Ensuring private property rights was essential for the development of the capitalist economy in the Western world. To any of the libertarians such rights are sacred, however, not to governments. Governments consistently attempted to seize property by enforcing taxes and regulations preventing full order of such. This century is not without exceptions. The Lithuanian state is attempting to control the Lithuanian real estate market by imposing a universal real estate tax.
Imposing a mandatory tax on individual and commercial real estate leaves owners without full rights to their property as in case of insolvency they will be obligated to sell their land. Lithuanians already witnessed similar property ownership status during the times of the Grand Duchy of Lithuania in a system recognizable as feudalism. In the feudalist system, vassals would give away their property to lords in exchange for protection and material support but would remain free people. Such a contract would be called “commendation”. Through commendation, the vassal surrendered his land to the lord and received only the right to govern that land in return.
According to the minister of finance, the tax is meant to bring municipalities additional income from sustainable sources, but the mayor of Vilnius from the same party claims it will help to sell unused real estate. The latter goal does not only violate property rights. It will, most likely, not achieve its goal. Human action is purposeful, and lack of action is an action on its own. Lithuanians don’t sell and probably won’t sell their real estate because to them it serves as a store of value.
Store of Value
Real estate is considered to be a good tool for storing value as individuals seek resources for their future actions. Lithuanians, especially, are conservative investors, the most preferred tools for local investments are real estate, pension funds, and children’s insurance.
81.7 percent of all Lithuanian wealth is stored in real estate and financial wealth makes up only 4.3 percent (business, cars). This is well noticeable as well from the actions of individuals during a pandemic. During 2020-2021 Lithuanians saved around 6.2 billion euros. Most of the savings Lithuanians held as deposits, cash, or invested into financial assets. In 2021 those funds were mostly invested in financial assets until inflation started to rise in 2022. In 2022 Lithuanians directed one-fifth of their funds to non-financial assets such as real estate.
The inflationary policy of central banks has led to a situation where Lithuanians prefer land as a saving tool instead of liquid currency or other financial instruments. People hold land for the future because very few alternatives on the market can provide a reliable pool of funds. In 2023 Lithuania witnessed a situation when real estate prices grew while real estate sales were lower than the previous year by 14,3 percent.
Universal real estate tax
The new tax would calculate a median of housing per area and offer to pay progressive taxes on housing above 1,5 of the median. The tax would be progressive where houses below 1,5 medians would not pay anything, and the rest would fluctuate based on the preferences of the municipality from 0,05 to 4 percent.
However, if taxes are meant to promote sales of real estate that is being used as savings. The returns on land have to be lower than taxes paid. Which is not the case. In Lithuania, average apartment price growth and profits from rent grow 14.1 percent per year compared to average 3.9 percent inflation and 3.9 percent deposit growth. Universal real estate tax will not help to sell unused real estate because to Lithuanians it serves as a store of value and returns on real estate are higher than all other financial instruments.
Conclusion
Lithuanians are conservative investors and use the land as a saving tool. A new universal real estate tax proposal will not help to sell unused land because the land is of high value. It will only violate their right to private property and full ownership of the land. If governments want people to stop investing in land, they should address reasons why individuals store their wealth in land in the first place.
