An increase in the military tax will lead to rising prices for new housing as early as the first half of 2025 and may result in reduced demand due to a decrease in purchasing power, according to Ukrainian developers interviewed by the "Interfax-Ukraine" agency.
"The rise in taxation on real estate purchases is an additional factor that will influence price increases. Starting December 1, 2024, the military tax will increase from 1.5% to 5%, covering nearly all real estate transactions. This will result in higher costs for processing transactions concerning all properties with ownership for less than three years, as well as new constructions. The consequences of the military tax increase may include a decline in real estate transactions, reduced purchasing power, and increased costs per square meter," the press service of City One Development stated.
According to their data, average prices in the primary housing market of Kyiv increased by 14% in hryvnias in 2024. Meanwhile, in dollar terms, apartments in the "economy" class decreased in price by 5%, the "comfort" class by 6%, while the "business" category rose by 2%, and the "premium" class by 8%.
The rise in prices has been significantly affected by the increase in construction costs, which continued to be pressured by inflation, currency exchange rates, rising material costs, complicated logistics, a shortage of skilled labor, and expenses for energy resources in 2024. According to Irina Mikhalyova, CMO of Alliance Novobud, next year these factors will be compounded by the increase in military tax.
"The increase in the military tax to 5% will undoubtedly affect real estate prices. The first to rise will be the costs of construction materials, logistics, and contracting services. I believe the changes will have a short-term effect, where the increase will be partially offset by existing material stocks and long-term contracts with suppliers, and a medium-term effect, where over 3-6 months, there will be a gradual increase in the cost of construction work and materials due to rising developer expenses," she reported.
At Zezman Holding, they also anticipate a significant rise in construction costs as early as the first quarter of 2025. According to its founder and CEO Boris Goldenstein, the increase in military tax will lead to a "chain reaction," where expenses for all market participants will rise at each stage of project implementation, thus inevitably increasing the final cost of products.
"Firstly, the increase will impact suppliers operating under a simplified taxation system. Consequently, their expenses will rise, which in turn will lead to higher costs for goods and services provided to developers. Secondly, the shortage of skilled labor will compel employees to demand compensation for the increased tax, creating an additional burden on businesses," the expert indicated.
Thus, at Perfect Group, they are already planning gradual salary increases for skilled workers such as crane operators, plumbers, electricians, and other professionals to avoid exacerbating the labor shortage.
Moreover, the increase in military tax will have the most significant impact on mid-range and "economy" class real estate, believes Alexey Koval, project manager at Perfect Group.
"We expect the impact of the military tax factor to become noticeable as early as the first half of 2025, especially in the mid-range and economy segments. The tax increase will lead to higher costs, which may in turn result in increased prices per square meter for the end consumer," he stated.
Additionally, the increase in military tax will also affect professional real estate investors, according to the Greenville group of companies.
"The increase in military tax is primarily a blow to those who are professionally engaged in real estate investment. It will also affect ordinary citizens who are selling their apartments and, in general, purchasing power. Thus, in the long term, demand may decline further," emphasized the developer's press service.
At the same time, the low demand for housing moderately restrains the price growth of apartments, as noted by the development company Enso.
"According to our estimates, developers needed to raise prices by 7-8% by the end of 2024 to compensate for the rise in construction costs. This is due to the tax burden, labor costs, and their shortage, as well as inflationary processes. However, it is likely that prices will begin to rise only when demand picks up," explained Enso CEO Ramil Mekhtiev.
Overall, it is currently difficult to predict and assess the effects of tax changes, according to the Lviv-based Avalon. In the opinion of the company's CEO Roman Davimuka, the assessment will depend on the growth of the shadow business sector.
"We are not a general contractor, so we cannot accurately assess the impact, and the burden on our administration will be minimal. Regarding the real effect, we do not truly understand what portion of the business will move further into the shadows," the expert pointed out.