Government Ministers are said to be at loggerheads over proposals to give developers a tax break in a bid to ramp up the delivery of new homes.
Tánaiste Leo Varadkar and Minister for Foreign Affairs Minister Simon Coveney agree with the property industry’s assertion that tax is an impediment to development and that we should not be taxing something we desperately need more of, particularly at a time of rampant construction inflation. A slowdown in commencement activity also seems to be ringing alarm bells.
There is, however, unease about announcing a tax break for developers for obvious reasons, not least the possible political field day it might give Sinn Féin.
It will undoubtedly draw the same reaction as Minister for Finance Paschal Donohoe’s recent decision to lift the cap on bankers’ pay and partially reinstate bankers’ bonuses. That’s not to say it’s wrong, just that we have scar tissue in this area.
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A raft of development tax breaks in the 2000s, lobbied for by the industry and duly delivered by the then government, led to a mushrooming of development, often in the wrong areas, and an eventual blowout.
This time the industry wants the Government to reduce VAT on the purchase of new homes from the current rate of 13.5 per cent, in a bid to restore the development margin, which has been squeezed by a surge in input prices. Building costs have risen more quickly than house prices, reducing the return for developers and undermining viability.
When you buy a new home, the builder retains 86.5 per cent of the purchase price and remits the 13.5 per cent to Government as VAT. If the industry had been smarter and adopted a price rhetoric which gave the price of new homes separate from VAT then maybe consumers might have lobbied for the reduction themselves.
Either way, the move, if enacted now, will be framed as a tax incentive for developers.
Department of Finance officials are said to be wary of the cost of delivering a VAT reduction and the difficulties of rowing back from it once it’s operational, as illustrated by the one given to the hospitality industry. Outgoing Taoiseach Micheál Martin has also expressed reservations though his party colleague, incoming minister for finance Michael McGrath, is said to be more amenable to the idea.
The property industry has been lobbying hard on the question of viability, which it says is particularly difficult here, is out of kilter with the rest of Europe and is now compounded by inflation.
Whether or not the Government moves on the question might come down to whether the targets laid in the Government’s Housing for All strategy are being met or not. The targets for 2022 and 2023 are for 24,600 and 29,000 new homes. Several industry analysts believe the 2022 target will be exceeded, not least because output for the first three quarters is already at circa 21,000.
John McCartney, head of research at BNP Paribas Real Estate Ireland and author of the BNP Paribas’s quarterly report on the sector, thinks the out-turn will be in region of 28,000 this year, about 14 per cent ahead of target.
And because there is a strong pipeline of properties already under construction that will not be finished in 2022, but which will feed into 2023 completions, he believes the output next year will be broadly in line with the 29,000 target.
Nonetheless, he warns that “we are seeing a real-time slowdown in commencements” and that this creates a risk that completions will undershoot targets from 2024 on.
Property Industry Ireland, the umbrella group for the industry, forecast just 24,600 completions this year as recently as September despite the actual out-turn pointing to a much higher end-year total. Commentators from the industry have consistently underpredicted housing deliveries.
If housing delivery is on target or exceeds target, the case for a tax break is perhaps weakened. On top of this, there have been two significant interventions to facilitate developers in recent months – the shared equity loan scheme, which helps people secure a home by providing part of the purchase price in return for a minority equity stake, combined with changes to Central Bank’s mortgage lending rules to increase the loan-to-income limits for first-time buyers to four times income.
Both these interventions are designed to enhance affordability and boost property transactions. There is also the Croí Conaithe scheme, a €450 million fund, introduced specifically to subsidise developers whose apartment schemes aren’t viable to build.
“It might make sense to wait and see the impact of these recent measures on viability before advocating for further subsidies,” McCartney says.
He also notes that development land prices, which represent a significant part of the developer’s cost base, may be starting to adjust downwards in response to the increased cost of development, which should help viability in the future, albeit this is cold comfort to developers who have already paid for their sites and who expected to be building in 2023.
UK house prices fell for the third consecutive month in November and at the fastest rate since the 2008 financial crisis, according mortgage provider Halifax, with household budgets squeezed by inflation and rising borrowing costs.
The industry here says we won’t see a similar reversal on account of strong population growth and chronic undersupply.
