Coveney's tax refund won't help anyone if it comes in before many more houses are built
Published 19/07/2016 | 02:30
Plans floated by Housing Minister Simon Coveney to give first-time home buyers a leg-up through "generous" tax refunds should be approached with extreme wariness.
There's nothing wrong in principle with Government supporting home buyers. Experience in the nineteenth and early twentieth centuries, and again in recent years, is that left to its own devices, the market won't produce affordable homes for ordinary workers.
In the great scheme of things, homes, especially in places where land values are high, quickly become unaffordable.
That is especially true when heavily taxed individuals are competing with tax-efficient, capital-rich institutions to buy the same properties.
But the latest move to tilt the system more in favour of home buyers raises very real questions around fairness, effectiveness, and unintended consequences.
First and foremost is the risk that any move to put more money into the housing market without lifting supply will simply drive up prices. Any relief for buyers would quickly be cancelled out as a result.
It is worth saying that mass ownership has, by and large, been a good thing, here and abroad. It ended for many the spectre of an impoverished and dependent old age, for one thing. It has also helped ordinary families build up capital against economic shocks on an unprecedented scale.
But even if the thinking is sound, a long-term policy shouldn't be decided by short-term factors.
Introducing it before the supply of new homes has risen to at least the 25,000 a year mark, would certainly be a bad idea.
There are other issues. The notion of a tax refund sounds reassuring, as if people will be getting their own money back. The reality is that using tax breaks to help fund those buying a house means cash is ultimately coming out of the public purse.
That means the issue of fairness becomes crucially important. Any effort to rig things in favour of home buyers will create winners and losers.
In a worst-case scenario, it means support for better-off people who can get a toe-hold on the housing ladder while the poor remain trapped in long-term renting. That's not right.
Weakening the tax base to find that cash - which, ultimately, this will do - also strikes me as risky, given the delicacy of both right now.
In fairness, Coveney's idea isn't outlandish. Before the crash, mortgage interest relief and, to a far lesser extent, first-time buyers' grants and other schemes, helped put home ownership within the grasp of ordinary families and individuals. The capital gains exemption for those selling a home, means home owners still get some favours from the tax system.
In Britain, the government still provides significant help to first-time house buyers, and, equally, the US has ploughed on with policies aimed at ensuring home ownership remains within the grasp of working-class families, even after runaway mortgage lending precipitated the great crash. Here, policymakers ran a mile from supporting house buyers after the crash. Frankly, they threw out the baby of mass home ownership with the bathwater of risky lending.
Supports were ditched for new buyers, along with everything else that could be blamed for inflating prices.
In addition, rightly or wrongly, the Central Bank mortgage rules actually make it harder for most people, who rely on the banks for the kind of money needed to buy a home. And at the same time, it's became more attractive for large-scale landlords to buy residential property thanks to tax efficient structures called real estate investment trusts (REIT), brought in by Michael Noonan as finance minister.
The current policy mix doesn't work. Some parts of the country are gripped by a housing crisis that threatens to be every bit as debilitating as the mortgage crisis was. Coveney is right in wanting to shake things up.
Unfortunately, floating an idea that appears to aim, at best, at softening the effects of the Central Bank rules risks making things more rather than less muddled.
Floating those ideas this far out from the Budget isn't helpful either. Inevitably, some buyers will now put their plans on hold until the new policy is in place.
Worse, builders, already doing too little, may opt to sit things out too. That's a real danger when supply is already dangerously low.
It's become trite to point it out, but unless more houses are built quickly, every move to support house buyers is doomed to fail.
There's a real danger the Government is dangling the promise of front door keys to an already disgruntled and restive public, regardless of the reality that the houses they are meant to open simply don't exist.