Sir, - Your second editorial of March 8th poses an important question which can be answered in part, at least. Unlike many, other investment assets, owner-occupied residential property is not taxed. Moreover, as only a small amount of money is required to purchase a substantial asset which will grow in value, large capital gains can be made for a small outlay. As a result, owner- occupied residential property is about the most attractive investments that any one can make in this State.
Popular understanding of the history of house prices is one of long-run increases interspersed - with periods of tolerable recession. To buy into this bonanza, a mortgage is required. The higher the mortgage, both as a percentage of value and as a proportion of income, the greater the expected gain.
In a time of prosperity with job and income security, the risks look low and the incentive high. The expectation of low interest rates is persuasive. The security of knowing that if it all goes wrong the property can be sold and the gain realised is, perhaps, the catalyst that makes the formula work. The British experience can be seen as an aberration not likely to happen here.
In an economy experiencing high levels of economic growth, demand for property will increase at a rate much faster than the supply, with an inevitable increase in prices. When there is a recession, demand and prices will level off. Indeed they might fall heavily depending on the depth of the recession and, perhaps more relevant in present circumstances, on how much of an increase there was during the preceding boom. This is the inevitable cycle of the housing market.
If house prices continue to rise much faster than incomes, it is reasonable to presume that proportionally more money is beings borrowed to fund purchase. If prudent lending guidelines are being faithfully followed, there should not be a problem when the boom comes to an end. If, however, they are being exceeded say by using devices such as including as income, bonuses, expenses, overtime or other benefits likely to fall proportionally more when the boom ends, then trouble lies ahead.
Where there is a relative shortage of property, giving everyone in the market more money to buy, by way of increased mortgages will only serve to inflate prices. In the same way, your proposal to give the first-time buyer's £3,000 grant to purchasers of all existing dwellings would also be inflationary.
The property price rises over the past couple of years could be expected and are a healthy stimulus to the construction industry. If, however, prices continue to rise at this pace, there is great reason to be concerned about the likely fallout. There is, therefore, a great need for vigilance among lending agencies to ensure that prudent and tried lending guidelines are not breached.
A great duty of care now lies with the mortgage-providing agencies. They need to advise cautions to intending purchasers and to exercise rigour in their application of their own lending criteria. They should do this in their own interest, as I am sure that if there is a problem, one of their customers will sue them for not giving them responsible advice.
The favourable treatment of owner-occupied residential property for tax purposes increases the incentive to use family homes for financial speculation and creates the dynamic for large price rises. Perhaps the Minister for Finance should reconsider the introduction of a tax on houses, to encourage moderation in prices. This could also be used to solve another pressing problem - that of providing discretionary funds for local authorities. Yours, etc.,
Department of Surveying & Building Technology, DIT,
Bolton Street,
Dublin 1.