Background
Measures Designed to Cope with Demand
Review of Mortgage Lending Criteria
Shared Equity Schemes
Increase in Tax Relief for Rent
Review of Landlord and Tenant Legislation
Finance Bill Initiatives
Barriers to Institutional Investment
Measures Designed to Cope with Supply
North Dublin Development
Supply of Affordable Housing
Planning Changes
National Development Plan
Conclusion
The residential property market in Ireland over the last five years has undergone an incredible boom which has seen the prices of property escalate to unprecedented heights. This has been one of the most patent aspects of Ireland's economic boom but, as successful as it has been, it has also been unexpected. The result is that Ireland was not prepared for such an increase in demand for property and while that demand looks set to continue it is equally apparent that this will not be matched by corollary increase in supply.
Ireland is now increasingly facing a market where first-time buyers can generally not afford to compete with the investor, and while the investors' faith remains it will be difficult for this situation to be resolved.
The government, in acknowledging that this was an area that needed immediate and thorough attention, commissioned the economist Dr Peter Bacon to produce a report outlining measures which they might take to try to redress the situation. The first Bacon Report, published in 1998, had the short term aim of balancing supply and demand principally by attempting to slow down demand. The main proposal adopted by the government was to cease giving wide tax breaks to those investing in residential property. Recent figures show that the rate of increase in the price of property is slowing and so, Dr Bacon contends his short term aim was, to an extent, achieved. But demand has clearly not fallen and while first-time buyers find themselves priced out of the market further intervention is required.
The publication of the second Bacon report on March 9 1999 recognizes that long term matters in the residential property market need to be addressed. The report's overall policy is to set about increasing the supply of housing and improving the infrastructure as a means of coping with the demands of the buyers. There is also a strong focus on the measures that may assist home buyers to compete with investor-purchasers.
Set out below is a broad guide to the key measures proposed by the second Bacon Report:-
Measures Designed to Cope with Demand
Review of Mortgage Lending Criteria
The report suggests that new criteria be introduced for assessing the amounts which home buyers can borrow. The present Central Bank guidelines allow the borrowing of 2.5 times the gross salary of the main income earner plus one time the salary of a second earner.
The report contends that in the context of lowered tax rates and low interest rates, these guidelines are too restrictive. Presently a couple with a main annual income earner of £25,000 and a second income of £20,000 will only be able to borrow £87,500. This is clearly short of the required capital prospective home buyers will need to generate.
An increase in the borrowing proportions and a study of the net rather than gross income are among the measures put forward in the second Bacon Report. Dr Bacon argues that these changes would give the borrower greater potential scope without resulting in a significant increase in risk to the lender.
The report recommends a private shared equity scheme in which the purchaser might finance 70% of the property with the balance acquired for a specific period by a trust or similar vehicle. Similar proposals have since been announced by the Irish Home Builders Association.
Increase in Tax Relief for Rent
A financial incentive aimed at improving the position of the renter rather than the home buyer is a 50% increase in tax free allowance for rent paid. This proposal though has received a cool response from government. With commentators expressing fears that this benefit will merely be transferred to the landlords, the government reflected that, "this proposal requires further consideration in the context of overall budgetary policy." Indeed it appears that, on the basis of it being immensely costly and doubtfully beneficial to tenants, it is most unlikely that the government will accept this recommendation.
Review of Landlord and Tenant Legislation
In the area of landlord and tenant law the second Bacon Report suggests a detailed examination of the current legislation. In the light of this the government has resolved to set up a commission to examine the issue. However not all have welcomed the decision to attempt to improve the security of tenure in the private rental sector. The Irish auctioneers and valuers warned that any artificial interference with rents would be unconstitutional and, in deterring potential landlords, would further reduce supply. This may be set against the advantages of heralding a substantial improvement in tenant rights.
The Finance Bill 1999, published in February last outlined various measures which were echoed in the second Bacon Report. Among these measures was the introduction/extension of tax incentives for the construction of various developments which the government sought to encourage. These developments included:
- multi-storey car parks;
- third level student facilities;
- third level student accommodation;
- nursing homes; and
- child care facilities.
Barriers to Institutional Investment
On the demand side the second Bacon Report acknowledges that almost all investment in residential property is by individuals. Indeed the first Bacon Report was criticized on this point in that it stopped granting tax incentives to these (predominantly) Irish individuals while in areas of commercial property mostly foreign institutions are still reaping tax benefits.
Aside from that the second Bacon Report acknowledges the lack of institutional investment in residential property as something which the government should aim to rectify. Dr Bacon argues that measures should be introduced to encourage large institutions to build up residential property portfolios. The traditional reasons for institutional reluctance to enter the market include high maintenance demands and costs involved with residential property as well as higher yields in the commercial market.
Measures Designed to Cope with Supply
The second Bacon report was quick to warn that its recommendations should only be introduced as new housing supply comes onto the market. Despite massive increases in the last five years on the number of new houses being completed annually (more than 42,000 in 1998) at the present rate of growth demand will continue to far outstrip supply.
The report suggests several measures which would assist in bringing about an increase in supply.
A key initiative is the early release of 16,000 housing sites in the north Dublin area through the use of temporary sewage facilities. This has been welcomed as an example of how infrastructural bottlenecks can be broken.
This more general proposal encourages local authorities to avail of all possibilities under planning acts, development plans, development control and policies in relation to densities to ensure the necessary mix of house types and sizes to meet prospective demographic trends. This would mean requiring local authorities to use all their influence to persuade developers to provide various sized dwellings beyond the traditional three bedroom semi-detached house. The report also raises the possibility of requiring a proportion of lower cost housing to be provided in each development. Coupled with that is the claim of the report that improvement in design and management could lead to savings of 20 to 30% in the cost of a three bedroom semi-detached house. A saving which should then be transmitted to the purchaser.
As a result of the inefficient planning process there have been difficulties in bringing many sites to the market. The second Bacon Report makes two recommendations which may go some way to tackling the problems.
(i) An increase in staff and introduction of improved procedures within An Bord Pleanala.
This has been endorsed by the government but inevitably any changes made will take time to manifest themselves into an improved service.
(ii) To withdraw the requirement of obtaining planning permission in order to qualify for the reduced 20% capital gains tax rate on the disposal of development land. This will significantly increase the supply of development land on the open market with the result that house prices may well level off and more affordable homes will be available to the first-time buyer.
Improvement in the supply of housing will necessarily have to be mirrored in an improvement in the infrastructure that must cope with it, particularly roads, services and public transport. Arguably the new property based revenue being generated should be channeled into dealing with these issues.
The government recognizes that the improvement in supply of housing would not, in itself, be sufficient. The Taoiseach, Mr Bertie Ahern has commented that the next National Development Plan will involve an ambitious programme of investment in roads, transport and essential services. Indeed, in response to the finding of the second Bacon Report that several significant housing developments were still being delayed by inadequate services, the department of the environment pressed local authorities to expedite delivery of schemes in a £39 million programme.
Conclusion The second Bacon report has received a positive reception from most of the interested parties involved in the residential property market. The general consensus is that, while the situation is reaching crisis point, the proposals that form the basis of the report, on the whole, strike the right balance. The report advocates taking bold steps which the situation requires without precipitating a panic by taking extreme measures which could shake the foundations of the market. It is hoped that the measured response of the government turns out to be the correct approach. But, as was the case five years ago before this boom began, there seems to be no definite way of determining which direction the market will take.
For further information on this topic please contact Paul Eustace at Dillon Eustace by telephone (+353 1 667 0022).
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