IT: John FitzGerald on Tax, Bubbles and Market Forces

From The Irish Times, 27th Oct 2015, Dr. John FitzGerland, of The ESRI explain why tax breaks won’t help fix the the current issues of supply or affordability in the Irish property market and illustrates how throwing more cash at the demand side will make matters a whole lot worse.

Perhaps someone should provide a large copy to certain Government Minsters.


](Tax breaks are no solution for Ireland’s growing housing crisis – The Irish Times)

Blue Horseshoe

I don’t agree with him on this.

The idea is to move the profit from the state’s income statement to the Developers income statement.

If it costs a developer €200k to build a house and he needs a 15% return plus he has to pay 13.5% vat the minimum sales price for him has to be €261k which is the price the consumer has to pay. VAT accounts for €31k of this €261k price.

If developers won’t build as there’s currently not enough profit in it, the reduced costs to the purchaser through the exclusion of VAT provides more fat in the transaction to deliver the developer his required profit margin.

As for a loss to the taxpayer - a 13.5% VAT rate on no sales is €0 tax income which is the current case.

There is no taxpayer funds being used. Right now there is no VAT revenues but there is a housing problem. The main problems with the last bubble were 2 fold 1. excessive credit driving up purchasing power,
2. zoning residential developments in the back arse of nowhere.

Attempts have been made to rectify point 1, and one would assume the planners have received a kick in the arse over point 1.

What is apparently needed is a huge surge in house building which is in fact what happened during the boom.

He uses the following example which I think is a straw-man argument.

This argument misses the point. It focuses on the purchasers side. The problem is on the developers side. The developer can’t build a house and sell it with VAT and make the required return. The idea is to give less money to the government and more to the developer. It is a subsidy.

If you want to argue that big bad developers should never be helped, that’s fine. But you can’t also complain that nothing is being built.

His point on inflating land prices seems valid but it assumes developers will plough their profits back into land purchases. Land prices are abhorrent in Ireland but it wouldn’t make sense for developers to use a VAT reduction to inflate their costs. Either way, if there’s to be an increase in development (which seems the consensus on all sides of the political spectrum) land prices will increase through increased demand.

Price rises have stalled. How can one increase the supply of land? Sell off state owned land at below market prices? One option could be for councils to act as developers but there’s no sign of that happening.

I don’t understand his comment on property taxes. I would agree that property taxes should increase, largely so improved infrastructure in local areas aren’t purely paid for by new residents with the existing residents getting the benefit for free i.e. a new house in sandyford was levied with a Luas contribution however existing home owners don’t pay anything yet have the benefit of the new infrastructure.

Most people here believe that an increase in rent allowance will do nothing other than push rents up further.

That’s his closing line. Yet, nowhere in his article did he suggest how it’s done.

The expected value of a new house in Dublin is some 30% to 40% more than it was 2 years ago. Building costs have not increased very much in the meantime.

This is already three times more than what a full elimination of VAT on new homes would achieve.

So why are so few houses being built? That’s a genuine question not a rhetorical one. I have yet to hear a decent answer.

Put a tax on all zoned land and derelict buildings of 3% annually. This is not so onerous that it forces those who are going through the planning process to sell immediately but it is significant enough that it will force speculators to sell. Watch the price of land fall over night. It won’t solve all of the problems but it is a very good start. Obviously Baldy would never allow it

Where do you get the above figures from?

I understand that Ronan Lyons, TCD, isn’t even sure about the cost of building
He has examined the building regulations and highlighted the costs they add.

I would hazard a guess that one of the problems is builders & developers have virtually no equity left after the bust to insert into projects. If you’re getting mezz finance at 15% (which has been cited by some builders) this will eat away at your return very very quickly.

I wonder whether it’s as simple as inelastic supply caused by a lack of credit requiring small-scale house builders to grow organically.

To clarify: the price of an existing house in Dublin (depending on where exactly) is up 30% to 40% on 2012. Given a new house is a near-perfect substitute, you would think that the cost-benefit to a developer of starting construction would have changed substantially, and that we would be seeing more building. But we’re not, and no one has a good explanation.

On your other question I have looked at a CSO price index of residential construction and also hourly construction labour costs. I will put a chart up some time. Both of them are essentially flat since 2007.

I appreciate there are a lot of non-price elements to construction (safety regulations, planning, etc), and Ronan has been excellent at bringing these into the public debate. But are they really so onerous the recent increase in prices hasn’t made it worthwhile to build?

This is as good an answer as any I guess.

But in real terms the fall in prices from about 1981 to 1989 was the same as 2007 to 2015. Development in Dublin fell a lot in the 80s, but it didn’t fall as much as it has this time.

I appreciate the mass failure of the developer class did not happen on that occasion!

According to the CSO Dublin house price index,
Base = 100 in Jan 2005
Peak = 136.7 in Nov 2007
Bottom = 60.8 in Aug 2012
Current = 90.4 in Aug 2015

While prices have increased significantly (49%) in Dublin since the bottom of the cycle, the index is still 10% below 2005 levels.

Can builders now build housing stock profitably and sell at 10% below prices achieved in 2005?

That assumes costs have remained flat but there have been a number of factors there too:

  • senior financing costs have increased,
  • more equity & junior financing is needed,
  • you suggest labor costs have been flat on 2007 but what did they grow between Y/E 2004 & 2007
  • regulations have increased (DLR CoCo now requiring Passive House standards XX
  • You’d assume there is also the increased cost associated with having to actually build the bloody things correctly now

So if we can serve CPOs for roads, & hospitals & prisons; why can’t/won’t we do so for housing; when this is the only purpose that is actually a human right ?

Answers on a postcard please !

It really is amazing that with a combination of near-zero policy interest rates and a market with crushing (and stable) demand and insufficient supply for a very simple product whose production is extremely well understood, it apparently isn’t possible to get new homes built.

Building loads of houses is exactly what easy monetary policy is supposed to make happen.

Like, WTF.

Out of curiosity, what was non-house inflation like then? I know that it was high in the UK for the first part of the 80s, but don’t know about Ireland. Did the nominal money supply grow faster then than it has over the last eight years, when we’ve had almost static prices and static or falling wages?
This time, the lack of inflation means real falls and nominal falls have been essentially the same thing. I know we’ve had QE, but the money just seems to have gone into the balance sheet holes of nationalised banks and stayed there.


Developers and landowners “waiting”…for even higher prices?
A builder’s “boycott”?
Tom Parlon?

Why won’t anyone admit that Part V is one of the key reasons developers are holding back? It’s delivering very little anyway - so get rid of it and let’s see what happens.

Here’s the CIF’s view: … ident.html
*It is boomtime tax that has never worked and we need to completely change the way funding for social housing is generated. **Those who ultimately pay the price of Part V are new home buyers. It is a tax on those who wish to buy newly built properties. **Providing social housing is an onus for all of society and it is not fair or equitable that it should only be paid by those who opt for a newly built house.
A much fairer system would be to introduce a 1 percent levy for all residential property purchases which would then be ring-fenced for social housing. Last year, a levy of this nature would have created a fund of €60 million for social housing - substantially more than the funding created by Part V. We estimate it would generate another €75 million this year. **We don’t want to see house building projects delayed because of Part V *or some variation of it adding extra cost. We don’t want to see people who want to buy newly built homes unfairly taxed.

…because you don’t want to live near poor people?

The truth is a line should have been drawn between the ideas of the past that let’s call it the package of failure and dumped. New ones imagined in the change world. What we have is a denial of change. An attempt to pretend with good money and human time that the failure of the past is worth something more than it was then.

Part V is a tax on buyers. If people/“society” were sincere they’d look to have social housing funded by all property/land owners.

Don’t know if 3% is the right figure, but a tax on zoned land is the way to go, and set it up so that from a revenue/exchequer point of view the state apparatus is agnostic on whether the land is developed or not, or ever so slightly in favour of development.

Folk hate losing things they have, and paying out this money would create a continuous pressure to get the zoned/derelict land moved on.

In this case I think the loss is a more powerful motivator than any potential benefit you’d offer (like VAT rebates or whatever). Look at the motor tax and how that distorts people’s calculation of the economics with regard to buying a car. People spend far more to avoid a motor tax than they’d spend on the motor tax in itself.

‘No company will build houses unless there’s a margin there for them’ … 70925.html

Interview Michael Stone President, Construction Industry Federation

Thats silly talk, the answer is simple

A lot of builders got wiped out (and others have left country) in not to distant past, even if they could somehow get finance to build and are not buried under NAMA or debt, the memory of this past might be enough of a stop, plus i doubt there is enough (any?) profit to be made.

Anyone who would go to an Irish bank today and say I need X euro to build Y homes would probably be laughed out (lol thats if they find anyone working at a bank :smiley: in our postcash society)