Ireland Turns To Taxation To Curb Rising House Prices

Lisa Ugur, Tax-news.com, London

19 June 2000

Ireland is still reeling from the revelation that spiralling inflation in the country has reached a hefty 5.2% in the year to May, the highest level in 15 years and three times the European average. But the bad news does not end there. Alongside the rise in inflation, house prices have shot up in the last few years.

The situation in the property market reached crunch-time with the publication at the end of last week of the third Bacon Report into housing, which makes a number of recommendations, some of which the Irish government are sure to take further. The government is certain to bring in tax changes to try and curb house-price rises, although it it remains to be seen whether it will accept the proposals in full.

Investors in the housing market are sure to face a raft of measures designed to curb inflation and calm down the market; in practical terms, the effect will probably be to drive much speculative investment away from the market, which may achieve the opposite of the increase in supply recommended by the Bacon Report.

The measures will certainly deal property developers an almighty blow. The Bacon Report proposes a new property tax of 2 to 2.5 per cent a year on second homes, including holiday houses, in order to discourage speculation. Its primary intention is to penalise those buying houses and apartments in urban areas with a view to selling them on at a large profit in a short period of time. However, the proposal applies only to properties bought from now on, and not to existing second homes. Neverthe-less, it means that thousands of apartments planned for Dublin's city centre may not be built and there could well be a shift in focus as developers move away from residential to commercial projects as speculative buying dries up. This in itself could have a knock-on inflationary effect, with a greater demand for rented accommodation pushing rental prices sky-high.

The report by Dr Peter Bacon also recommends that first-time buyers of second-hand houses worth up to I£150,000 be exempt from stamp duty, a substantial increase from the current I£60,000 threshold. The rates of stamp duty on second-hand houses worth over I£150,000, but under I£300,000, would also be reduced for first-time buyers. Stamp duty is not payable on newly-built houses.

The report, the third on the housing shortage produced by Dr Bacon, says that while house prices are continuing to rise, the rate of increase has halved since early 1998. Prices for first-time buyers have tended to rise more quickly, and economic growth, falling interest rates throughout 1999 and the large numbers of people coming to Ireland to work have continued
to push up prices.

The proposed property tax on second homes will obviously impact bona fide purchasers of holiday homes, quite an irony given that under current regulations purchasers of holiday homes in designated schemes receive tax benefits.

The Irish government is to bring its housing proposals together in a supplementary Finance Bill, which is expected to be passed this month. Prime Minister Bertie Ahern said the high price of housing was 'fuelling demands for unsustainable wage increases and making it difficult for the labour market to function effectively' whilst Peter Bacon, who advised the government on the changes said 'The basic strategy is to expand supply and where necessary curb speculative elements of demand.'

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