Monday 22 January 2018

Government's first move on housing crisis should be to lower VAT to 3.5pc

An example of a modular home. Photo:
An example of a modular home. Photo:

Paul McNeive

The revelation in the 2016 census that the housing stock grew by just 0.4pc over the previous five years, despite growing demand, is confirmation of a complete seizing up of the house building market. That the Government was strategising on the basis that apartment and estate completions were at ten times that rate, is as bizarre as trying to reduce road deaths, based on fictitious breath tests by the Gardai. Most commentators agree that boosting supply is key, but there are subtleties to the debate, as consumers, and developers, are not all behaving as they did for decades.

I'm not as convinced as the consensus about the shortage of supply in the second-hand market, especially in Dublin. To the chagrin of estate agents, the volume of sales is well below what it should be in a country where the economy and population are growing strongly. Indeed, proportionally, the rate of sales here is below 40pc of the rate in the UK.

Yes, new supply is needed, but I think that one of the main reasons that prices are rising by over 10pc per annum is because owners are reluctant to sell. There is a lack of the normal 'mobility' that a market needs to function. For example, keeping an eye on suggests that for every week this year, apart from part of April, there have been more properties available than the corresponding weeks last year, with the majority always being available to rent, rather than for sale.

I believe that one of the big reasons for this is that many people who bought houses from 2000, through to the end of the boom, are on tracker mortgages. While the value of their house might be down 40pc in value, they are probably paying interest rates of 1.5pc; however, if they sell, they will lose their tracker mortgage and pay 3.5pc-plus.

Sociologically, there are other changes, which are also reducing mobility. In a growing economy, people tended to trade-up as they progressed, creating movement in the market. I see less of that desire now, partly because buyers are afraid of taking on more debt, and may still have outstanding debt. There is no doubt that more people are now happier to rent longer term, than commit to a purchase, leading to rising rents and a lack of sales.

The census also showed us that children are remaining in the family home for longer, and, chatting to letting agents, another change is that many two-bed/two-bath apartments are happily being rented, by two couples.

First-time buyers, in Dublin particularly, can't afford to get their foot on the ladder because the penal rates of VAT, levies and taxes are making building unviable. The biggest culprit is VAT and it's very frustrating that the Government can't see that reducing it would kick-start the market. The State earned very little VAT on the meagre 8,000 new units built between 2011 and 2016. Why not reduce VAT to 3.5pc for five years? There will be a big surge in supply, competition created between developers, and the State will earn more tax. Win-win.

Developers/builders are reacting differently and one builder I spoke to this week, who will complete 200 units on one development in greater Dublin this year, will offer all of the properties for renting only. As he said, there is a market to rent them, but it is not profitable to build and sell.

There is a real shortage in the social housing sector, where large-scale new building is needed, but all the evidence is that the State is not capable of delivering that in any useful timescale. In Dublin, the first attempt at providing 22 emergency modular housing units took about eight months to deliver, in a scheme ironically called 'rapid build'. The quickest solution would be to sell the local authority's land, or make it available under licence to builders, who would tender to complete design-and-build projects, as worked from the 1950s through to the 1980s.

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