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:
- To promote greater private sector participation in housing delivery;
- To create an environment conducive to investment in housing for rental purposes.
Policy initiatives to achieve these objectives include:
- 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;
- 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. Let’s consider these contradictions below:
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.
Dr. Kenneth Appiah Donkor-Hyiaman
The author is a Real Estate Consultant, Researcher, Lecturer, and Managing Partner at MeTis Brokers (a private equity real estate investment and management firm).