Opinion: increased tax will discourage new investors and encourage current investors to leave the market
A decade on from the property bubble, Ireland is once again feeling the effects of a dysfunctional property market. Back then, it caused an economic collapse - this time, it’s driving a social crisis. While homelessness is the most visible symptom, there is a more invidious problem and that's the inability of individuals to purchase their home. Unless a solution is found in the short term, the effects of this will be felt for decades.
The most recent census highlights the problem. Home ownership has fallen back to a level last seen in 1971. Renting is ubiquitous among the under thirties. In 1991, half of 26 year olds owned their home. Now, almost 90 percent rent and a recent survey found 25 percent never expect to be able to buy their own home. In just 25 years, owning a home has gone from being part of most peoples’ plans to an aspiration many see as unattainable.
From RTÉ Radio One's Morning Ireland, Louise Byrne looks at The Economist survey which found that property price growth in Dublin has outpaced growth in 22 other global cities over the past five years
While the situation is unpleasant for twentysomethings, they have at least the time to find a solution. For those a decade older, the situation is critical. They are approaching a tipping point when their expected working life will be less than the length of a mortgage. Once this point is passed, owning a home becomes unachievable. At an age where they could have expected to be leading a settled family life, they face the stress of an uncertain future, paying rent instead of a mortgage, knowing little stands between them and losing their home.
As home ownership becomes unachievable for this cohort, Irish society will face a generation renting into retirement. This will lead to widespread poverty in old age as the bulk of pension income is spent on rent. State services will face a significant burden to alleviate the worst symptoms.
In just 25 years, owning a home has gone from being part of most peoples’ plans to an aspiration many see as unattainable
Solutions to the crisis have focused on increasing supply. However, two forces drive markets - supply and demand - but little attention has been given to the benefits or means to reduce demand. This has potential because demand in the Irish property market is made up of two competing groups; those looking for a home and, less desirably, an excessive number looking for an investment.
Investor purchases reduce the number of properties available to home seekers and drive prices up. Collectively, they own 350,000 properties, 22 percent of the nation’s stock of private housing. In urban areas, a third of residential property is owned by investors. If the supply problems were solved tomorrow, 350,000 households, representing over a million individuals, still could not purchase their own home. The extent of the problem is highlighted by the sale of a 262-apartment development in south Dublin. Rather than being made available to home buyers, the development was sold as a single lot to an investment company, destined for the rental market.
From RTÉ Radio 1's Drivetime, the Sunday Business Post's Jack Horgan Jones on how the the state is paying market rates to buy back propertties sold to vulture funds at a discount
The effects spread beyond the property market to threaten society as a whole. As average rent moves beyond €1,000, monthly payments transfer €350 million from the bottom to the top of Irish society every month, increasing inequality and damaging social cohesion.
Given the malign effects of excessive investment on the property market, the onus to provide a remedy falls on government. Despite this, the system is tilted in favour of those seeking investment rather than a home. Investors’ mortgage interest can be off-set against tax. Wealthy individuals can earn investment capital and receive profits tax free through their pension funds. Efforts to make leases more favourable to tenants are quietly dropped.
The social cost of the failure of the property markets gives government both the right and the duty to act
Commercial investors also avail of our low corporate tax regime. The recent budget continues this trend. Perhaps this is unsurprising, given that one in five TDs and one third of the current cabinet own investment properties. Legislation focusing on bad landlords, although welcome, is a distraction.
The Central Bank’s 20 percent deposit requirement provides the final fatal hurdle to many wanting to get on the property ladder. Even those who can afford a mortgage need to save €50,000, and up to €80,000 in Dublin, while paying rent often at a level above the corresponding mortgage payment. Inequality is locked into society, separating those privileged enough to be able to ask their parents for a loan (as the Taoiseach advised) from those who are condemned to renting.
From RTÉ Radio One's The Business, Frank Barry, economist at Trinity College Dublin's School of Business, and Frances Ruane, director of the ESRI, discuss the Central Bank's 20% deposit requirements
Individually, landlords are not a problem as they are investing their savings as profitably as possible and paying tax as demanded by government. A properly functioning rental market is an important part of a healthy property market. It is the cumulative effect of excessive investment, particularly from private landlords, that generates negative effects. The social cost of the failure of the property markets gives government both the right and the duty to act.
The simplest and most effective way to reduce the number of investors is by tax. Increased tax will reduce the profitability of property investment, discourage new investors and encourage current investors to leave the market. As investors sell up, properties will become available to home buyers. Funds raised should be recycled to help home buyers overcome the barriers to ownership created by the Central Bank’s deposit requirement. The tax must focus on rent, not profit. This will maximise its impact by eliminating opportunities for tax avoidance or moving profits out of the state.
Action is urgent, but a buoyant property market and record low interest rates mean conditions are ideal. High property prices allow landlords to exit the market profitably. Except for a very unfortunate few, the days of negative equity and accidental landlords are finished. Low interest rates make mortgages just about affordable even at the current price level, though any delay could see the European Central Bank increasing rates putting repayments beyond the means of many. Homebuyers can have the security of fixing their repayments for up to 10 years, while paying less than their current rent.
However, reducing the number of investors is not sufficient to fix the property market and increasing the supply is essential. But acting now to reduce investor demand can stop inequality becoming entrenched in our society. It can also ensure that as properties are built, they become homes not investments.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ