In a country that is only 4% urbanised, to have a scarcity of land for building takes quite some doing. In fact, it takes generations; generations in which the political class and those who elect them, ignore the best interests of long-term planning.
The budget next week is an opportunity to begin to undo some of this, but it is increasingly unlikely that it will do so.
Any asset bubble arises when the price of the assets deviates in a persistent way from the underlying fundamentals. In that context, we might be careful about calling the Dublin house situation a formal bubble. There is, by every single account, a vast scarcity of supply. In a situation where supply is limited, or growing more slowly than demand, prices will inevitably rise. That said, year-on-year price increases of 20%-plus must surely be a bubble in all practical terms. It is a bubble in that it cannot continue in even the medium term. The numbers of planning permissions have slumped to approximately 3,000 to 4,000 per quarter, the level last seen in the 1980s. Within that, the proportion of extensions vs new-builds has increased significantly. New dwellings are at their lowest since the CSO database began in 1977.
There is clearly a supply problem. The oversupply of property built during the latter stages of the boom is not, by and large, located in the areas where the economy is now taking off. This does not mean that we should engage in widespread tax-based initiatives to build shoeboxes in Dublin, Cork, Limerick and Galway. It does suggest that some way needs to be found to undertake three interlinked initiatives. We need property developers. But we don’t need that kind of developments we saw during the boom. We need to see properly-structured corporations, with adequate working capital, combined with the growth of large numbers of not-for-profit housing associations.
The second issue is that we need to investigate how we can temporarily dampen down the housing market. In this context, the initiative from the Central Bank in relation to loan-to-value ratios on loan-to-income ratios is welcome. However, the evidence from such supply-side macro-prudential initiatives is that they are, at best, limited. They typically slow down, or perhaps temporarily halt, property appreciation. But this may only last six months to a year. In international studies, the only way that has been found to stop property bubbles dead — absent choking off credit — is via the tax system
The first prong should be a 30% per annum mandatory levy on the development potential value on all zoned serviced land where development does not take place within 18 months of planning permission. This would surely incentivise developers to either start building themselves or to sell to somebody who could.
The second prong relates to the principal private dwelling. The commission on taxation noted that the exemption of principal private dwellings from capital gains tax in 2006 house values, amounted to the loss of some €2bn per annum. Introducing this would therefore, even in these times yield a significant sum. There is absolutely no chance of this happening of course. The budget next week will be an election budget. It will mark the start of a bidding for our votes for 2016.
In an economy still running a significant budget deficit, with double-digit unemployment, with continued emigration, and a massive debt-to-GDP ratio, the evidence is that we prefer to vote ourselves tax cuts than for improved services or, heaven forbid, a stable economic future.
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