It’s not ‘difficult decisions’ that Fianna Fáil is being punished for, but its spectacular mishandling of the boom
FRANK FAHEY was on the radio last weekend saying it was not surprising that Fianna Fáil had slipped into third place in the latest Irish Times/Ipsos MRBI opinion poll, given the "difficult decisions" the Government had to take. But as a man of property himself, with interests in Galway, Dublin, Belgium, France, Dubai, Portugal and the US, he must know that this is not the full story.
The public knows that Fianna Fáil and its erstwhile allies, the Progressive Democrats, spectacularly mismanaged the boom, and that’s why we’re in such a sorry state now. In particular, they inflated the property bubble, witlessly engineering the catastrophe that has saddled us – and our successors – with billions of euro in debt. But we need to remind ourselves how this happened.
The Honohan and Regling/Watson reports on what precipitated the banking crisis here, published last week, deal with this issue only in general terms, noting that the Government relied to an “unsustainable extent” on revenue from the construction sector – notably stamp duty – and stoked the building boom to such an extent that people were “led to believe that the party could last forever”.
However, the real irony is that just months after taking office in 1997, the FF-PD coalition was so concerned about spiralling house prices that it commissioned economics consultant Dr Peter Bacon – who had acted as an adviser to Bertie Ahern – to examine what was fuelling inflation in the housing market, particularly in the Dublin area, and recommend how it could be cooled, with an eye on first-time buyers.
An editorial in The Irish Timesin November 1997 welcomed the move, saying there was "an onus on Government to ensure that a British-style 'boom-and-bust' cycle in the property market is averted". And when Bacon reported in April 1998, this newspaper applauded the measures being taken to curtail tax reliefs for investors, saying they "should help to dampen the speculative boom in the housing market".
The juiciest of these reliefs was the Section 23 tax incentive scheme, first introduced in 1981 when the building industry needed a boost. Under this highly popular scheme, buy-to-let investors could write off all but the site cost of an apartment or town house against their total rental income in the first year – including rents from other properties – with any unused tax relief being carried forward indefinitely.
Although the measures taken on foot of Bacon’s first report slowed down the rise in property prices – principally by curbing the speculative frenzy among Section 23 investors – they didn’t solve the problem. So Bacon was commissioned to do two further reports, published in April 1999 and June 2000, which recommended further squeezing investors with some relief for tenants facing big increases in rent.
Then, in 2001, when the residential property market was showing real signs of stabilising, Charlie “When I have it, I spend it” McCreevy buckled under intense pressure from builders, developers, estate agents and the growing army of buy-to-let investors, executing what his predecessor as minister for finance, Labour’s Ruairí Quinn, described at the time as a “spectacular U-turn”.
Stamp duty for investors was cut and an annual tax rate equivalent to 2 per cent of the value of second and subsequent properties proposed by Bacon was not implemented. In response to Quinn’s taunt that the government had “capitulated to the moneyed interests”, then taoiseach Bertie Ahern claimed that it was doing this “to maintain the supply side and the number of first-time buyers”.
Even more significantly, McCreevy reinstated as a tax-deductible expense loan interest payments by investors – reversing a decision taken on foot of Bacon’s first report. This was hailed by Liam Connellan, then director general of the Construction Industry Federation, who said it would make investment in residential property as attractive an option as investment in commercial property.
Connellan expected that McCreevy’s measure would have “an immediate positive effect” on the market. As indeed it did – by getting the merry-go-round going again, for the benefit of those who supped in Fianna Fáil’s tent at the Galway races. With the party in full swing, the FF-PD coalition was re-elected in 2002 and then eviscerated the “social and affordable” housing provisions of the 2000 Planning Act.
Land and property prices soared to such an extent that apartments in Dublin came to be “worth” more, in euro per square metre, than in the centre of Paris. And because of McCreevy’s indulgence of the property sector, capital gains tax on the sale of land for development had been slashed from 40 per cent to 20 per cent while developers were also able to avail of unclosed loopholes in the tax laws.
The whole property market was infected by incentives not just for buy-to-let housing, but also multistorey car parks, hotels and anything else that seemed worth a punt. Brian Cowen finally phased them out as minister for finance, but by then it was too late; many of the hotels built during the boom are now zombies in the hands of Nama.
As Ruairí Quinn has observed, “Bertie and McCreevy turned the country into a building site and the economy into a casino”. It would be pointless to propose another tribunal to find out why they did what they did, because we simply couldn’t afford it. But how about a show trial in that hulk on North Wall Quay that was meant to be the headquarters of Anglo Irish Bank? After all, we own it now.