Wednesday 16 January 2019

Colm McCarthy: Rising prices, policy failures

The unaffordability of housing in Dublin and the east is part of a problem that must be addressed, writes Colm McCarthy

'The crisis everyone saw coming'
'The crisis everyone saw coming'
Colm McCarthy

Colm McCarthy

With unemployment rates continuing to fall across the country, household incomes recovering and Brexit-related problems despatched to the long grass for a while, political attention will refocus on domestic policy failures.

The unaffordability of housing, especially in the east region, is the biggest failure by far and another few years of economic recovery will not make things better. If government candidates do poorly at the next election, the disaffection of losers in the great Irish housing lottery will be part of the reason.

House prices around the country are heading back towards bubble levels - good news for homeowners and for banks with mortgage-heavy balance sheets. Rents have risen even faster than prices. In the Dublin area rents are now higher than they were during the worst years of the bubble. Every rise in house prices is greeted with silent relief as banks and borrowers contemplate further declines in negative equity and mortgage arrears. But every upward kick also expands a generation of voters that struggles to meet rental costs and has abandoned the ambition to own their own home.

There is another complication. The appreciation in house prices will bring extra tax burdens, since the local property tax is not based on any estimate of long-term, common-sense housing values or on ability to pay, but on escalating market prices.

The next revaluation of residential property for tax purposes comes in 2019 and lucky Dublin-area homeowners, enjoying the recent price recovery, will discover their annual tax bill is escalating too.

There has been too much focus in recent discussions of housing policy on new-build targets - whether for public or private accommodation. What matters is affordability. The correct amount of new supply is whatever it takes to make housing affordable, particularly in and around the capital.

The extent of the divergence is staggering. Whether the cost of housing comes in the form of monthly mortgage repayments or monthly rent is secondary: if accommodation costs far too much relative to typical income, there has been a policy failure and there will be political fallout.

In counties outside the over-extended Dublin commuter belt - Tipperary, for example - rent for a modern three-bedroomed home is in the region of €1,000 a month. In the outer suburbs of the capital, places like Dundrum or Glasnevin, a comparable property will cost from €2,500-€3,500; in the inner suburbs (Ballsbridge or Ranelagh) even more. Like-for-like comparisons are never exact, but a rule of thumb would be that Dublin rents are up to three times those of most provincial locations.

The same pattern is evident in house prices. The average asking price in Tipperary, according to the most recent report from daft.ie, was €160,000. In none of the Dublin sub-divisions was the average below €300,000. It was €395,000 in the south city and €560,000 in the south county.

For a young person in a decent job - say a 30-year-old working in a skilled trade or for a bank or public service - €40,000 a year is an above-average income. A mortgage sufficient to buy in Dublin - even at the lower end of the market - is unattainable at this level. Even if it could be offered within the Central Bank lending guidelines, the borrower would be as unwise as the bank to deal on this basis. Who knows that interest rates will remain at today's levels indefinitely? Who can be sure that another burst bubble will not produce negative equity down the road?

Even a couple both earning this kind of income will struggle to finance a mortgage at today's Dublin prices. Even if they succeed, they face potential crisis if one has to abandon or curtail full-time work perhaps to look after chilren.

Not surprisingly, people in what used to be called the first-time-buyer age group, especially in the capital and neighbouring counties, are no longer able to contemplate buying a home and owner-occupancy levels are declining. Renting, even at exorbitant cost, is the only available option, at least for the foreseeable future.

Eventually many of this generation will stand to inherit from their parents, probably when they are in their 40s or 50s. At which point many of them will need to take out a mortgage to pay inheritance tax, since the tax-free allowance is only €280,000. If you inherit a house in Tipperary valued at €280,000, which buys a very nice house in the premier county, there will (assuming no other bequest) be no tax bill. The identical house in Dundrum or Rathfarnham will likely be priced at around €800,000, with the excess over the tax-free limit liable at 33pc. So the lucky middle-aged beneficiary will face a bill for €171,600.

Valuations for residential property tax were set initially at 2013 self-assessed levels and are due to be revised in November 2019. The tax is levied at 0.18pc of the "value", rising to 0.25pc for any excess over €1m. The upcoming revision is going to come as rather a shock to many people, especially in the Dublin area, since value is taken to be the market price.

Since the autumn of 2013, prices nationally have risen by about 50pc and the daft.ie survey indicates the public is expecting further increases. Property tax is set and collected on a national basis - essentially a flat percentage of the price. Not surprisingly, most of the tax is collected in the east region, since that region has the most expensive residential property. Based on recent listings, about 70pc of all residential units in the country priced at €500,000 or more are in Dublin and the adjoining counties of Meath, Kildare and Wicklow, which contain only 39pc of the population.

The proceeds of the property tax are redistributed - each county retains 80pc and the balance goes into a pot dished out to the counties, all in the provinces, considered to have inadequate revenue. On the face of it, Dublin subsidises Mayo. But this is what happens with all national taxes and is not necessarily unfair.

A redistributive state, which has both progressive taxation and spending programmes calibrated to need, will always transfer some tax proceeds geographically.

What is different about the residential property tax is the basis on which it is levied. If you buy a packet of cigarettes in Mayo, or earn an extra €10,000 a year, your liability to tax is the same as in Dublin.

But if you own a house in Mayo identical to one in the Dublin suburbs, you pay far less tax.

The source of this disparity is the ridiculous price of housing in the greater Dublin area. Dublin is a small, low-density city surrounded by rolling prairies of vacant land zoned for agriculture, or for "amenity", whatever that means. The full cost of an utterly dysfunctional land-use policy includes the hours wasted daily by commuters from distant Leinster towns commuting to the city through the aforementioned rolling prairies.

The only solution is to reduce house prices in the Dublin area - which means a concerted push to zone and service more of the wasted land close to the city and to make the granting of planning permission automatic in all areas of the country where prices are unaffordable.

Sunday Independent

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