But Chrudimský is facing a dilemma.

The increase of value-added tax on new housing construction from 5 percent to 19 percent scheduled for 2008 means he could save hundreds of thousands of crowns by going ahead and buying an apartment now. On the other hand, the Cabinet of Prime Minister Jiří Paroubek is working on a loophole that would keep the majority of housing construction in the lower tax bracket and is promising subsidies to support new home buyers.

So, Chrudimský is wondering, should he buy now or wait?

"In general, I don't usually rush things, but this time an early purchase could save me hundreds of thousands of crowns," says Chrudimský, who is also a part-time real estate broker. "Honestly, I don't know. It's really hard to say what will happen."

Indeed, the ultimate success of the government's plan will determine whether new home prices will significantly increase from 2008. By way of example, the price of a 3 million Kč ($127,497) apartment goes up 420,000 Kč under the 19 percent tax bracket.

Investors such as Chrudimský and the construction industry are paying close attention to how the situation develops, but in the meantime the market is stricken with uncertainty.

Social accommodation

Considering the government agreed to the tax hike in its European Union accession treaty, the hike shouldn't be causing such surprise. But that didn't stop the Cabinet from launching a lobbying campaign before a meeting of EU finance ministers in late January to have the VAT increase pushed back until 2015.

The effort failed, but the Cabinet hasn't given up. At the end of January it struck a compromise with the EU that would allow new residences defined as social accommodation to fall under the 5 percent tax. The government hasn't officially defined social accommodation. But Radko Martínek, regional development minister, has said apartments with as much as 90 square meters (969 square feet) of floor space and homes with up to 150 square meters could fall into the category.

By Martínek's calculations, these limits would apply to as much as 80 percent of new apartments and houses, which means the vast majority of new housing would be protected from the 14 percent tax increase.

"It seems now that 70 percent to 80 percent of apartments and houses could fit in that category," he said Jan. 30.

The Cabinet says it will contribute to the cost of construction of social accommodation by, among other things, subsidizing mortgage loans. But, while the Cabinet is making bold claims, it is still unclear what percentage of new housing construction will be protected by the social accommodation loophole, and there are no promises.

Construction concerns

The planned VAT increase has already had an impact on the construction industry and will continue to, regardless of what happens.

Expectations that the tax would shoot to 19 percent generated a boon for the industry in 2005. Indeed, Central Group, a development company, boasted record sales.

"It was our best year in the 12 years that we've been operating on the market," says Miluše Netolická, the company's director.

The industry is expected to do even better this year, but it is nevertheless hoping the government's initiative is a success. That's because demand for new apartments would drop after 2008 if all new housing construction is subject to the 19 percent tax, says Miloslav Mašek, chairman of the Association of Building Entrepreneurs.

"It would kill the industry for some time," he says.

The industry will be protected if the government's social accommodation strategy really does provide a broad tax shelter. The major result of the shelter would be an increase in demand for smaller apartments, says Iva Cikánková, director of Mexx Reality.