We must learn to do property in moderation
It looks like we are going to have to stomach the return of construction and property developers in a big way, says Brendan O'Connor
Published 20/10/2013 | 05:00
THERE is a phenomenon around certain parts of Dublin at the moment whereby properties come up for sale and all these young and not-so-young families come and view them. These are the lucky ones, who maybe have mortgage approval. So all these hopeful families cram in and view these properties and get ready to bid. But increasingly, before they even get to consider their bid, they are told there is already a cash bid in for the asking price. Before they have a chance to take this in, the property has gone maybe 10 per cent or more over the asking price and they are being told there is no point in getting involved unless they have cash and can move straight away. Even if they do have cash and get involved, as soon as they put a bid in, a counterbid zaps straight back at them. Even if they have the cash and the balls to go a bit further, every bid they make is bettered, instantly. Sometimes, a slightly more humane estate agent will even tell them not to bother bidding anymore because there is no point. And within weeks the house is sold, for cash.
These are the mechanics of the property bubble that has seen property jump over 20 per cent in parts of south Dublin in the past year. It is almost as if there is a class of invisible people who have moved in and are hoovering up property. Follow up on some of these properties and you discover they are not going to be lived in but maybe put out for corporate lets or the booming rental market.
The prices seem daft, so people started deciding to sit it out, and wait for this effervescence to die out. Talk to people and they would tell you authoritatively that there has to be a finite number of these cash buyers around. How many cash rich old people can there be? But recently people realised that it is more complex than that. It's not all just old people with cash that they would have put in bank shares back in the good old days. The property market in affluent areas is being driven by a huge amount of investors of all hues. Because good property in the right area is seen as a solid, tax-free, one-way bet for a guy with cash to store. After all, you'd hardly be putting it in the bank would you?
So these people are investing in property, buying it at what they see as rock bottom prices. They reckon they'll certainly see a good appreciation in it over the next seven years, and then they can sell it, and they will pay no capital gains tax on the appreciation in that seven-year period. Because the Government has offered this massive incentive for wealthy investors to invest in property. So if you're a rich guy with plenty of cash, and you're thinking you might invest it in some indigenous Irish company, or a small start-up company, or a pub, or a restaurant, or something that might provide some jobs locally, you dismiss all that. Because property right now is seen as a less risky punt, and because you pay no tax at all on any capital gains you make on property in the next seven years.
The Government's free money for property investors scheme was due to end at the end of this year and maybe then, people thought, a real market, not distorted by speculators, would develop. Well, they'll be waiting another year now because the Government decided in the Budget, against the background of this property bubble, and a massive property shortage in Dublin, to extend tax incentives for property investors for another year. Despite the fact that money has been flooding into Irish commercial and residential property, the Government is taking phone money off old people in favour of giving property-based tax breaks to rich guys.
Everybody knows we can't run away from property forever. While words like construction and developer and property have become dirty words here in Ireland, we do actually need to learn to dance with those devils again. The Irish attitude is obviously that we went crazy on it once, we got a very bad hangover, so now we have to stay away from it forever, because it is evil and it ruined all our lives.
But we need to learn to do property in moderation. We need to learn to deal with it again, and deal with it responsibly. Two-thirds of the jobs created in Ireland in the first half of the year were construction jobs. One in four or five people on the dole in this country is a construction worker. And somehow, though we never thought we would see this day again, there is a shortage of residential properties in some areas and a looming shortage of certain types of commercial property.
As Michael Noonan pointed out during the week, construction should be twice the size it is as a proportion of the economy. In a healthy economy construction is 10 per cent of the economy. Here it is still only 5 per cent. So it looks like we are going to have to stomach the return of construction and property developers in a big way.
But whether we need to actually encourage all this with tax breaks is another matter.
The irony of all this is that those of us, and I am one of them, who are being squeezed out of trying to buy property by investors, are now to be penalised even more for trying to save up to buy a house. While cash-rich investors can put their cash into property for seven years and pay no tax on their gains, any bit of a pittance of interest we earn on our deposits will be taxed at 41 per cent or 45 per cent at a certain point.
If we learnt one thing last week, from the medical cards fiasco and the medical insurance fiasco, it is that this Government isn't very good at working out basic maths, and it isn't very good at working out the consequences of various taxes. They clearly haven't thought through the property one very well. Property will be an important part of our recovery, but given that we have form in this area, we should be careful how we go.