Do you want a lesson in what happens when the vicissitudes of electoral politics hi-jack economic planning, putting the State on a short-term collision course with their long-term objectives? Look no further than what was announced this week in the budget concerning the property market.
The State’s primary objective should be – and this Government’s chance of re-election rests on – making homes available to people at an affordable price. Prices are too high on every metric so we are talking about price reductions. An obvious way to reduce house prices is via the cost of borrowing. If interest rates rise – which they have done 10 times over the past 20 months – the cost of borrowing rises and the amount of money people can prudently borrow falls. As the total size of each new mortgage falls the amount of money chasing every available house falls. The price of that house falls too making housing that little bit more affordable.
A government wedded to affordable housing should, when interest rates raise, sit back and let house prices fall. Monetary policy is, in this case, doing its job. But what does this Government, supposedly wedded to affordable homes, do? It gives a tax break to blunt the impact of higher rates on mortgage holders, which will ensure that house prices continue to rise!
Let’s examine the budget contradictions in housing and bear in mind that the real problem is not enough homes. Let’s restate that the aim of Government policy when it comes to homes should be to build, not to tinker about with one-off taxes.
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The Housing for All plan is based on building 33,000 homes on average each year out to 2030. These targets are based on ESRI research that projected cumulative net migration to Ireland in the 10 years 2019 from 2029 of 220,000 people, so 22,000 per year. We’re already at 240,000 net migrants as of April 2023. Ireland has welcomed in more migrants in four years that we had planned to accept in 10 years. Housing economists, such as Ronan Lyons, estimate the actual figure of homes needed is in the range of 48,000 to 62,000 per annum. We are way off this level of home building. So what did the Government unveil in the budget?
Initiative 1
The tax tweak introduced for existing mortgage holders will not build one extra house. In the past year 160,000 mortgage-holders have seen their repayments jump off the back of higher rates. The budget introduced a once-off tax relief measure to offset the pain of this, at a cost of €125 million. It will apply only to private residences with an outstanding mortgage balance between €80,000-€500,000.
Verdict This moves puts money back in the pockets of existing homeowners in a scattergun manner. These folks have become richer with the upswing in property values. Many have also benefited from ultra-cheap tracker rates over the past 15 years. This is back of the envelope stuff, hardly efficient and given that the real cleavage in Ireland is between renters, would-be buyers on one side and owners on the other, existing mortgage owners are not victims of our supply-constrained property market.
And how will the Government avoid this “once-off” from recurring every time we see a bump in interest rates? If recurring it means that houses are a one-way bet, when interest rates rise the State introduces a tax break so house prices go up. House prices, therefore, go up whether interest rates rise or fall!
Instead of doing something that could boost building like, say, cutting development levies or funding them through higher local property tax or cutting VAT on new builds, parties of the centre have adopted the nonsensical policy option advocated by Sinn Féin, based on special pleading of the already reasonably well-off and, more importantly, the already housed. The fact that it was advocated by Sinn Féin is critical here. Is the purpose of the Government simply to cancel out Sinn Féin? If it is it betrays a profound policy insecurity at a time when arguably, with the economy growing, they should be confidently highlighting the ideological difference between themselves and Sinn Féin rather than robbing Sinn Féin’s clothes.
[ Mortgage interest relief: How do I apply and how much can I save?Opens in new window ]
Initiative 2
The rental tax credit is set to be increased from €500 to €750.
Verdict
A rental credit is hardly a long-term solution to the problem of too few homes available in the rental market and the aim to keep rents affordable. This will help those in tenancy agreements in the short-term, but it puts a floor on rents, possibly contributing to upward pressure on rents more generally.
Initiative 3
The budget, based on less-than-convincing evidence of mass small landlord flight from the property market, introduced a tax break of €600-€1,000 for landlords, with an incremental rise in value every year they stay in the market up to 2027.
Verdict
It should not matter who owns the homes that are rented. If these homes come off the market due to fleeing landlords they are homes for people who didn’t have one. This move makes little sense. With around 160,000 landlords reporting rental income to Revenue, this move will likely cost in excess of €100 million and line the pockets of existing landlords (hardly the most hard-pressed group in a squeezed property market) many of whom had little intention of leaving the market. So it’s a windfall for all those landlords who are happy to receive rent.
Initiative 4
The vacant homes tax introduced in 2022 has been increased from three to five times the property’s existing base local property tax liability.
Verdict
This step is in the right direction because vacancy is unacceptable when we have a housing crisis. However, given LPT is a) based on self-assessed valuations and b) basic charge rates are trivially small (less than €500 for all properties worth under €525,000) this is unlikely to make much of a dent, particularly if the owner is speculatively hoarding. The tax on vacancy has to be increased dramatically – not to raise revenues but to prevent hoarding. The proceeds of the tax might be used to finance incentives for those who want to do up derelict buildings, so that addressing dereliction could be cost-neutral.
Initiative 5
The Help to Buy scheme has been extended to the end of 2025.
This policy more than any encapsulated what economics term the “paradox of aggregation” meaning what is good for the individual is not always good for the community. A Help to Buy scheme is good if you and only you get it, but if everyone gets it it simply pushes up all prices. It is already costing 43 per cent more than original estimates in 2021. It is the policy ghost they simply won’t slay.
Housing is the biggest problem facing the State, and this Government’s budget interventions are contradictory and short-sighted. They will protect existing residents/homeowners, blunt the impact of higher interest rates that would otherwise bring house prices down, and will not help deliver one extra home.
You couldn’t make it up.