The increase in house prices has become a hotly debated topic in Aruba lately, particularly among stakeholders, as well as people who want to get their own homes. Popular opinion blames the vacation rental industry as the main reason for this increase. The Government of Aruba recently decided to introduce a 7% border tax (BB0, BAZV, BAVP), on imported products, including construction materials, which raised further concerns about the impact on the construction industry and house prices.
The intention to support local suppliers is something extremely positive. However, the direct effect this border tax has on construction costs and consequently housing prices cannot be ignored. The inability of construction companies and developers to offset the BBO when selling homes has led to higher house prices. The impact of the cap on the construction industry can be quantified by considering that construction companies import 80% of their raw materials, of which 60% are construction costs. This means that if the government imposes a 7% tax on imported materials, it will cause a direct 5.6% increase in the cost of the materials (which is 80% from 7%). With this, construction costs will increase by 3.4%, which is 60% from 5.6%.
This impact is significant, especially when considering the stagnation of wages in Aruba over the last decade. High import taxes, oligopoly between suppliers and subcontractors, low productivity and bureaucracy, are the real causes that construction costs in Aruba are more than 30% higher than in the United States, for example. The impact of the tax cuts will only worsen this problem and make it harder for a large portion of our population to work or buy their own homes.
It should also be noted that the lack of affordable housing, popularly called “affordable”, over the past two decades is worrying. Initiatives such as Casbon or Caribbean Town are very positive, but do not qualify as affordable housing, as prices are already at a slightly higher level than not everyone can afford. The introduction of a comprehensive policy for affordable housing that includes purchase subsidies as well as tax incentives, has been delayed. The Government of Aruba must take action to address this problem and provide a solution that actually makes housing more accessible to all.
It is important to note that in the US studies conducted by the National Bureau of Economic Research, UCLA, and the University of Southern California indicate that every 10% increase in listings on Airbnb means that house prices increase by 0.76%. Although this will be different from the Aruba market, it may give some indication of the potential impact that the Vacation Rental industry has on house prices. The problem of affordable housing in Aruba has been a problem for several years. A Housing Plan was already introduced in 1995, but it was time for the Government to revise the plan to the current situation. The simplest solution would be for developers to offset the BBO with transfer tax at the time of sale. This not only benefits and stimulates the construction industry, but also helps control the house price growth caused by the allocation of Vacation Rental. It is time to take action and implement this solution to ensure a sustainable future for our housing market.