Originally posted on Business Post 3 December 2023.
Nobody wants to be seen to profit from the housing crisis, but everyone loses out if we insist on retaining the tax status quo.
You cannot profit from the housing crisis. This seems to be the guiding principle behind the reported resistance by Fine Gael to introducing any form of tax relief which might help address the property supply problems.
This aversion to property tax incentives is a consequence of the great recession a decade ago. It doesn’t seem to be the amount involved that presents the problem, as much as the very notion that a property incentive could be part of a solution to a current market failure.
Big income tax reliefs for rented residential accommodation, renewal projects for cities and towns, holiday cottages and student accommodation contributed to the property boom and subsequent crash. Many houses and apartments derived their value not from their location or the accommodation they offered, but from the attractiveness of the tax relief on their purchase.
As a 2006 review of property tax incentives by Indecon, the economic consultants, put it, in addition to increasing investment in projects, “the tax incentives had led to an increase in site prices, financial returns to promoters and property prices”.
That Indecon report was one of a number of reviews into tax incentives commissioned by the government in 2005, amid alarm that Ireland had (yet again) overdone the whole property tax break thing. The reversal of the tax reliefs agenda started in 2006, but by that time it was too late to manage the popping of the property bubble in an orderly way.
The chaos that ensued in the following few years has eclipsed another memory: that these property incentives contributed to improved housing supply. Analysis by the Economic and Social Research Institute found that persistent increases in supply and demand from the early 2000s resulted in housing supply averaging 84,000 units per annum between 2005 and 2007. Think of how an average supply of 84,000 units per annum now would help the current situation.
Of course, it is too simplistic to attribute supply levels of this order solely to a favourable tax regime. In the previous decade when government got nervous about the housing market, the 1998 Bacon report identified that the key drivers of the housing market were economic growth, demography, cost of finance and the speed of the supply response. Now the problem driver is the lack of speed of the supply response, despite the recent interest rate rises.
Unlike government interventions in the property market over the last 40 years, the tax system is not currently being used as a lever of government policy. While there have been adjustments to the stamp duty regime in favour of residential property development as compared to commercial development, and in recent weeks some tinkering with the refurbishment rules for landlords, there has been no broadly-based incentive introduced which might foster property supply.
The Department of Finance’s own guidelines on tax incentives say that any new relief must be prompted by market failure, time-bound and re-evaluated on an ongoing basis to ensure that they continue to fulfil their intended purpose. How much more does the market need to fail by before tax reliefs are put back on the agenda?
Previous tax reliefs have primarily been directed towards the buyer by granting future tax deductions from the purchase cost. Now the priority should be for measures that reduce development costs, ease cashflow concerns and make investment more appealing.
During the pandemic we warehoused tax debt effectively to promote business survival. The same could be done for the construction sector by offering PAYE and Vat payment deferral associated with wages and materials costs incurred as units are built. Arrears would be collected when the housing development has been completed and sold.
Another possibility would be to provide enhanced tax deductions for the cost of training workers in the construction industry. Boosting allowances for investment by builders in heavy plant, machinery and safety equipment could accelerate the supply of high-quality, affordable homes. Any such allowances should be time bound, and linked and targeted to the type of high density affordable housing most needed.
The great advantage of tax incentives is that they can be delivered quickly. Yet we seem to be closing off any reasonable political discourse on approaches of this type purely on ideological grounds. Well publicised fire safety and structural safety construction defects in some existing developments don’t help the case for more incentives for developers.
When interest groups put forward ideas for tax breaks, the most fervent advocates are usually those who will benefit most. Yet builders and developers are not the only ones who would benefit from reducing tax costs and barriers to residential property supply. Families need homes, and employers need their workers to have decent accommodation convenient to the workplace.
It is politically difficult to get away from the notion that no one should profit from the housing crisis. But it is only the exchequer that profits if we insist on retaining the tax status quo.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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