THOSE who entered the residential buy-to-let market, particularly at the latter end of the boom, are now experiencing a triple onslaught of a significant reduction in rental income, a raft of new Central Government taxation and a disturbing average capital equity loss of €150,000 to €200,000 on each purchase.
To compound the financial stress, the lending institutions have — in many cases where finance was not tracker-based — upped their interest rates levels and have also begun to insist on early capital repayment.
A reduction in rental levels since 2007 has on average been equivalent to 25%, reducing the typical monthly rental income from €1,100 per annum to €825 per month for each residential unit.
The taxation on rental income during the height of the boom involved a single tax rate of 41% income tax, however, with the more recent taxation additions of the Universal Social Charge (7%), PRSI (4%) and the newly introduced Property Tax in addition to the Second Home Charge, the effective taxation stands at 55.5% of rental income. Of more concern is the projected increase in both the newly imposed property taxes and the intended introduction of the Communication Tax (replacing TV licence) to be levied on residential property in 2014 is likely to raise the overall direct taxation burden to approximately 62.5% of rental income.
The combined effect of the reduced rental, and the increase in taxation, will reduce the net monthly income from €649 per month to €308 per month. This reduced figure — and the additional expenditure of the proposed water charges and the existing Private Residential Tenancies Board fees — will reduce net income further.
The very much reduced income will greatly undermine the investor’s ability to cover mortgage repayments which can typically run to €1,250 to €1,500 per month. This would mean that the investor would have to have deep pockets to make up the balance from other already taxed income sources.
It is unfortunate that many individuals who have purchased late in their working careers as a last ditch effort to provide for a much-needed pension income have been dealt a devastating financial blow and are unlikely to recover.
With the level of taxation being applied it is now not possible to expect the eventual recovery in the housing market to be investor-driven. During the Celtic Tiger years, the yields from residential investment property had compressed to a low level of 3%. However, yields would now need to move to 8% or higher before investors are encouraged to enter the market, allowing them to absorb some part of the additional taxes being imposed.
It will be incumbent on rising rents to provide this level of yield, as the continuous lack of funding for purchase from the banking sector is unlikely to improve any time soon. And, therefore, any significant capital appreciation is unlikely to arise.
Some encouragement may be taken from the most recent Daft Rental Report indicating a 5.5% rental increase in Cork city over the past 12 month period; however, on a nationwide basis a zero growth level was reported.
Even making the assumption that rental levels will revert to 2007 levels (€1,100 per month) by 2014 it is of concern to note that the projected net income would still show a reduction from €649 per month to €412 per month, a very sizeable drop of 36.5%.
The Government would need to look closely at the level of taxation that they now intend imposing on this important, if not critical. supply chain of the housing market. Otherwise, the natural consequence may well be a significant exodus of the investor from the market who will seek out alternative investments where the taxation is less aggressive and more benign. Another unfortunate consequence may well be a steep increase on the already high Local Authority Housing waiting list which currently stands at just over 100,000.
* Robert Jeffery of Frank V Murphy & Company is also a partner of the nationwide National Property Consultant Group (NPC).
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