The Minister for Finance Mr McCreevy has been accused of pandering to intense lobbying by property interests over recent changes to the tax regime on development land and on second or investment homes.
The Minister has substantially changed what was originally proposed and partly implemented, a move that has been broadly welcomed by auctioneers, builders and developers, but has been criticised by the Opposition and some economists.
Two sweeping changes have been made. The first change came when the Finance Bill was published. The Minister said the threat of a 60 per cent capital gains rate on zoned lands not released for residential development by April 2002 was being dropped. The second change was the lifting of penal stamp duty and the anti-speculator tax on new homes, which had been targeted at the rental sector.
The first change has been criticised by ESRI research professor John FitzGerald. He believes that there is now no incentive for developers not to hoard land that should be used for residential development. This will drive up land prices and then house prices, he argues.
The Labour party's finance spokesman Mr Derek McDowell also argues that this is totally unacceptable and that land owners will "make a financial killing out of it".
Others in the industry such as the Irish Auctioneers and Valuers Institute's chief executive Mr Alan Cooke said the Minister's decision merely removed a threat that no one believed would ever be imposed anyway. "If it were applied it would stop residential land being released into the market. Government by threat is not the way to run a country. You should say what you are going to do it and then do it. The big problem is really planning," he argued.
But whatever the truth is, it would seem that lifting the threat will certainly not speed up the process of getting more land onto the market.
Last week Mr McCreevy also announced that the Government would not be proceeding with the 9 per cent stamp duty on second homes or the 2 per cent anti-speculation tax for the first three years on those homes. This stamp duty change only applies to new homes and not to the second-hand market. The argument goes that investors are more active in the new homes and particularly the apartment market than in the second-hand homes sector.
According to Department of the Environment survey data, first-time buyers are almost evenly split between new and second-hand homes nationally. However, in Dublin almost 70 per cent of first-time buyers bought second-hand homes and only 30 per cent bought new homes, perhaps because there are more houses at the cheaper end of the second-hand market in Dublin than in the new homes market.
But critics also point out that targeting new homes provides benefits to builders that targeting second-hand homes would not. Nevertheless, the move was more widely welcomed than the reduction in capital gains tax. It seems certain that this will provide more rental accommodation in Dublin and other large cities.
The problem is getting the balance right between the rights and needs of first-time buyers as opposed to those who are renting. According to Prof FitzGerald the priority must be "bodies in beds", whether in rented accommodation or in the private ownership. If that is true then encouraging investors into the rental market should be a priority. If so, it is hard to see the justification for not removing the 9 per cent stamp duty on second-hand homes.
There is also an argument for allowing interest relief on rental income and thus treating landlords in the way any other business class in the State is treated. However, there is a timing issue here and incentivising landlords just as the market turns down might prove to be foolhardy.
The move will also kick-start the holiday home market once again, which had slowed down significantly. One of the initial reasons for the imposition of this tax was to encourage the shift of scarce building resources to building homes for people in the larger cities. However, the property industry argues that many small country builders were never going to move into the Dublin market and thus the only impact was to kill off the holiday home market.
However, there is also an argument that building large numbers of holiday homes would drive prices out of the reach of local people. Thus the real victims were young people in rural areas without homes and the landless, according to Prof FitzGerald.
The broad welcome for the proposals by the industry certainly suggest that builders and developers will benefit. But it is of course almost impossible to provide a good rental system without landlords.
However, there have to be questions about the reason for only incentivising new homes, which will benefit builders and not first-time buyers, rather than second-hand homes, which would mean more rental accommodation close to the city and would help the rental sector but not necessarily builders. Granting the same incentives for holiday homes that will not be rented out also raises questions at a time when building resources are scarce.
