Stamp duty: the debate rages on
14 October 2007 By Michelle Devane
As property prices continue to drop, the issue of the controversial house purchase tax is back on the table.
The issue of stamp duty has caused a considerable amount of tension in the property market over the past year, and it looks set to continue until budget day in December.
Stamp duty was brandished as an electioneering tool earlier in the year, causing speculation and uncertainty in the market. A degree of closure was experienced when the tax was abolished for first-time buyers, but in recent weeks the discussion has been revived, with the Irish Auctioneers & Valuers Institute (IAVI) again calling for reform.
Last week, Robert Ganly, the president of the IAVI, told The Sunday Business Post that the property market was in danger of stagnating and the public finances were suffering because the government had acted too late in reforming stamp duty.
Ganly said there was a need to reform this ‘‘inequitable tax by bringing the top rate of 9 per cent down to 6 per cent and introducing incrementation’’.
Opinions are divided on whether the government should be interfering in the housing market at a time when prices are levelling out and becoming more competitive. Brian Cowen, Minister for Finance, has warned against speculation on issues such as stamp duty, but has said that he would, as promised, use the upcoming budget to increase mortgage interest relief.
The 9 per cent rate of stamp duty is seen as particularly inequitable and many estate agents believe it is hindering the market, with many home owners viewing it as a barrier against trading up or down.
The latest Permanent TSB/ESRI house price index has shown the decline in house prices is accelerating with prices in Dublin falling for the first time. The average price paid for a property in August was €300,375. This average price compares with €306,173 in August last year and is €11,000 down on a peak reached earlier this year.
The average price paid for a house in Dublin in August 2007 was €410,466. The stamp duty bill on this property is more than €30,000, or a 7.5 per cent of the purchase price. Under the current stamp duty regime, first-time buyers do not pay any stamp duty on the purchase of a property. But all other buyers of second-hand homes are subjected to the tax. Stamp duty is not applicable on new properties which are purchased by an owner-occupier and the total floor area does not exceed 125 square metres.
On the average price paid for a property in August of €300,375, a non-first-time purchaser would face a stamp duty bill of €15,018, or 5 per cent of the house purchase price.
If a second-time purchaser bought a property for between €317,501 and €381,000, a 6 per cent stamp duty rate applies on the purchase price of the house. Between €381,001 and €635,000, a 7.5 per cent rate applies.
The rate for a second-time purchaser is 9 per cent on any home worth over €635,000.This means if a non-first-time buyer purchases a property worth €800,000, they face a hefty stamp duty liability of €72,000.
The reality is that stamp duty can easily amount to a whole year’s salary for buyers, or considerably more if they are buying a more expensive home. The high rates of tax also act as a deterrent to older purchasers who might want to trade down to a smaller house but who are not keen to pay stamp duty to do so.
A key issue with the current stamp duty regime is that once a house price moves into a higher bracket, the higher percentage rate is chargeable on the full price.
For example, if a second-time buyer buys a house for €635,000, they would pay stamp duty of 7.5 per cent, meaning a bill of €47,635. However, if he bought a house for €635,001, the rate goes up to 9 per cent and this is chargeable on the full price, resulting in a bill of €57,150.
This newspaper has asked six experts for their views on whether now is the time for the government to reform the tax.
Is it time to cut stamp duty?
**NO: ALAN AHEARNE
Cuts in stamp duty in the next budget would do little, if anything, to breathe life into the moribund housing market. Activity in the housing market has seized up and sales transactions have plummeted. But stamp duty is not to blame for the collapse in sales.
The problem in the market at present is that potential buyers either can’t afford or are unwilling to pay the sky-high prices that sellers are still looking for. It is worth recalling that first-time buyers, mover-purchasers and investors each accounted for roughly one-third of house purchases over the past few years.
First-time buyers are already exempt from paying stamp duty, so they would not be directly affected by cuts in stamp duty. Many first-time buyers are holding off because they expect that house prices will continue to decline. I don’t see any concrete reasons to expect that cuts in stamp duty would change buyers’ expectations about where house prices are likely to go in the near term.
Might cuts in stamp duty reignite investors’ demand for property? The answer is almost certainly no. Despite recent increases in rents, yields remain below four per cent.
Without the prospect of large capital gains, it is difficult to make the case that houses are a good investment. Investors will only return to the market when house prices have declined enough to push up yields to attractive levels.
That leaves us only with mover-purchasers. Most home owners looking to trade up to larger homes are stuck because they can’t find first-time buyers for their current dwellings, not because they face stamp duty.
But as we saw above, cuts in stamp duty will not bring first-time buyers flocking back to the market.
The reality is that now that our housing bubble has burst, the market will only repair when prices fall to their natural level -where demand equals supply. This means that activity in the housing market will recover only when sellers drop their asking prices. Cutting stamp duty will do little to help this healing process.
There are, of course, aspects of the stamp duty regime that are problematic. At some stage in the future, changes to stamp duty should be considered as part of an overall reform of our system of property taxes.
But such changes should wait until the excesses of the boom years have been unwound and conditions in the housing market eventually return to normal.
Alan Ahearne is a former senior economist at the Federal Reserve Board in Washington DC. He currently lectures in economics at the Cairnes School of Business and Public Policy at NUI Galway.
YES: JIM POWER
Government intervention in the housing market does not have a good track record, and more often than not interventions have tended to deliver inefficient outcomes. However, the fact that there is a poor track record should not be used as an excuse to do nothing.
The reality is that the current stamp duty regime is not delivering the most efficient outcome for the market. It is acting as an impediment to mobility in the housing market and consequently in the labour market, and this in turn is not good for the overall efficiency of the economy. Reform of the regime would have an efficient outcome, if engineered properly.
The key reforms required would include lower rates of stamp duty rates for non first-time buyers, and a tiered application of the different rates.
Such reforms would facilitate trading down, thereby freeing up larger houses for larger families. The current system is penal, and there is little incentive to trade down or move house.
From the Exchequer’s perspective, the obvious dangers are that reform would damage the revenue take from stamp duties, and/or just end up getting built into the price of the house, thereby benefiting the vendor or developer rather than the buyer. In relation to the revenue take, reforms of the type mentioned could be engineered in a revenue-neutral or even a revenue-enhancing manner.
Reform would undoubtedly lead to more movement and mobility in the housing market, and an increase in the number of transactions. The halving of the capital gains tax rate and the impact on revenues is a good example of how stamp duty reform could work.
There is always a danger that an easing of the stamp duty burden would fuel house price inflation, but timing is very important. Such an outcome could be avoided in an environment of weak demand and price resistance from house buyers.
We are currently in such an environment, and to date there is no evidence that the abolition of stamp duties for first-time buyers has actually fuelled house price inflation.
If the Minister for Finance does nothing, stamp duty revenues will continue to weaken, which will make his budgetary situation more difficult. Speculation is obviously not good for the market, but while an inefficient stamp regime remains in situ; speculation will inevitably persist from budget to budget.
There is now a window of opportunity that should be exploited. Further mortgage interest relief for first-time buyers would just be a waste of time; there is a better path that could be taken.
Jim Power is chief economist with Friends First
YES: ROBERT GANLY
Successive ministers for finance in Ireland have shown courage. In some cases, like John Bruton’s ill-fated move to impose Vat on children’s shoes and Richie Ryan’s dalliance with wealth tax, the outcome was disastrous.
In other instances, ministers such as Ruairi Quinn, Charlie McCreevy (with the possible exception of his decentralisation plan) and the current incumbent, Brian Cowen, have shown bravery which, when combined with astuteness, has benefited the country. On occasions, brave decisions were made that might have appeared to benefit the rich, such as the halving of the rate of capital gains tax from 40 to 20 per cent.
The result was that revenue from CGT increased dramatically - the public liked the new regime and overnight it seemed there was full compliance coupled, no doubt, with the release of potential gains by those who up to that time, did not want to sell and incur a rate of 40 per cent.
There are clear parallels with a property market that has stalled and which badly needs momentum. A dramatic reduction in stamp duty rates –coupled with the provision of proper incrementation - would greatly increase the number of property transactions, and thus the Exchequer would be better off in the short to medium-term.
The Tanaiste should adjust the stamp duty regime because the use of our housing stock is inefficient and current high rates are driving property investment overseas. High transfer costs are limiting transaction numbers, and we have tens of thousands of people living in the wrong homes for fear of incurring penal stamp duty rates if they trade up or down. The top rate in the North and in Britain is 4 per cent.
There is the potential to release the equivalent of a full year’s new build within the existing home sector if we remove this inefficiency. Current high rates are driving property investment overseas, taking money from our economy at a time when it is needed for domestic investment.
We have a ridiculous 11 rates of stamp duty, depending on the type of property and the buyer’s circumstances. We should have only three or four, with a top rate of 5 per cent and proper incrementation at each threshold, to remove any temptation to evade tax and to provide equity where it currently does not exist. Our rates of stamp duty are inequitable and should have no place in a modern Republic.
Robert Ganly is president of the Irish Auctioneers and Valuers Institute.
MAYBE: DAVID DUFFY**
The issue of stamp duty reform has already been raised twice in the last 12 months -prior to the last budget and during the campaign for the recent election.
With house price declines, evidence of a much lower level of house completions this year and a further fall in completions forecast for next year, some calls are again being made for the reform of this tax to re-stimulate the housing market.
We have already seen some reform this year, with the changes focused on first-time buyers. We have also seen the effect of the uncertainty about any response to earlier calls for stamp duty reform. In anticipation of change to the tax, people postponed housing market transactions, contributing to some stagnation in the market.
Stamp duty is a tax on each transaction. The existing stamp duty bands have not been updated for some time, and so the current stamp duty regime may be hindering mobility. Anecdotal evidence points to people extending or refurbishing their house rather than moving, because of the anticipated stamp duty burden. If this is the case, then the tax is preventing a more efficient allocation of resources and accommodation within the housing market.
In the context of the calls for reform, it is worth noting that the adjustment taking place in the housing market is not necessarily a bad thing. Many had viewed prices as overvalued and completion levels as too high. The current slowdown is bringing prices and activity back towards what would be considered more sustainable levels.
When activity was at its peak, there was recognition that the growth in prices and the high level of completions were unsustainable. If stamp duty is to be reformed, there is a case for delaying the reform so that the changes do not distort the current correction and cause the housing market to return to growth levels that are once again viewed as unsustainable. If there is reform, it should only take place once the effects of any changes in the market are fully understood.
Stamp duty is a significant source of government revenue, and the duty from residential transactions is a substantial component of this.
In an environment of slower economic growth and demands for improvements to public services, any revenue loss from stamp duty reform would need to be compensated for by other taxes.
While on balance, there may well be a case for reforming this tax, would the introduction of a property tax at the same time that stamp duty is reformed be an acceptable approach?
David Duffy is economic research officer at the Economic and Social Research Institute.
YES: PAUL MURGATROYD
In a booming property market, a wholesale reduction in stamp duty would undoubtedly inflate property prices, as vendors would add the stamp duty savings for buyers to their asking prices. But given prevailing market conditions I firmly believe an opportunity exists for stamp duty reductions without inflating prices.
There are two main reasons for this. Firstly, supply levels in the residential market are such that there is a great choice for buyers and hence, strong competition and price sensitivity among vendors.
Secondly, the tighter lending conditions that currently prevail -due to a succession of interest rate rises -mean that buyers simply may not be able to automatically finance a higher purchase price and, as a result, would simply keep looking for property that was priced appropriately.
By European standards, levels of stamp duty in Ireland are high -so me would say excessive. During the property boom, these high rates did not prove to be an impediment in the market, and hence the government decided to leave the rates for non first-time buyers untouched. I would argue this is no longer the case and that the past twelve months have proved this.
Much pre-election uncertainty about possible reductions in duty rates led to a reduction in transactions, as buyers held off in anticipation of reductions that were not forthcoming. As a result, the tax take for stamp duty has fallen dramatically this year. I would argue that a reduction in the rates applicable -particularly the top rate of 9 per cent to 5 per cent -is warranted, perhaps in conjunction with fewer different bands in total.
In addition it would be beneficial, although more complex to calculate, if the rates charged were on a proportional basis rather than the current situation, whereby the highest rate is applied to the full consideration.
For example, implementing this scenario to a €1 million property purchased by a non first-time buyer would reduce the stamp duty liability from €90,000 (under the current rates) to €41,745 (a top rate of 5 per cent over €254,000). This would give a significant boost to transaction levels in the market, and, as a result, a boost to exchequer revenues without inflating prices in the vast majority of cases.
Paul Murgatroyd is an economist with Douglas Newman Good.
YES: MARIAN FINNEGAN
The stamp duty applicable to residential property is, by its very nature, a barrier to entry to the market and a tax on mobility. It has been used by successive governments as a crude means of controlling demand - in a market where the demand for property significantly exceeded supply.
That imbalance between demand and supply, which fuelled price inflation in the market over the past decade, has now largely been addressed through the development of over 600,000 residential units in a ten year period.
The argument in favour of high rates of stamp duty has therefore been eliminated. A stable market place requires mobility and activity. Current stamp duty rates are prohibitive and penalise activity, particularly in larger cities such as Dublin, where the value of property is significantly greater than regional Ireland.
The decision taken to eliminate stamp duty for first time buyers earlier this year went someway to addressing this situation -but not far enough. A young couple trading up from a one-bedroom apartment to a two or three-bedroom house or apartment in locations such as Rahenyor Portobello in Dublin can expect to pay almost €40,000 in stamp duty, a significant outgoing.
Stamp duty is equally prohibitive for investors, who are, after all, an essential ingredient in any market. The reduction in investor activity in the market in the past twelve months has been the greatest single factor fuelling rental inflation in the private rented market -the CPI index of private owned rents rose by over 12 per cent in the twelvemonths to August 2007.
In the past, investors and owner occupiers have recouped stamp duty costs through strong levels of price inflation. However, in a more mature housing market with lower rates of price inflation, such stamp duty rates would be viewed as more punishing and therefore, a greater hindrance to activity.
It is therefore essential that the government address this through a single swift change in stamp duty policy, eliminating the 9 per cent stamp duty rate and tiering all other rates. Purchasers should only pay higher stamp duty rates on the percentage of the property which falls into that category of tax, rather than on the full amount.
Any alteration in the stamp duty rate -if implemented speedily -would certainly incite activity, thereby counteracting any potential revenue reduction.
Marian Finnegan is chief economist at the Sherry FitzGerald Group.**