Viljar Aralas, executive manager of real estate developer Eften Kapital, said on the "Esimene stuudio" talk show that real estate could be subject to higher taxes from a moral standpoint, to avoid idle land and to boost state revenue.
Arakas said that the Land Board's 2022 mass land valuation reflects the value of land fairly and described as sensible Estonia's system of only valuing the land itself, without the properties or forest on it.
"Estonia is one of just a few OECD countries to do it that way. Only Denmark and News South Wales in Australia also look at the value of land alone. I believe this to be the right approach as land tax is technically the most neutral in terms of economic growth. Capital can be taken out of the country no problem, jobs are harder to move but by no means impossible. But you cannot take land out of the country unless a neighboring state decides to conquer it," he said.
The 21 years since the last mass land valuation in Estonia is a very long time, especially considering Estonia's rapid development. There are many different models for land valuation in the world, while Arakas believes that doing it every ten years would be sensible.
Price advance since the last mass valuation of land (for example, land has become on average 14.8 times more valuable in Tartu County since 2001 – ed.) is a sign of Estonia's success, the businessman suggested.
Refraining from hiking land tax insensible
"The truth is that I live in a private residence and pay the same in land tax as someone who owns a small flat in one of Tallinn's sleeping districts – nothing. It is not morally right. It is not a decision (to exempt land under one's home from tax – ed.) any government would be willing to overturn, while it serves as a warning to voters in that they will be courted using their own money before elections, which is why it pays to be rational," he said.
Arakas does not deem it sensible to refrain from hiking land tax rates following the national land valuation. "While this is contrary to my business interests, there is only one OECD country that has an even lower land tax rate," he said.
"Real estate is not a staple or a commercial commodity – rather, it is a luxury that could be taxed more. Low land tax rates are keeping plots idle. There should be an element of motivation to it. Annual land tax payments should be enough to motivate people to come up with ways of using their land so it would at the very least pay for itself," Eften Kapital's manager said.
Arakas suggested that politicians can afford to steer clear of tax issues for several election cycles to come as Estonia's national debt is still quite modest. "We can keep sweeping this problem under the rug for years. While the debt-to-GDP ratio will keep growing, it will remain a viable option for many election cycles to come."
Real estate market headed for correction
The expert said that it is difficult to forecast how the real estate market will change in the coming years as the economic situation is highly unstable. "There is a law of nature many dislike that sees the price of real estate go down as interest rates go up. You can protest and petition against it and are under no obligation to like it, but it remains a fact," he remarked.
Arakas said that the market is looking at a correction rather than a sharp fall in the next few years. "We need to understand that things will go back to normal. The last ten years of smooth sailing under quantitative easing have been too long."
But he did not forecast a shortage of buyers on the real estate market as individuals are still relatively debt free in Estonia following the privatization campaigns of the 1990s.
Ongoing developments will be finished, while new projects will not be launched as lightly, the expert suggested, adding that Estonia will not see the construction sector come to a standstill in a repeat of 2009.
"There is a future problem that has not been paid enough attention. Tallinn has approved around 60-70 plans annually for the last decade. However, just eight plans have been approved in the first nine months of this year. "We are developing the problem of major cities where you cannot build because plans fail to secure approval."
Sweden is clearly headed for a real estate crisis, Arakas suggested. Many loans have been issued there the principal amount of which never has to be repaid. Swedish banks' Baltic branches are avoiding mistakes made at home, which makes a collapse here less likely.
Editor: Marcus Turovski