Tuesday 23 January 2018

Squeeze in the Budget could well backfire

Donal Buckley

Finance Minister Brian Lenihan should be wary of extracting further taxes from residential property investors in December's Budget as a further squeeze could well backfire.

Already recent Budgets as well as other government stealth taxes have added significantly to the cost burden on residential investors. These have been just some of the factors discouraging investors from entering the market, as reflected in fewer investor purchases.

Daft's August rental market survey recorded that nationally investors who bought at summer asking prices would achieve yields of only 3.7pc. However it did show that .some investors buying some Dublin properties could achieve yields ranging between 4.9pc for one-bedroom units up to 7.2pc for three-bedroom properties in the city centre. With prices continuing to fall since the summer and Dublin rents showing signs of stabilising, prospects are begining to improve for some house hunting investors.

However such yields are not available to those who bought during the boom at prices that were much higher and their experience is reflected in the a more widespread investor fear of property risks. Such risk is not confined to covering the cost of mortgage repayments or price falls. There are the difficult economic and social issues their tenants may face which all combine to add to the uncertainty, and therefore the risk, that an investor has to weigh up.

Recently Threshold, the national housing organisation, reported a doubling to 96,000 in the numbers of households moving on to rent supplement.

While Threshold went on to warn the Government against cutting the overall amount it spends on the rent-supplement scheme from the current level of €500m, it nevertheless encouraged the Government to seek cuts in rent from landlords.

Threshold argues that, rather than paying the supplement to tenants, the Government should pay it directly to landlords. As landlords would benefit from secure, regular payments, the State could negotiate cheaper rents and also ensure that landlords pay their taxes.

In fact, the scheme's administrators already stipulate that landlords supply their tax numbers and receipts to show they pay the €200 levy on rented properties.

The effectiveness of these stipulations is reflected in how the levy has already exceeded its targets. Originally it was expected to generate about €40m a year from both investors and owners of holiday homes. In fact, it has raised about €130m during its first two years.

However, the levy was not the only measure to hit landlords since the current crisis began.

In addition, the amount of tax relief on mortgage interest has been cut by 25pc. But those investors with mortgages lasting more than five years are finding that their mortgage interest now accounts for a lower portion of their repayments, so consequently they have to pay an increased portion of rental income in tax.

That would be bearable were the rents and value of the property stabilising, but in reality values of most properties are falling and not all rents are stabilsing. Furthermore, their mortgage repayments are increasing and after recent rent falls, not all repayments are not being covered by the rents. Many landlords now find they have to pay the tax on their rental income out of their other personal income.

In the last two years they have also seen further costs: fees of €70 for tenancy registration, BER fees for energy assessment and the income levy on all their rental income even before their expenses have been deducted.

In addition, those with homes in multi-unit developments await new legislation that will force them to pay increased service charges to provide for a sinking fund to cover repairs.

Furthermore, the prospect of NAMA selling off apartments and funding developers to complete new homes will not make it easy for investors to recover their expenses by selling off their investments. So NAMA presents the question: should they sell sooner rather than later?

Mr Lenihan should be careful as to how he addresses investors in his next Budget as he may well make a proposition that they will have to answer: "No more."

If he forces more of them to sell then he could well exacerbate the downward pressure on prices and as a result NAMA may suffer losses on its housing sales.

Investor sales will also reduce the income tax and other taxes the Government harvests from the rental market. Furthermore when investors sell to the first-time buyers who dominate the market the minister loses out on stamp duty. In addition as prices fall and investors sell at a loss the Government loses any prospect of future capital gains tax.

Irish Independent

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