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Richard Curran: It has just become the 'even-more-help-to-buy' scheme


(Stock picture)

(Stock picture)

(Stock picture)

The Government's Help-to-Buy scheme for hard-pressed first-time home buyers made a unique journey in the last two weeks between the budget and the Finance Bill. It went from the sublime to the ridiculous.

The measure is a direct subsidy to developers in the guise of a measure aimed at helping first-time buyers. It will, of course, help to raise prices of new homes, but that is no surprise.

It is exactly what the measure was intended to do.

The Finance Bill change, whereby those availing of the cash top-up only have to borrow 70pc of the value of the house instead of 80pc, makes it available to a whole raft of other first-time buyers, who are not struggling to gather a deposit under the Central Bank mortgage lending rules.

Sometime in the past two weeks the Central Bank told the Department of Finance that the average loan-to-value of first-time buyers is actually around 78pc, and applying an 80pc plus rule would encourage them to borrow more in order to receive the cash.

This light-bulb moment at the Department of Finance suggests the Central Bank may not have been consulted or were kept in the dark about the details of the proposed scheme.

If consulted, surely the Central Bank would have told the Department of this salient fact in advance of the Budget.

Anyway, someone who can muster tens of thousands of euro in savings or a family dig out to buy a €400,000 house can receive a cash top-up of €20,000.

It is free money that gets transferred directly to the developer in the form of higher prices.

Housing minister Simon Coveney discussed the measure in a detailed and insightful interview with Property Developer Magazine before the budget.

He said there was a gap of around €40,000 between what first-time buyers could pay and the price of developing good starter homes. He added that the Help-to-Buy scheme would aim to close part of that gap.

In fairness to the minister, it is one part of a wider programme of solutions to the housing crisis - and it may even work in helping to increase supply by making house building more profitable.

However, we had lots of demand in the last boom and lots of supply to meet it - but prices still kept going up. This measure could end up costing us all dearly.

The vultures have already feasted

A 20pc tax on profits from various investment funds holding property assets won't fill up the Exchequer's coffers. Unfortunately, when it comes to those controversial Section 110 investment vehicles, a lot of the big money has already been made.

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Anyone who is a foreign investor in a Qualifying Investor Alternative Investment Funds (QIAIFs) or other special purpose vehicles may well have ensured they have their profit taken. Others will probably have to cough up 20pc.

The 20pc tax is complicated because so-called vulture funds, who had been using these vehicles to pay little or no tax in Ireland, were worried that the Government would introduce some kind of retrospective legislation to grab money on profits that were made in the past.

The danger for the Government was that an aggressive retrospective approach might be seen as reneging on a tax agreement that was in place - which is exactly what the Government is complaining about in the European Commission/Apple Inc tax case.

The most surprising thing about the clampdown on QIAFs and SPVs is that international investors appear to be using the funds in exactly the way in which Michael Noonan intended when setting up the tax breaks in the first place.

The Section 110s were different - because they had existed for years in the financial services industry, and were being applied by property funds more recently in a way in which they were never intended.

The estimate in the budget that new measures to tax these kinds of funds would bring in around €50m for the Exchequer suggested two things.

Firstly, it wasn't enough money to signal a major piece of retrospective legislation, given the hundreds of millions in profit booked by these funds.

Secondly, it also begs the question of how did the Department of Finance come up with this figure. How could they know? Did they just make it up?

But it is a long way from a Finance Bill to a Finance Act and its implementation - especially where complex tax issues are under scrutiny. Usually these Bills get little attention as they move slowly through the legislature and the amendments stage.

This time round, I suspect every detail will be heavily scrutinised.

Describing the national debt as it really is

Finance Minister Michael Noonan wanted to take the dirty look off the sheer scale of our €200bn national debt when presenting his Budget 2017. He told us it was equivalent to 78pc of our GDP, something echoed by the Central Statistics Office during the past week.

This apparent drop in our national debt, which peaked at 121pc of GDP is due to the phenomenon now known as "leprechaun economics", whereby our GDP technically shot up by 25pc last year.

In his budget speech Noonan said: "The national debt peaked at over 120pc of GDP during the crisis. It will be down to 76pc of GDP at the end of this year and we will continue to reduce it to achieve the target of 60pc of GDP in accordance with the European Stability and Growth Pact."

No mention of the leprechauns there.

Over to the NTMA, which is charged with managing our national debt. These guys don't do spoofing - because they simply wouldn't get away with it in the international bond market. The NTMA's latest investor presentation explains the reality in different terms.

It says: "Ireland's GDP and GNP are exaggerated by new multinational companies' activity… The national accounts are distorted by several companies and their assets being reclassified as resident in Ireland. GDP and GNP series have little information content as a result."

It goes on to say that: "Government debt and deficit metrics are also distorted by GDP revisions; focus should turn to other measures of Ireland's debt serviceability."

In other words, talking about debt to GDP ratios is now utterly meaningless - and if you look at our national debt as a percentage of how much revenue the Government takes in, we are at 277pc, according to the NTMA.

It points to the level of interest payments on our debt running which is running at 9.6pc of Government revenue. So nearly one in every 10 euro collected in tax and other income by the State goes on servicing our national debt. This compares to 7.6pc for Greece. It's a somewhat different picture.

The NTMA does point out how dramatically things have improved and how the ECB's quantitative easing project is allowing us to raise money more cheaply. In fact it reckons the Eurosystem holds around €32bn of our national debt and has been buying it up at a rate of €1bn per month.

We still owe €50bn of debt directly to Troika members, debt which is averaging around 3pc (or €1.5bn) in interest per year. Yet the NTMA is raising new borrowing on ten-year bonds at just 0.33pc or one tenth the cost of troika loans.

Imagine what the fiscal space would be if we could re-finance those borrowings at current rates.

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