The tax strategy group has published a paper on taxation policy and housing.
Looking at the metrics of house prices and house rents, it’s clear that the uplift in demand for houses is significant.
Dublin prices have increased 45% from the trough to the current level, while outside of Dublin, prices are up about 16% from when they bottomed out.
Rental rates both in Dublin and outside of Dublin have risen rapidly, at 19% and 6% respectively, over the past 24 months.
The demand seems insatiable, with houses coming available for rent being snapped up without delay.
Other empirical evidence, such as the DAFT housing report for Quarter 2, points to a chronic lack of supply.
Of course, supply will naturally come on stream as prices continue to rise, but this may not be economically desirable.
The tax strategy group looks at what the tax system currently offers by way of incentives and reliefs for property owners, and the taxation on property transactions.
Continued economic recovery and population increases are listed as the main reasons for increasing demand,which has not been met with an equivalent supply response.
In 2013, 8,400 housing units were completed, increasing to 11,000 in 2014, and expected to amount to 12,500 in 2015.
Data produced by the Central Bank of Ireland for Quarter 3 of 2016, shows that of the 29,000 units traded in 2014, nearly 59% of transactions were purchases by cash buyers.
Piecing together the information from all of these sources, it’s apparent that the housing market is dysfunctional, with property prices rising but not satisfied by supply, and first-time buyers becoming priced out of the market, mainly by investors, who in turn are benefiting from rapid increases in the value of their investments, and increased rental yields.
The tax strategy group report highlights the dangers in subsidising the rent or mortgage interest, noting the Commission on Taxation was of the view that, in the same way that mortgage interest relief increases the cost of housing, rent relief increases the cost of private rented accommodation and, as a result, the tax strategy group ecommended that rent relief should be discontinued.
A push to support buyers and tenants simply adds more to the demand side of the equation.
On the supply side, the tax strategy group explores the property incentives regime, such as the living over the shop scheme.
Wealthy investors were best positioned to benefit from investments in such schemes. And many such schemes overran their useful lifespans, leading to oversupply and dead-weight in certain areas.
The TSG report stops short of recommending the re-introduction of such schemes, but does point out that the ESRI is due to report on how tax policy can support the residential property sector.
Meanwhile, the Union of Students in Ireland has been forced to launch a drive to free up accommodation for students by asking home owners to consider renting spare rooms in their homes.
Interestingly, the tax code grants a tax exemption to a home-owner who is in receipt of rent from the letting of a room in their home, where total gross receipts are below €12,000 per annum.
Stop gaps introduced over the last 23 months, such as the cap on lending limits by the Central Bank, the plan to roll out modular housing, and restrictions imposed on landlords in applying rent increases, have done little to address to lack of supply.
Access to finance, stringent planning regulations, infrastructural constraints, and building costs are highlighted as possible factors which may be affecting supply, according to the ESRI.
The TSG report notes that incentivising developers should be avoided where developers effectively benefit from the incentives. Likewise, incentives toward the cost of meeting more stringent regulations are discouraged, until the costs of such stringent building regulations are properly understood.
The TSG report sticks to documenting the existing regime, and does not consider or propose alternative strategies — such as increasing local property tax on vacant properties, and expansion of the Home Renovation Scheme through a higher incentive, or taxation of development land, a so-called “use it or lose it” approach.
© Irish Examiner Ltd. All rights reserved