I think we may have come full circle on this debate now …
[*Reform of stamp duty will bring social benefits rather than financial savings * (https://www.unison.ie/irish_independent/stories.php3?ca=36&si=1828596&issue_id=15616)
By Dr John McCartney is an economist and is head of research at Lisney
IN financial terms, the recent debate about stamp duty is a red herring. Claims that reducing this tax will improve affordability and generally ease the burden of housing costs do not withstand close scrutiny.
This does not mean that stamp duty reform is without merit. While the financial arguments do not stack up, the proposed changes should bring a welcome improvement in the distribution of our housing stock.
Our mainstream political parties have now set out their stamp duty proposals and it seems clear that there will be no big savings for house buyers. Much of the focus has been on first-time buyers. However, the reality is that most first-time buyers already sidestep stamp duty by purchasing new homes under 125 sq m which are exempt from the tax anyway.
Therefore, proposals to scrap or limit stamp duty will be of little benefit to them - at least in financial terms.
As for reducing the general burden of housing costs, there are two reasons to be sceptical. At a conservative estimate, only 4.25 per cent of households were affected by this tax last year. Therefore, even if the reforms worked as planned, they would have minimal coverage. It is also unlikely that reducing stamp duty would result in any net saving for families that were affected by this tax.
Economic theory suggests that sellers are likely to react to any stamp duty reductions by increasing their asking prices and precedent tends to support this view. After Budget 2005 increased the stamp duty threshold on second-hand homes, many buyers responded by immediately increasing their existing offers.
If the proposed changes are unlikely to benefit house buyers financially, some of the current stamp duty proposals might improve the distributional efficiency of Ireland’s housing market and this could bring its own benefits.
While reducing stamp duty for first-time buyers may not save them money, it will widen their choices by enabling them to compete for second-hand houses in established residential areas. This may enable more young people to stay in their own neighbourhoods, thus helping to build better communities.
The ‘banding’ of stamp duty so that buyers would only pay the higher rate on sums above certain thresholds might also improve matters. It would help to eradicate ‘blockages’ on pricing because as things stand, houses that are genuinely worth â‚¬325,000 can face buyer resistance at that price because of a higher rate of stamp duty at â‚¬317,000.
Conversely, properties that are valued just below the stamp duty cut-off may get bid right up to the threshold level because buyers are keen to secure a deal below the â‚¬317,500 limit. These distortions, which can be unfair to both buyers and vendors, would be eradicated by banding.
A second effect of banding would be to help ensure that the properties occupied by different household types are more closely aligned with their accommodation needs. According to census figures, Ireland has one dwelling for every 2.4 persons in the country. Furthermore, while 69 per cent of our households are quite small (ie, they contain up to three people), 74 per cent of our dwelling units are relatively big (ie, they have five rooms or more).
We have ample housing to meet our population’s needs.
What the census does not do is cross-tabulate household size by dwelling size. Therefore we cannot tell whether the bigger dwellings are currently occupied by the bigger households. This is almost certainly not the case. At both ends of the spectrum, we have households living in properties which are inappropriate for their needs. On one hand we have ‘empty nesters’ - older couples in large family homes that are now unmanageable for them. At the other extreme, we have couples in apartments who are forming new families and who require more space.
Both groups have been discouraged from moving to more appropriate accommodation by the existing stamp duty system. Banding would not eliminate these costs but it would reduce them. And the Green Party’s proposal to eliminate stamp duty for over-60s who want to trade-down would reduce these costs even further and free up larger properties.
Stamp duty reform has become an improbable election issue. Ultimately, it is unlikely to deliver big savings for first-time buyers as some politicians would have us believe. By offering greater choice and helping to get the right families into the right type of accommodation, the proposals currently being debated do represent an improvement on the status quo.