Another year on, undersupply of residential housing remains the key issue in our property market. In the rented residential sector, the number of landlords at the end of 2017 was 18% lower than it was in 2012.
Contributing factors to this decline include:
- Higher prices allowed accidental landlords to exit the market. These landlords have not been replaced.
- Perception that the reward for being a landlord does not justify the risks/costs of investment i.e. the high rents on offer do not outweigh the high cost of acquisition, the interest costs on debt funding, the rent cap in rent pressure zones and high personal tax rates on rental profit.
- Insufficient number of apartments being developed.
- Stock which might otherwise be used for new tenancies being used for short term lettings with investors seeing same as a more appealing route to market (e.g. the rise of ‘Airbnb’ “hosts”).
The suggestion that institutional landlords might be responsible for this decline is not supported by the statistics which show that at the end of 2017, 70% of landlords held just one rental property.
With FDI remaining crucial to Ireland Inc., it is imperative that action is taken to improve the supply of available stock to ensure Ireland does not lose out due to an inability to house new workers.
On a positive note, increased focus in the past year on the development of student accommodation should positively influence supply pressures. In the absence of unplanned private sector movements such as this, the Budget available to the Government to make meaningful changes remains small.
Stamp duty on commercial property transactions increased from 2% to 6% in October 2017. It was hoped that this change would bring in additional revenue of €376m. The stamp duty intake was €38m (34%) below target at the end of June 2018.
A stamp duty refund scheme was also introduced for residential land with the intention of ensuring the net rate payable by a purchaser would remain 2% where land was used for the development of housing. The Government has faced criticism on the design of the scheme from industry participants who have described it as unnecessarily complex and impractical. As this refund scheme only recently became operable, it remains to be seen how refunds will impact on the intake target for the year.
The decline in the number of residential landlords is compounding supply issues in our property market. Recent discussions on what can be done to incentivise long term lettings is welcome but immediate action is needed to keep existing landlords in the market and to drive new entrants to the market.
The introduction of a personal tax credit for landlords should encourage new entrants to participate. Full interest relief on residential lettings should be re-instated immediately given the current practice can still result in a tax liability for landlords where no economic profit was made. In addition, consideration should be given to allowing the LPT as tax deductible for landlords at least until the supply issue has been overcome. Furthermore, we suggest reducing the write down period for capital expenditure on plant and fit out from 8 years to 5 years.
On the residential stamp duty refund scheme, consideration should be given to engaging with industry participants to make the stamp duty refund scheme workable in practice. To further help with underutilised housing stock, “empty nesters” could be incentivised to downsize by introducing a stamp duty exemption for those who sell their home and relocate to a smaller property. Incentives to develop new retirement communities may also help to free up housing stock.
To mobilise large scale capacity in the development sector, consideration could be given to providing for a tax exemption on profits which relate to the development and sale of social housing. The Government should encourage local authorities and the private sector to work together to carry out the developments necessary or indeed partner with the private sector to develop same.
All of these measures would help the current market in our view.
We noted last year that the challenges in the property sector would only get worse if insufficient action was taken. On review, little has changed.
We hope that some of the measures suggested above or similar measures are taken to protect existing stock and bring new supply into to the market.
On a separate note, given the increase in residential property prices since the first valuation date for LPT in 2013 and the next revaluation date in November 2019, it is likely that changes will be made to how the tax is calculated to ensure LPT remains affordable post the revaluation.
If the Government fails to meet its intake target with respect to stamp duty on commercial property, we may see the rate increase further. It is hoped that rather than taking this approach the Government would incentivise activity in the development and rental sectors of the market instead which should drive additional tax revenues as a result of this increased activity.
We await the October Budget with interest.