Life Homes

Tuesday 23 September 2014

A pocket history of property policy

Published 02/11/2012 | 05:00

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As pressure mounts on the Government to delay the abolition of mortgage tax relief, Donal Buckley looks back at previous taxes and incentives and asks if Minister Michael Noonan is for turning

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Finance Minister Michael Noonan is coming under increasing pressure to change his mind on mortgage interest tax relief for those who buy a home beyond the December 31 deadline. While the Minister has been adamant that there will be no change, this would not be the first Government to change tack on property related taxes.

Over the years there have been several reversals after measures backfired or interest groups mounted pressure.

This week the Professional Insurance Brokers Association ( PIBA), which represents mortgage advisers, has called for mortgage interest relief to be extended for a further two years for those buying a home including those trading up or down.

The Institute of Professional Auctioneers and Valuers want it extended beyond 2013.

Others feel that the least Minister could do is to allow those who pay a deposit on their home before the end of the year to qualify for the tax relief.

This would allow such buyers more time to close the sale and meet the criteria set by the Revenue Commissioners which require a buyer to draw down their mortgage from their bank in order to qualify for the tax relief.

Buyers now effectively face a mid-December deadline for closing a purchase in case processing delays cause them to miss the tax deadline.

Currently first-time buyers receive mortgage interest relief at 25pc while other home-owners who buy would receive relief at a rate of 15pc.

That means a saving of €18,000 over seven years for a couple taking out a €300,000 mortgage at a 4.25pc interest rate, if they buy a house before the end of this year, PIBA said.

It also called for an end to rules that mean anyone building a home, and drawing down their mortgage in stages, only gets mortgage interest relief on the share of the debt drawn down before the end of the year.

Over the years various Governments have tinkered around with the taxes on housing sometimes to address problems such as the need to broaden the tax base, boost economic activity, meet a shortage of accommodation or stop the decay of city and town centres.

In contrast, when prices are steaming ahead, the Government has on rare occasions sought to cool down the market.

Unfortunately these cooling measures sometimes backfired and the Government has for various reasons changed its mind and restored old buying incentives or introduced new variations.

One of the best known reversals is residential property tax. This had been introduced in 1983 by Alan Dukes in a Fine Gael Labour coalition effort to broaden the tax base. However in 1997 it was abolished by a then Labour Finance Minister Ruairi Quinn.

Now it's back on the agenda again and is expected to be introduced sometime next year. Interestingly while there is strong opposition on the household charge there has been little opposition to property tax ahead of the Budget. But that may be because the mortgage relief is of more immediate concern with the deadline looming.

Governments have also tinkered around with stamp duty changes over the years.

During the boom, stamp duty was gradually increased in what were regarded as relatively painless moves at the time because the banks were willing to lend up to 100pc of the price of a house and with prices continuing to rise buyers felt future increases in house values would more than offset the cost of the tax.

However home owners who bought second-hand homes after the year 2003 were paying rates of up to 9pc and buyers of relatively modest houses in Dublin had to pay 6pc.

So high were house prices and consequently the stamp duty as a percentage, that then PD Minister Michael McDowell signalled in the autumn of 2006 that he would seek the abolition of stamp duty in the December 2006 Budget.

He was castigated by the property industry within weeks as he was blamed for putting off buyers and causing a drop in sales after buyers delayed buying in the hope that they could buy a second-hand home in 2007 without having to pay the duty.

There's a touch of irony about this criticism as ordinarily any move to reduce taxes on property sales would have been welcomed by the industry.

Furthermore as 2007 saw the start of the slide, a few procrastinating buyers may have been saved at least some negative equity as a result of his move.

In 2006 stamp duty was abolished for first-time buyers of second hand homes and four years later in the 2010 Budget, the Government slashed all residential stamp-duty to only 1pc for existing owners who bought a house worth less than €1m.

It was hoped that the 2010 reduction would help the market which was in the doldrums but it had no effect.

Other tax changes also backfired and were reversed. For instance in 1998 when the boom was in its initial stages and the rate of price increase was 30pc a year, the Government came under pressure to cool the market.

Investors were blamed for pricing first-time buyers out of the market and so Government decided to move against speculators by abolishing mortgage tax relief on their rental income.

Soon afterwards, the rate of price increase slowed from 29pc to around 3pc a year between 1999 and March 2002, according to research by David Duffy of the ESRI on the Permanent TSB house price index.

Mr Duffy also points out that other economic factors contributed to this slowdown including the bursting of the dotcom bubble, the 9/11 attacks in the US and the impact on the Irish economy of foot and mouth disease.

But within a further short time, other sectors of the Irish economy, particularly the IT and financial services sectors, resumed strong growth and were finding it difficult to attract sufficient overseas staff with the expertise to fill the IT jobs that were being created.

A shortage of modern rental accommodation was identified as one of the deterrents for talented people coming to Ireland.

Capitalising on this the property industry lobbied the Government and Minister Charlie McCreevy's 2002 Budget restored the tax relief for investors and the rate of house price increase again accelerated from 10pc to around 15pc in 2003.

But these are just some of the u-turns as over the years the Government was back sliding on a range of investor incentives as it postponed their withdrawal.

Charlie McCreevy slashed capital gains tax from 40pc to 20pc but that was increased to 30pc by Michael Noonan in the last Budget.

Such reversals prompted the chartered surveyor William Knowlan to call on the Government to stop tinkering with market measures and instead adopt a better thought out approach to changes on property related taxes. He proposes a property advisory council which would be consulted on the likely impact of any changes and enable Government to have a better understanding of what measures can work best and how.

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