AIB: Builder Vat breaks and landlord incentives will increase house supply

AIB: Builder Vat breaks and landlord incentives will increase house supply

AIB has called for tax breaks for developers, incentives for private landlords, encouragement for empty-nesters to move homes, and extending the lifespan of the help-to-buy scheme in order to accelerate housebuilding and lower rental costs across the country, writes Pádraig Hoare.

In its housing supply report out today, the bank says the profit margins developers are working to are “constrained” and generally range from 10% to 15%, based on its analysis of business cases submitted over the past year.

“In general, we deem any development that has a profit margin of less than 10% as marginal given the inherent — and high — risks in building and selling houses,” the report said.

It called for Vat to be reduced to 9% for developers to stimulate the market. “Cutting Vat would directly reduce the cost of building and consequently would improve developers’ ability to generate their own equity.

“First, cutting costs would help make marginal projects viable and would see more residential units delivered to the market. Second, an increase in profitability would help developers repair their balance sheets and build equity from their own resources. This, in turn, would allow developers to fund more developments and ultimately increase supply,” the report said.

Such an approach would also encourage more players to enter the housebuilding market, the bank said.

However the Vat cut should be temporary, the report suggested.

“Cutting Vat may not be the most palatable of policy options and it has its drawbacks. A cut in Vat may not result in a reduction in house prices and might ultimately feed through to higher land prices.

That is why the reduction in Vat should only be a temporary measure and should be time bound or linked to housing output,” it said.

In relation to landlords, AIB said it believed individual private landlords “should be encouraged back into the market and placed on a more equal footing with their institutional equivalents”.

It said large institutional investors “will not be a solution to the shortage of rental accommodation” and “rather, it will fall back on individual landlords to meet this demand”.

The 20 largest landlords such as Reits, investment funds and companies account for less than 3% of tenancies, the report said.

It claimed concessions were required to encourage landlords back into the market.

Measures, it said, should be considered include making the Local Property Tax a deductible expense, “which would further improve rental cash flows for individual landlords”.

It also said separating rental income from other forms of income for the purposes of applying a separate tax treatment would be beneficial.

“A new tax regime could be introduced for small landlords that simplifies their accounting and tax requirements and/or introduces a flat turnover tax in place of income tax on rental profits.

Simplifying the tax system and recognising the full suite of rental expenses as deductible expenses would prove attractive to potential investors,” the report said.

It said a “senior housing market” should be developed in Ireland in order to “free up under-utilised family houses”.

Empty nesters should be encouraged to move, it said.

“A key finding was that there was little evidence of housing mobility among this age cohort in Ireland, and significantly less mobility than occurs among this cohort in the UK and the US.”

The help-to-buy scheme needed more certainty and a fixed period to make it work more effectively, the report said.

“Developers and funders have made investment and lending decisions based on the assumption that the scheme would be in place until 2019. Any curtailment to the lifetime of the scheme may impact on the viability of some of these developments,” it said.

Meanwhile, construction activity increased at a faster pace during December amid strong growth of new orders, the Ulster Bank construction purchasing managers’ index (PMI) said. Total construction activity rose to 58 in December from 56.7 in November.

Any reading above the neutral 50 point mark represents a sector in growth mode. Ulster Bank chief economist for the Republic, Simon Barry, said: “Overall, the construction PMI is the latest indicator to paint a decidedly upbeat picture of the economy’s performance at the end of last year.”

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