Last July in this column we considered Latvia's anti-inflation strategy and corresponding changes to Latvian law. At that time, certain legislative amendments were introduced with a view to tackling the overheated real estate market, specifically by a reduction of speculative acquisition and mortgage loan demand. Recent economic indicators show that inflation is receding. However the real estate market is in a relatively moribund state, despite reduced prices. Although global developments have surely had an impact, it is also perhaps the case that the Latvian government's anti-inflation plan has had its effect. It follows, then, that it would make sense to lift some of the measures taken to cool down the market, since things are getting a bit too cold, and so that is what has been done.
In March of 2007 the government amended the Cabinet of Ministers regulation 23.01.2001 No. 28 on the "Rules of State Fees for Notarial Work and Real Property and Mortgage Registration in the Land Book." The amendments introduced a staggered stamp duty for registration in the landbook. Stamp duty was set at 4 percent of the purchase price if property is acquired by a native and such person already owned at least two properties. Stamp duty for registration in the landbook of an acquisition of property by a gifting arrangement was set at 6 percent of the value of the property, if the acquirer is an owner of two or more properties. The stamp duty for registration of a mortgage in the Landbook was 3 percent of the mortgage amount, if the borrower was a native and if the borrower already had at least two mortgages at the time.
Not long ago, the State Secretary of the Ministry of Finance stated that in executing the anti-inflation plan, Latvia had experienced a material decline in the number of real estate transactions, together with a decline overall in prices of real estate. Based on such developments, the Cabinet of Ministers was motivated to lift the new pricing of stamp duties for registration of title in the landbook. On Aug. 5 2008, respective amendments were made under which the 'new' pricing of stamp duties was lifted, such that stamp duty for registration in the landbook of transfer of title following a purchase and sale transaction of real estate was cut back to 2 percent, regardless of the number of properties owned by the acquirer. Similarly, stamp duty for registration of title transfers of real estate under a gifting arrangement were cut back to 3 percent, without regard for the number of properties held by the gift giver.
A couple of the 'new' reforms still apply. One is the requirement that the buyer provide evidence that it is using legally acquired income to buy the property (basically to be verified by a tax certificate). The other is that banks are required to limit their mortgage exposure to 90 percent of the value of the property.
This latter requirement, while perhaps good common sense from a practice perspective, continues to be interesting from a banker's perspective, as it amounts to the state telling the bank how to evaluate credit risk and collateral. Undoubtedly, most banks would feel competent to reach their own decisions as to the credit worthiness of the borrower and the appropriate proportion of financing applicable to each case. But the recent global subprime mortgage debacle has weakened the authority of the banks to claim to 'know best' what appropriate collateral is. So the argument concerning their right to decide for themselves does not quite have the same resonance it did only a few short years ago.
Martin Mezinskis is an associate at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.