Property outstrips Tax in competiveness debates
We have high income tax rates, high rates of Capital Gains Tax and we have a property crisis: It’s the perfect storm. When I speak with companies looking to bring talent into the country, they talk property before they talk tax. Of course, tax isn’t very far behind and forms that part of the conversation beginning with “…and another thing.”
You don’t need me to tell you the about the property crisis but tax can help so why doesn’t it?
A whole raft of documents get published by Government on Budget day and one of them comprised a 300+ page text reviewing certain tax expenditures. One of those reviewed by Indecon consultants in that document was the “Help to Buy” (HTB) scheme which I’ve previously written about in these pages.
The HTB incentive allows a taxpayer a refund of up to 5% of the purchase value of the qualifying residence subject to various Ts and Cs. When it was first announced it was to apply to persons who had mortgages with a minimum 80% loan-to-value (LTV) ratio. The Minister subsequently amended the scheme so that first-time buyers didn’t “feel compelled to borrow larger amounts in order to qualify” for the relief and set a required minimum LTV ratio for the scheme at 70%. This allowed more first timers to qualify and the tax tail didn’t wag the mortgage dog.
Back to the consultant’s report: It says that property prices were rising significantly prior to the incentive’s enactment and they’ve continued to increase since 2016 after it was introduced. Recent figures suggest some slowing down in Dublin. On the supply side, there has been year-on-year growth in completions with 14,446 completions in 2017 compared to 9,915 in 2016. While there has been a significant increase in the number of new dwellings completed, the number still falls way behind demand thereby reinforcing the need to address supply problems.
The report explains there was a marked increase in supply following HTB’s introduction but cautions against attributing this only to the incentive. It says that over 70% of registered qualifying contractors survey respondents indicated that the scheme encouraged them to build additional new units. However, the consultants consider other factors are significant in influencing supply levels but explain that the incentive is likely to have had an impact on the supply of housing in some price categories and has also affected the mix of housing units on offer.
Since its inception a couple of years ago, the HTB incentive cost the Exchequer €147m with the bulk of this constituting claims by First time buyers. However, Marketing 101 dictates “tell ‘em about the benefits”. They comprised €188m meaning benefits beat up costs by almost 28%. Let that sink in for a second.
Those benefits included some tax revenues but the main benefits comprised a reduction in time to fund a deposit, savings from lower mortgage payments than rent, a supply benefit and housing quality benefits. The accountant in me screams at the €147m price tag but putting that into perspective the Minister said as part of his budget speech that he was allocating a total of €2.3 billion to the housing programme for 2019. So given the benefits have outweighed HTB’s costs then “drop” and “ocean” come to mind.
I mention all of this because a few more ocean drops couldn’t hurt. Why not reduce the 70% LTV requirement for the relief given its purpose is to get people onto the housing ladder. Of course, it would be argued that a person who has the ability to fund a property in cash without resort to borrowing shouldn’t be allowed avail of the relief but there are others who have saved their “hard earned” in order to avoid borrowing significant amounts in the first place. The relief is designed to assist first timers so reducing the 70% limit could assist that purpose while addressing other problems I’ve previously mentioned in this column.
But that’s not enough. The report notes that house price inflation for properties which qualify for HTB are influenced by overall build cost inflation and other supply/demand factors. Housing cost inflation is impacted by changes required to adhere to enhanced building regulations, as well as in material, labour and site costs. The cost of sites are influenced by zoning policies and shortages in the availability of zoned lands inevitable impacts on housing prices.
The report suggests that while there may have been a very small increase in prices attributable to the introduction of the HTB incentive, the primary driver of house prices remain wider economic conditions and the continued misalignment between demand and supply.
Let’s go off-piste for a second. One of the biggest tax expenditures we have is the R&D credit which will be subject to a similar review next year. It’s regarded as best in class and has boosted that sector significantly. It gives a percentage of such expenditure incurred as a credit against corporation tax. Why not do something similar for building and site costs to reduce house building prices.
Of course a main requirement of getting this credit would have to be that a saving would have to be passed on to the first time buyer as insurance against price inflation. I’ve stuck with first time buyers initially, given the consultants’ HTB report explains that were the price of new HTB units to increase due to the incentive then the net benefits would be reduced. They argue that point highlights the risks of any demand incentive in a market where supply is constrained while confirming the merits of restricting the incentive to first-time buyers of certain priced housing and to purchasers who are seeking housing as their residence. You can see their point and the report explains these design factors are likely to have reduced any price impacts of the incentive. So we could “suck it and see” initially and enhance the proposed credit relief in future years.
This requirement of passing that benefit to the buyer would have to form part of the law’s DNA such that failing that would lead to that credit being taken back by Revenue. As the Bull McCabe said in the movie “the Field” (1990) “There's another law, stronger than the common law…The law of the land”. Of course, this would add drops to the ocean I mentioned earlier but even Noah needed an Ark.
Let’s get crystal here, we are at Defcon 2 in housing. It’s affecting our attractiveness and you know something’s wrong when tax is “…and another thing” when we’re talking how competitive we are. It’s time to reduce our Defcon level.
Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 18th November 2018.