Significant challenges face mortgaged investors
Published 27/05/2011 | 05:00
PROPERTY investors have many cards stacked against them when considering taking advantage of the keen prices currently available.
Tax changes and abolition of incentives make property less profitable, and banks are also pushing up rates independently of any ECB moves and restricting credit for investors who want to borrow.
While we technically have nine banks in Ireland, if you are an investor the figure is really two -- because the rest are not interested in lending to property investors.
When they do, the rates are high and the terms are tough.
The misery on the banking front is not yet in full swing, as when ECB rates go up a little more it will drive borrowers over the edge.
One of my popular consultations of late is a 'realignment', which we do for mid-range landlords, effectively figuring out where the break-even point is on their loans and giving them a plan to present to the bank for when that day arrives.
According to the recent CSO house price index, prices have dropped 40pc nationally.
Apartments, a popular property investment choice until 2007, are the worst hit.
In the past, when prices dropped so spectacularly, we were reminded of the Rothschildian maxim 'when there is blood on the streets, buy property'.
But in Ireland we have seen such prospects coincide with high unemployment, a huge supply of property, matched with taxation disincentives at the same time.
Rents are showing signs of stabilisation but are still down in the region of 25-30pc, meaning that yields in general are still less than 5pc on average.
Added to this, only 75pc of your interest expense can be offset against rental income.
While this is contrary to common standards of accountancy, it didn't stop our policy makers.
So, if you let a property for €1,000 and you have an interest bill of €1,000, in the eyes of the state you have made a €250 profit -- which is quite amazing, but for all of the wrong reasons.
Then you have the Non-Principle Private Residence tax (NPPR) of €200 per year.
As it doesn't distinguish between a castle and a cottage, it's a flat tax which is entirely inequitable.
The rub is that you can't offset the cost of this against rental income, even though it is a tax.
Again, common standards in international best practice regarding taxation are ignored.
The Private Residential Tenancies Board increased their cost by around 30pc, which is levied only on the property owner even though a tenant has equal incentive to avail of its services.
If you pay later than four weeks after the tenancy starts, the cost doubles.
I recently made a complaint about a tenant and was told that they were 'busy' and would get to it in eight weeks.
What a pity the charging structure doesn't work in reverse!
Then you have the Universal Social Charge of 7pc, which is applied even if you are carrying forward a loss from previous years.
In effect, there are no new property investors -- only the existing ones, who are painfully trying to pull through this market, as well as some of the professional or career investors who are generally faring well.
The main problem is that, in trying to find solutions, the policy makers are destroying a vital part of the economy.
Curing the boom is more important than fixing the bust, but the answer is not to do so by driving existing participants into extinction.
And irrespective of how one may like to complain about the housing market, it remains true that, come night-time, most of us prefer to be in a home rather than not.
Karl Deeter is operations manager at Irish Mortgage Brokers