Crippling taxes have stalled house builds
Ridiculous 'Rolls-Royce' rules on new homes are crucifying first-time buyers, writes Brendan Burgess
Published 03/04/2016 | 02:30
Have we learnt nothing at all from our recent history?
We are still dealing with the wreckage from the housing and credit bubble and crash. More than 70,000 mortgage-holders are still in arrears despite the recovery in the economy and earnings.
Politicians and commentators are excoriating the banks for reckless lending during the boom while in the same breath they are criticising the Central Bank for setting responsible borrower standards for first-time buyers.
Have the banks not learnt anything either? Their own records show that few bad debts are due from borrowers who borrowed less than 80pc of the value of their home and less than three-and-a-half times their income.
The 70,000 borrowers still in arrears are, in the main, those who borrowed more than 90pc of the value of their homes and four or five times their incomes. But in the banks' desperate rush to increase their lending, they too, want the Central Bank to relax the restrictions.
And who would pay the price of another economic downturn or property crash? The responsible borrowers would continue to pay penal mortgage rates to compensate for those customers who borrowed too much and who can no longer afford to meet their repayments.
And, if the downturn and crash were to get very bad, the taxpayer would have to step in again to bail out the banks.
It's very difficult for someone struggling to get on the housing ladder to see the bigger picture. They think that if only the lender would give them just a bit more money and require a bit less of a deposit, they would be able to buy their dream house.
But unfortunately, it does not work like that. If the lending restrictions were relaxed for everyone, then it would just push up the prices of all houses - newly built and second-hand. So the aspiring first-time buyer would be in a worse position.
It would take them just as long to get on the housing ladder and when they did eventually achieve it, they would end up with a bigger mortgage. And because they would be a much riskier borrower, the interest rate they pay and their monthly repayments would be even higher.
They would be condemning themselves to years of mortgage misery.
So the Central Bank is absolutely correct to stand firm and demand that the lenders and borrowers behave responsibly. It is in the interests of the banks. It is in the interests of the borrowers. And it is in the interests of the taxpayers.
Let's be clear about this. We have a serious housing problem. But the Central Bank did not cause the problem and it does not have the power to fix it.
Blaming it just delays us from facing up to the real cause of the problem. It also delays us from facing up to the solution.
The real problem is that it is not profitable for developers to build new houses because the costs of building are simply too high.
And the only solution is to bring down the cost of building houses. Well-meaning government policies in recent years have led to this very high cost and the very low level of building.
We have ridiculous specifications and regulations for newly built houses which push the costs of newly built homes beyond the reach of the first-time buyer. It would be nice if everyone lived in a well insulated apartment with solar panels, balconies, storage, disabled access, windows to the back and front, and a lift for every four apartments.
But do you know what? First-time buyers would prefer to buy an apartment now which didn't have all these bells and whistles rather than rent for another 10 years before they could afford to buy a perfect house.
Most of the rest of us are living quite happily in apartments and houses which don't meet these very high standards. Why should we impose a much higher standard on new builds? There might be a case for imposing these standards on higher value houses aimed at second-time buyers, but they should not be imposed on starter homes.
Then there is the Government's extraordinary tax take on newly built houses.
It seemed like a good idea at the time to force property developers to build 10pc social housing on every site. But it was, and is, a crazy idea. Property developers are not charities. The cost of this social housing is passed on to the buyer, who is usually a first-time buyer. So we end up with the ridiculous situation that first-time buyers are not only struggling to pay for their own houses, but they have to struggle a bit more to pay for houses for people who cannot afford their own homes.
The cost of building social housing should be charged to the taxpayer generally and not to the small group of buyers of new houses, most of whom are first-time buyers.
Local authorities charge development levies on newly built houses. In normal times, this would be fair enough. It does cost money to provide roads and services. But these should be scrapped for three years to give the developers an incentive to build.
And then there is the extraordinary rate of VAT. The Government takes 12pc of the selling price of a house in VAT from the first-time buyer. So on a house selling for €400,000 that is almost €50,000. In the UK, the VAT rate on newly built houses is zero.
It's almost as if the Government were trying to prevent house building. Insist on such high specifications that new home buyers must live in the equivalent of a Rolls Royce; impose the cost of providing social housing on first-time buyers; charge them very high development levies and finally take 12pc of the selling price in VAT. And then blame the Central Bank for the problem.
If the Government scraps the high specifications, scraps the social housing and development levies and reduces the VAT to zero, it will cut the cost of building new houses. This should increase the supply and bring down the purchase price.
The increased building activity will bring in employment taxes such as PAYE, USC and PRSI which will more than compensate for the lost VAT and levies.
It's time we started learning from the past. If we impose very high specifications and taxes on the buyers of new homes, we should not be surprised that they can't afford to buy them without reckless borrowing.
If we allow reckless borrowing, we should not be surprised when it results in mortgage arrears and bank failures.
Brendan Burgess is the founder of the consumer forum Askaboutmoney.com