Why Vat should be cut for builders after all

By Joe Gill

Over the past few weeks I’ve had some conversations with professional investors about the apartment market in Ireland.

It is a subject worth ventilating because apartments can be a powerful enabler of urban regeneration and, more importantly, supply much needed residential accommodation.

There are some known knowns about apartments.

They are a more efficient use of space compared to houses.

They can accommodate large numbers of people in urban environments and particularly in city centres.

On a per unit basis they should be available at lower prices than houses and are, therefore, of value to the younger population cohort, a section of Irish society that is struggling most to get on the property ladder.

On first glance, this analysis would seem to point to a huge opportunity to fast track apartment developments in Irish cities as a means of combating the residential marketplace.

Yet, all my conversations encountered highly critical comments from people who know these type of assets best — financial property experts.

They argue that the cost of “manufacturing” an apartment in Ireland is exaggerated by fixed costs, of which Vat is the most shocking.

This is putting completion costs of average two bedroom apartments at a very large premium to similar structures in Britain.

As interest rates and average incomes in the UK and Ireland are broadly similar, having apartment prices at high relative levels in Ireland make it very difficult for buyers to be encouraged.

Hence, the volume activity in the Irish apartment market remains extremely low and that is a very poor outcome for the national economy.

Of course these messages about costs have been shouted loudly by Irish developers for some time.

Their voices, however, seem to be politically sensitive as memories of the debt-fuelled property bubble a decade ago have taken a heavy toll on the collective mindset of politicians and the media alike.

Any suggestions of changes to the tax code that could kick start property development is quickly jumped on as being a break for voracious developers.

This narrative is standing in the way of rational analysis and thinking.

The people who discuss this with me are investors who have detailed excel sheets and financial models to explain why they are diverting capital to opportunities outside of apartments.

The only way their models work is if rampant price inflation takes place in apartments.

Such an outcome would be a re-run of the global 2006-08 period when prices shot past all reasonable income based multiples and led to disaster.

A cursory look around the centres of cities including Dublin, Cork, Limerick and Galway finds many sites that would be prime candidates for high quality but affordable apartment developments.

These could bring families and individuals to city centre living, something that all Irish cities should be trying to energise as a way to manage, in a civilised way, our growing economy.

Moreover, an active urban residential environment provides a source of employment for many companies that increasingly prefer to locate in city centres rather than suburban commercial parks.

Political leadership is needed to fix this. The elimination of Vat would bring Irish housing in line with UK Vat policy.

UK house prices are, on average, lower than those in Ireland for this fact alone.

Boosting the supply of housing, and in particular apartments, should be a big priority.

Vat foregone can be replaced with other taxes from labour through increased activity and all the taxes that surface from the material and contents bought to make a home.

While Government has made some changes to rules around apartments , it needs to think even more radically now.

If successful, the prize is a rapid advance in apartment building and the regeneration of cities with a flow of primarily young people.

What policymaker can afford to ignore that?

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.