxation policies.

Investigate Europe has analysed the laws and loopholes that enable real estate firms to embed themselves within cities. Austria, Belgium, France, Germany, Greece, Hungary, Italy, Norway, Poland, Portugal, Spain, Sweden and the UK all have tax regimes that favour certain kinds of real estate investments.

Capital gains exemptions, special free-tax guarantees, low rent income taxes and inheritance incentives are just some of the common privileges granted. Real estate funds in the Eurozone reached €1 trillion last year, up from €350 billion in 2010. The volume of housing purchases made by institutional investors topped €64 billion in 2020.

A chorus of economists, tax experts, lawyers and civil society groups are united in the view that these tax incentives are helping to inflate a housing crisis. “Real estate, both commercial and residential, is under-taxed or untaxed in the most countries,” says John Christensen, an economist and co-founder of Tax Justice Network. “There is no question that house prices are inflated by these tax reliefs.”

In Greece, where more than a third of the population spends at least 40% of their disposable income on housing, the former finance minister Yanis Varoufakis, agrees. “There is a kind of oligarchic populism… because of the difficulty of younger people to gain a foothold at the property ladder, when governments waive particular taxes and they use the coffers of the state in order to subsidise mortgage payments, this is a major victory for the real estate asset bubble”.

Taxation blackhole

The housing inequality felt by many might be on national agendas. But according to Sebastian Eichfelder, an economist and corporate taxation professor at the University of Magdeburg, “there is no discussion about the fact that the state massively promotes it” with tax privileges.

There is no evidence on how much money is lured into real estate with these exemptions. But experts in several countries have now provided an insight into the possible scale of such practices. Eichfelder calculated the amount of capital in Germany diverted into real estate investments, and estimated a misallocation range of 7.8% to 15% of the investment volume which “would correspond to a volume of €68.2 billion to €109 billion per year”. 

Adopting Eichfelder’s methodology, Espen Sirnes, associate professor at the University of Tromsø School of Business and Economics, concluded: “If Norwegian tax privileges for real estate were abolished, it would have led to between €1.24 billion and €6.39 billion less being invested in the real estate sector last year. These billions are thus the span for possible overinvestment or misallocation of capital in a year.”

In Portugal, Susana Peralta, a professor at Nova School of Business and Economics, estimates that the capital misallocation to real estate is between €700 million and €2 billion – four times more than the current public investment in “affordable housing”. The Belgian statistics agency Belgium last year ranged between €1.2 and €1.9 billion. In Italy, Massimo Del Gatto, Professor of Economics at the University of Pescara, estimates that the capital misallocation to real estate is between €11.9 billion and €19.2 billion per year.

‘Overburdened’ citizens

While these misallocations point to a taxation inertia among governments across the political spectrum, at street level, citizens are paying the price.

Europeans are facing the biggest surge in interest rates in the last 10 years – one that fuels mortgage prices and threatens many to foreclosure. Meanwhile, high inflation rates are hitting available incomes, already squeezed by bloated energy prices.

“Europe is experiencing a housing crisis, this is undeniable,” says EU Commissioner for Jobs and Social Rights, Nicolas Schmit. “We need massive public and private investment in affordable housing to avoid people being pushed into poverty.”

If a household spends more than 40% of their disposable income on their rent or mortgage, that means something is wrong. “Overburden” is the term that describes the situation lived by a very cold statistical average: a single European citizen,  who earns an average wage and rents a one-bedroom house today in the center of a capital city in the EU, will be automatically “overburdened”. 

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Property prices in Oslo increased 200% between 1990 and 2015.

This often leaves people resorting to seek financial support from elsewhere. On a cold November Wednesday, 3,061 homes were for sale in Oslo. Anna Matilda Kirsebom Lanto, a 27-year-old nurse, was on her way to look at one of them. After almost 10 years of living with friends, she hopes to soon be a homeowner. Statistically, however, her chances are slim. According to the national “nurse index” that tracks booming real estate prices, a single nurse can finance only 1.2% of properties in the city.

“Technically, I should be able to afford a 30m2 to 35m2 apartment, which is small but OK for one person. The problem is the bidding, which means that often properties are sold at much higher prices,” says Kirsebom Lanto. “That is a competition I can’t afford to take part in.”

In Norway, if you sell the home that you live in, the profit is tax free. If you let parts of your home while living in it, the rent income, too, is tax free. These and other favourable tax rules have contributed to a real estate boom and a 200% rise in prices between 1990 and 2015.

Yet Kirsebom Lanto knows she is among the lucky ones able to call on her mother: “Only one of my friends has been able to buy an apartment, and she was helped by her parents. Everyone who doesn’t have that ‘Bank of the Parents’, must rent. They have no chance to buy.”

Credit: Investigate Europe
Anna Matilda Kirsebom Lanto in Oslo.

Paris residents push back

In Paris’s 15th arrondissement, tenants are facing their own housing challenges. Built by the architect who designed the UNESCO headquarters, 10 rue du Dr Roux looks in good shape from a distance. A closer inspection reveals balconies supported by straps and makeshift canopies at the entrance, to prevent the risk of falling rocks.

“One day I picked up a large piece of concrete in my flower box on the balcony,” says Stéphanie, a tenant who did not want to use her real name. She believes it is the result of years of neglect by the manager, Gecina, which manages nearly 9,000 residential and student houses in the Paris region and plans to develop at least 5,000 more in the coming years.

“Curative interventions carried out on a piecemeal basis, without an effective and well thought-out maintenance plan, attest to a total lack of organisation of the landlord, in any case disgraceful coming from a company as large as Gecina,” Stéphanie says.

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In Paris’s 15th arrondissement, tenants are facing their own challenges with the property company Gecina.

At another of their properties in Ville d’Avray, a town south-west of Paris, tenants have been in dispute with the company since 2020 over renovations carried out. One resident said there had been a “strategy of exhausting the tenants” thanks to unchecked noise pollution and disruptions.

“The work carried out by Gecina was of such a scale that it was incompatible with the tenants remaining in their homes,” says lawyer Sophie Sarzaud who is representing seven tenants now claiming compensation. The only alternative ever offered to tenants, the lawyer says, was termination without three months’ notice of their lease.

After receiving more than 200 complaints, and mobilising five officials to calm relations, the local town hall wrote a letter to the landlord requiring it “implements all the promises made to restore security and serenity in the vicinity and within the residence”. In response to IE, the company said: “These anomalies and malfunctions are obviously not representative of Gecina’s portfolio.”

If the company is careless with its tenants, it does not receive the same treatment from the French government. As a REIT (Real Estate Investment Trust), Gecina benefits from special tax treatment, in reality it pays very little.

France’s so-called “tax transparency” regime, created in 2003, exempts listed real estate investors from tax on rental income and on capital gains from the sale of their assets. As a result of the favourable taxation policies, introduced to attract investment to a sector shunned since a housing crisis in the 1990s, Gecina’s latest annual accounts point to a tax rate between 0.1 and 0.6%. Consequently, based on IE estimates, it has saved €2.6 billion since 2015.

Changing city dynamics

It is not only residents and would-be residents who are suffering under the heavy head of the real estate sector, but it is also impacting the very fabric of Europe’s cities.

Giacomo Negri, from the via Padova Viva community group in Milan, is pushing back against the growing presence of real estate speculators in the city. “The system is exploding,” he explains. “In Milan you can no longer find tram drivers or teachers because they no longer want to come to work in the city, with rent at €1,200 for a two-room flat and a salary at €1,400.”

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A shop window advertises properties for sale and rent in Milan.

Yanis Varoufakis sees the same in Athens, where he lives. “We have whole areas like Koukaki [at the foot of the Acropolis], that effectively have migrated, they have moved out of Greece. That creates real estate price hikes without any money staying in Greece. And zero jobs. Maybe some cleaning jobs, mostly for migrants.”

In the UK, soaring rents are making life ‘unaffordable’ for private tenants, according to research published in November. Meanwhile, the “oligarch populism” referred to by Varoufakis, plays out in real terms in London. There, according to Transparency International, “suspicious wealth” floods the property market, and so-called ghost streets now exist. This is due to the near permanent absence of opaque overseas owners who have long benefited from favourable legislation.

If real estate speculation is a direct result of these tax benefits, and is forcing workers out of cities, why do governments maintain these privileges?

Varoufakis considers this to be “the natural repercussion of the policies enacted after the 2008 financial collapse”. To overcome the financial crisis – that began, precisely, with a crash on the banking system that allowed banks to finance a real estate bubble – all the major institutions supported a “recovery plan”.

Varoufakis criticizes it: “The G7, G20, central banks and governments decided the policy of universal money printing on behalf of the financial sector on the one hand and universal austerity on behalf of the multitudes on the other hand. We printed something between $16 trillion and $18 trillion altogether. This money refloated the banking system and at the very same time, austerity diminished investment.”

Christensen, the Tax Justice Network co-founder, has another answer to the “why” question. “Tax policies are shaped not for any particular economic reason but according to political power, according to whichever lobby has managed to most successfully gain the ear of politicians. Property development and property management lobbies are extremely powerful in almost all countries.”

Government inertia

In Greece, there is a clear view of the problem. Tryfon Alexiadis, the former vice-minister of finance of the left-wing Syriza government, says there is conflict of interests between political decision makers who are also real estate investors.

“The Prime Minister himself and many members of the government, if you look at their tax returns that are freely accessible on the internet, the real estate they have is immeasurable. It’s obvious that someone who owns a lot of real estate himself doesn’t want to burden himself or the social class he belongs to.”

In Portugal, the former minister of economy took office just one day after creating a real estate company. One of his most important laws, approved in parliament 2019, was the REIT regulation, that exempts these funds from paying taxes on their capital gains from sales or rents.

French president Emmanuel Macron, meanwhile, is a politician with very little assets to his name. He does not declare owning a car or even a home of his own. He has, however, declared owning nominal shares in three companies. One of these is Gecina. The government did not respond to requests for comment on this or on their taxation policies.

IE asked several governments for their justification of the tax favours for real estate investments. The German government is clear about why the myriad tax benefits exist, and shows no interest in reviewing them: “The coalition agreement does not foresee any changes in this area. Accordingly, there are currently no plans to change this regulation.”

The Portuguese government uses two arguments: it’s following a general trend and it believes it is the right policy to drive real estate prices down. “With regard to capital gains tax benefits on sales, this is a recurring practice at the European level… as high property sales taxes reduce the supply of housing, thus leading to an increase in prices.”

In the UK, the government said it is “levelling the playing field through the tax system by forcing foreign owned companies to pay higher rates of tax on purchases, as well as an additional surcharge and restricting relief for landlords.”

Norway’s government supports home ownership by favourable taxes, but admits to one disturbing effect; the historically heavy household debt, of 223% of disposable income, and says that taxation of expensive real estate and secondary homes has been increased. But “primary homes rarely have a connected cash flow. Many elderly people live in homes that have increased their value, without liquidity to pay high property tax. Therefore, the government is reluctant to tax people’s home as other assets”.

The Italian and Greek governments had not responded to repeated requests for comment by the time of publication.

In Greece, more than a third of the population spends at least 40% of their disposable income on housing.

The EU Commission has started to question the tax advantages of real estate, a discussion paper from February of this year highlighted that “favourable personal income tax treatment of owner-occupied property creates market distortions.”

The OECD came to the same conclusion in a 2021 report that found: “Many countries are underutilising recurrent property taxes and have substantial scope for increasing these levies, which provide local governments with a key and stable source of funds to finance local services, including in the area of social housing.”

Transparency under threat

It is evident to some that taxation policies are benefiting owners, but identifying those who hold the keys to Europe’s real estate is now an onerous task.  

A November ruling by the European Court of Justice allowed member states to close public access to their national beneficial owner registers. Austria, Belgium, Germany, Ireland, Luxembourg, Malta and the Netherlands have done so already. “The decision is a blow to beneficial ownership transparency,  and it comes when we actually need more information to be available, not less,” says Transparency International’s Maira Martini.

Such a move makes tracking an already secretive sector, where offshore ownership and the use of tax havens abounds, ever more difficult. 

There are calls for a Europe-wide registry of beneficial owners. But after the November judgement that feels some way off. Notwithstanding such a scheme, a plethora of tax privileges are still readily available to Europe’s real estate merchants.

And it looks like any concerted effort by European governments to limit such benefits is an equally distant prospect. If change does finally come, it will likely be too late for the residents of the colourful apartment blocks in Berlin’s Neukölln and thousands like them across Europe. 

Clemens Fuest, an economist and former adviser to Angela Merkel, is clear in his assessment: “It is clear that the prices of real estate have very, very much to do with the tax treatment. There is no reason why these tax privileges should not be abolished.”
Contributing to this investigation: Lorenzo Buzzoni, Wojciech Cieśla, Ingeborg Eliassen, Juliet Ferguson, Pascal Hansens, Attila Kálmán, Maria Maggiore, Leïla Miñano, Maxence Peigné, Manuel Rico, Nico Schmidt, Harald Schumann, Elisa Simantke, Amund Trellevik as well as Laure Brillaud, Eurydice Bersi(Reporters United) and Jef Poortmans (Trends)
 Editor: Chris Matthews
 Graphics: Marta Portocarrero