Friday 22 February 2019

Curing the ills of a property market in a tragic State

It is Lenihan's duty to stamp out a tax which is choking all prospect of recovery, writes Marc Coleman

Marc Coleman

THE story of Brian Lenihan's performance since this crisis began -- culminating on Wednesday -- has an air of Greek mythology about it. Homer could have written the script and Hercules himself would have been needed to do the amount of work that Lenihan and his officials did. Heroism is not an overstatement to describe the man's achievement. But the Greeks do tragedy as well as mythology.

Like many other high achievers, Lenihan is a Belvedere boy. One of the few private schools on Dublin's northside, Belvedere boys are known for their lack of snobbery, their decency and their charity to others. But they have a flaw: they have a sense that they alone are always right. And often, this is true.

But as the plaudits flow in for Lenihan's brave and correct stance on Wednesday, Lenihan needs to reflect on how Greek tragedies work: they strike the hero at the highest arc of his triumph and, like Achilles, use a characteristic from his past to pull him down.

Lenihan is well-meaning on stamp duty. But he is also totally and utterly wrong as even a simple analysis of the Budget shows: it has allocated some e55m to extending mortgage interest relief to help those in negative equity. But this is almost the same amount as middle-income families pay to the Government by way of residential stamp duty, a tax which is causing much of the current negative equity crisis.

With house prices now affordable many can afford to trade up when it comes to the price of the house. And as EBS chief executive Fergus Murphy rightly pointed out, negative equity need not be a barrier for the housing market to return to full health.

This is because although the price of a buyer's old house has fallen, the house being purchased is usually relatively more expensive. This means that the gain from the fall in the house being purchased usually exceeds the loss on what is being sold. In net terms, negative equity means those trading up are quids in. Until the Government comes along, that is.

By forcing the hapless buyer to stump up 7 per cent of the house price, the Government puts a concrete wall six feet thick and 10 feet high between buyers and sellers. Sane banks rightly refuse to lend stamp duty liability (the State forcing people to borrow simply to pay tax is morally depraved, by the way). As a result a transaction that could go through to the benefit of everyone concerned is blocked thanks to Government stupidity. As Irish Banking Federation figures show, trading volumes are down 60 per cent.

And as the paltry revenues from this Frankenstein tax show, the Government's meagre revenue from this source is far less than it would get from VAT and income tax from the boosted activity that would follow abolishing it. On a stand-alone basis, abolishing residential stamp duty would yield at least twice what the Government is now receiving from this source.

The minister's advice on this has been disastrous. He has been led to believe that the property boom was caused by decisions relating to property tax. As a cursory glance at both the Central Bank's monthly credit statistics since 2005 and the Permanent TSB house price index shows, this is nonsense: like inflation, house price inflation is a monetary phenomenon caused by rampant credit growth. Like a roller-coaster ride, tax changes may have altered the precise position of the curves, but their speed and scariness were determined by the failure to regulate bank lending. Removing stamp duty is not, as some around Lenihan believe, a unwarranted intervention in the market but rather the removal of an unwarranted intervention.

But Lenihan is convinced that abolishing stamp duty constitutes pandering to those responsible for the housing boom. What about those with growing families who cannot trade up because they can't afford to pay stamp duty (but can afford the price of the property they want)?

How is helping them "pandering" to those "responsible for the boom"?

And how is it socially just to force someone to pay tens of thousands of euro to the State simply because, having lost their job, they have to relocate to another part of the country?

Stamp duty is also levying a tax on citizens living in Dublin, although here another fallacy needs to be dealt with; namely the fallacy that the tax is "not a problem" -- outside Dublin. With a three-bed semi in Cork still setting you back e300,000 this implies a stamp duty liability of e12,250 on a struggling family. Perhaps those advising the minister have bought their own houses too far back in the past to understand how much misery this policy is heaping on ordinary people. The minister clearly is unaware. Perhaps that is because -- unlike the social partners traipsing in and out of Government Buildings every five minutes -- those affected are too busy working and caring for their families to attend his clinics.

The final fallacy is that stamp duty cannot be abolished before a property tax is introduced. This is not so. On a stand-alone basis, as argued above, abolishing stamp duty will not cost the Government a cent but will in fact gain the State revenue. And as public acceptance of the Budget -- and carbon taxes in particular -- shows, people will accept taxes that are linked to services provided by the State.

Having announced a reform of local government, Lenihan has now created ideal conditions for public acceptance of a modest property tax of a few hundred euro a year.

But the abolition of stamp duty should not be held hostage to this. Regardless of whether a property tax exists, or whether other countries have one, a tax like stamp duty that goes up 50 per cent in a good year but falls 80 per cent in a bad year is inherently unstable and has no place in the tax code.

Stamp duty is killing the housing market, a market that will never (God forbid) drive our economy again but which remains an essential to restoring normality. Lenihan needs to read his classics on this one. So far, the quote he's taken most inspiration from is the wrong Homer: "Boy, everyone is stupid except me."

www.marccoleman.ie

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