Finance (No. 2) Bill, 1998: Second Stage.

Minister for Finance (Mr. McCreevy)

I move: "That the Bill be now read a Second Time."

This is the second Finance Bill which I am introducing to the House as Minister for Finance. While I did not expect to be before the House again so soon with taxation legislation, I think everyone will agree that the recent Government action in response to developments in the housing sector was required. Consequently, the measures contained in this Bill are necessary to ensure that a balance is restored to this market and that more importantly, the sharp increase in house prices can be addressed and defused.

Before dealing with the specific provisions of the Bill — the legislative consequences of the Government's action — I wish to briefly reiterate the rationale behind the Government's response to the recent trend in house prices. This response has not been ad hoc. It is a well thought out and integrated package of measures, from which we cannot afford to pick and choose. Each of the elements has a part to play in achieving the balance we are seeking.

The rapid escalation in house prices over the past few years has had serious adverse implications for first time buyers. Furthermore, excessive house price increases carry potentially serious implications for the wider economy in terms of possible inflationary effects and the dangers of excessive personal borrowing. It was necessary, therefore, for the Government to take action in this area and a comprehensive range of measures in relation to the housing market was announced on 23 April 1998 on foot of the economic assessment of the recent house prices developments.

I remind the House that late last year, the Government commissioned a comprehensive study of housing. The report on the developments in house prices by Peter Bacon and Associates has provided us with an independent, expert analysis of the situation, which has become a matter of serious public concern. Furthermore, this report provides a sound platform on which to formulate a balanced, well targeted package of measures to address this critical issue.

There are two priorities the Government must address regarding housing. First, the question of affordability of housing, especially for lower income groups needed to be addressed. I have said previously that this Government is not prepared to countenance the possible development of a situation where the goal of home ownership might be pushed beyond the reach of a significant proportion of households who reasonably aspire to it. Second, the long-term strength, stability and balance of the housing sector must not be jeopardised by excessive overheating or distortions in the market of which recent price developments are symptomatic.

The consultants' report has given clear recognition to these priorities and the Government's package will help restore balance to the housing market. This package will also help to remove another significant factor that has been fuelling price escalation — the expectation or, depending on one's perspective, fear of further major price increases. The publication of the report itself, with the Government's speedy response, will help take much of the heat out of the market. Furthermore, it is hoped that this package will restore a degree of parity between the various market participants, the owner-occupier and the investor.

The Government has formulated a selected range of actions designed to alleviate these pressures, on both the demand and supply side, which are identified in the report as causing overheating, bottlenecks or distortions in the housing market. The Government's response consists broadly of a three-pronged approach. First, measures to increase the potential supply of housing which involves increasing the availability of serviced land by the removal of infrastructural constraints, promoting increased densities at appropriate locations, encouraging faster release of serviced land for residential development and achieving better movement within the existing housing stock. Second, measures to dampen excessive investor demand and thereby help restore better balance between supply and demand and third, measures to improve the position of prospective first time buyers.

I now turn to the specific taxation measures contained in the Bill. It is usual on Second Stage to give a run through of the main sections contained in the Bill. Given that the Bill is short and deals specifically with the issue of housing, I propose to outline briefly each section even though the explanatory memorandum gives a more detailed description of individual sections.

Section 1 gives effect to the changes in the treatment of interest on borrowings used to purchase, improve or repair rented residential property. The consultants recommended the removal of the deductibility of interest on borrowings for residential property against rental income for tax purposes. The Government has accepted this recommendation. Accordingly, investors will no longer be entitled to a deduction for tax purposes against rental income in respect of interest on borrowings used on or after 23 April 1998 to purchase, improve or repair residential property. This measure, which will apply to individuals, partnerships and companies, will directly address the situation identified in the report that investors were, to some extent, replacing first time buyers in the market — a development which goes against the thrust of housing policy objectives accepted in recent decades. As is only reasonable, however, pipeline cases have been catered for, where a contract in writing was in place before 23 April 1998 to purchase an investment residential property and the borrowed money is employed for that purpose by 31 December 1998, instead of 30 September 1998 as announced in the Government statement of 23 April.

Neither will the restriction apply to borrowed money employed on the improvement or repair of a residential premises which on 23 April 1998 or at any time in the 12 months to that date was a rented residential premises and which was owned by the investor on 23 April 1998 or which was purchased by him or her on or before 31 December 1998 under a contract in writing entered into before 23 April 1998.

The disallowance of interest will not apply to rented residential properties covered by the provisions of the designated seaside resorts scheme or the new rural renewal scheme. Neither will it apply to holiday cottages or holiday apartments in other parts of the country, registered or listed with Bord Fáilte, where the planning permission specifically states that the premises are not to be rented or leased for periods in excess of two consecutive calender months at any one time. This latter exclusion will, however, only apply to developments where planning applications were received by the planning authority prior to 23 April 1998.

The section also clarifies that Irish investors who invest in residential property outside the State will also be subject to the new restrictions on interest deductibility. Thus such investment outside and within the State will be treated in the same way. In the case of rented residential property outside the State the restriction will not, however, apply where a contract in writing was in place before 7 May 1998, the date of publication of the Bill, to purchase the property and the borrowed money is employed for that purpose by 31 December 1998.

Section 1 also provides that where, at any time on or after 23 April 1998, a person turns their sole or main residence into rented accommodation, the restriction on relief for interest will apply from the date of the change of use, irrespective of when the borrowed money was employed. This measure is included to prevent people buying a house moving into that house and retaining their original house for letting purposes. To have allowed that situation would have run counter to the thrust of these measures, that is, to restore some balance in the housing market between investor and owner-occupier. These arrangements are fair and reasonable in the circumstances.

Section 2 is an anti-avoidance measure designed to prevent the circumvention of the measures in section 1 by channelling the borrowed moneys through a company or partnership. If this situation had not been catered for, a person could have obtained tax relief on interest on the borrowed money invested in the company or partnership which he or she could then invest in rented residential property.

Section 3 implements the Government decision to introduce a temporary reduction in the rate of capital gains tax on development land from 40 per cent to 20 per cent for disposals of serviced land zoned for residential use which are made between 23 April 1998 and 5 April 2002. The consultants recommended that, to encourage the supply of serviced land zoned residential, such a measure was required. The consultants were not specific in their definition of what should constitute serviced land and, consequently, I have decided to link the 20 per cent rate to the planning process. This is a transparent way of implementing the Government decision.

To qualify for this temporary reduction in the CGT rate on a disposal of development land, planning permission for residential development on the land must have been acquired prior to the disposal and such permission must still be in force at the time of disposal. Furthermore, if the contract for sale of the land which has planning permission for residential development is conditional on planning permission other than for residential development being obtained, this temporary reduction in the rate of CGT will not apply.

This section also provides for a new 60 per cent rate of CGT to apply from 6 April 2002 to disposals made from that date of development land zoned residential. This is in accordance with the recommendations contained in the consultants' report and will act as a further incentive to the early release of land suitable for residential development, thereby increasing supply.

Part 2 of the Bill contains the stamp duty provisions of the Government package. The House has had an opportunity to discuss these measures as they were contained in the Financial Resolution passed by the Dáil on 28 April 1998 subject to one change in the case of pipeline cases. I will outline briefly the changes in the stamp duty code.

Section 4 is a definitions section. Section 5 provides that the reduced rates of stamp duty on residential property and the imposition of stamp duty on all new residential property bought by non-owner occupiers will apply to all conveyances which take place on or after 23 April 1998. Pipeline cases have been catered for where written contracts had been entered into prior to 23 April 1998 and the conveyance takes place by 31 December 1998. This is an extension of three months on the 30 September 1998 period specified in the Financial Resolution. Where these transitional arrangements apply, the existing stamp duty relief on new residential property will continue to apply to investors.

Section 6 and the Schedule impose the new rates of stamp duty for residential property. These new rates are as follows: residential property valued at up to and including £60,000 is exempt; in excess of £60,000 but not exceeding £100,000, 3 per cent; in excess of £100,000 but not exceeding £170,000, 4 per cent; in excess of £170,000 but not exceeding £250,000, 5 per cent; in excess of £250,000 but not exceeding £500,000, 7 per cent; and in excess of £500,000, 9 per cent.

Section 7 deals with the transfer of mixed property, that is, property which has a residential and a non-residential element. In such cases, the Bill provides for the imposition of stamp duty as if it were two separate properties. In other words, the residential element will be chargeable to stamp duty at the new residential rates and the non-residential element of the transaction will be chargeable to stamp duty at the appropriate non-residential stamp duty rates. In this situation there will be no aggregation between the two rates. Sections 8 and 9 provide for the apportionment of the consideration on a just and reasonable basis in the case of mixed properties.

Section 10 provides that the existing stamp duty exemption for new housing not exceeding 125 square metres is restricted to owner-occupiers. In other words, if the purchaser does not intend to reside in the property and that property is not his or her only or main place of residence, stamp duty will apply at the appropriate residential rate.

Sections 11 and 13 deal with larger new housing units. If the purchaser is an owner-occupier, the existing treatment of levying duty on either the site cost or on 25 per cent of the aggregate cost of the site plus the building cost, whichever is the greater, will continue. If the purchaser is not an owner-occupier, stamp duty at the appropriate rate on the full amount of the transaction will be charged.

Section 12 is a technical matter dealing with mixed property and specifies that all details of how the consideration is to be apportioned must be supplied to Revenue. Sections 14 and 15, contained in Part 3, deal with the "care and management" provisions and relate to the Short Title, respectively.

The Government has acted in a decisive and considered manner. While criticisms have been made, inside and outside the House, about certain aspects of its response, the measures contained in the Bill are an appropriate response by Government and must be viewed with the other measures being taken as an overall package. The suggestion that building activity will cease because of these measure is unfounded. I have taken heart from recent media reports of sales of properties to owner-occupiers where in previous schemes a significant percentage of sales were made to investors. This is evidence that there is sufficient demand for housing from those who wish to purchase as an owner-occupier. To suggest otherwise is to miss the point of the detailed analysis contained in the consultants' report.

I look forward to an interesting and good debate on this important measure which I am pleased to commend to the House.

Mr. Noonan

I thank the Minister for acting expeditiously in introducing this Bill so soon after he announced his intention two weeks ago but that is where my welcome begins and ends. There is a housing crisis. Prices have risen to a level and at a rate which were not credible even 12 months ago. This is extremely disturbing. It has brought about a situation where persons who would normally expect to own their own houses can no longer afford to do so. Certain professions such as nurses, teachers, gardaí, middle grade civil servants and those on the average industrial wage can no longer afford to buy their own houses. The Government must face up to this situation and move to rectify it.

The Minister was short on details of the policy underpinning the measures. I presume he intends to continue the position in Ireland where it is the norm for people to own their homes and he is in favour of owner-occupiers. His measures regarding rented accommodation appear to indicate that he does not consider the solution to the housing problem will be provided by the rental sector. He has pinned his colours to the mast in terms of a solution which involves people being able to afford to buy their own homes.

Why has the crisis occurred? Essentially, it is a supply and demand problem. There is a lack of supply for the demand which currently exists in the marketplace. The Bacon report examined the situation carefully and its analysis of the problem is good, although I do not fully support its solutions. I agree the effects of the baby boom in the late 1960s and early 1970s are now becoming apparent. It is one of the few occasions when the entire crop of people leaving second and third level education can expect to be employed in Ireland. The pressure valve which was always available through emigration is no longer necessary. The full young population is in the marketplace and they want to buy their own homes. This is where the demand arises.

The Bacon report includes an interesting statistic. It suggests the net emigration figure of 15,000 last year was composed of approximately 30,000 people leaving Ireland and approximately 45,000 to 46,000 people returning. The point which weighed heavily on me was that those who are leaving the country are between the ages of 16 and 24 while those returning are between the ages of 24 and 35. The people leaving are not at a house buying age while those returning are at that age. The additional net demand is not the 15,000 net figure of emigration but the 45,000 people returning. This is in addition to the demand which already exists and that is driving the situation.

Similar to the demand for Mercedes cars, demand is nothing unless it is supported by money. The fact that many people want to own their own homes or bigger properties is not demand in the economic sense. Demand must be supported by hard cash so what has caused the position where there appears to be enough money available to people, particularly in Dublin, to drive prices to astronomical heights? The Minister must, to an extent, bear responsibility for this position. He inherited an economic boom from the rainbow Government which has given extra income to sections of society. In addition the Minister introduced an expansionary budget against the prospect of a fall in interest rates. Already the prospect of interest rates falling by 2 per cent has been discounted in the property market but people are making their borrowing arrangements in the expectation of reduced interest rates. This is feeding the problem to a major extent. Even after reading the Bacon report and listening to the Minister, it is difficult to pinpoint the key to rising house prices and to explain how a house which cost £100,000 in Dublin 15 months ago now costs more than £200,000. It is difficult to understand what is driving the market. The Minister in bringing forward a package of solutions may get it right in certain respects but wildly wrong in others. It is always dangerous to interfere with the market and there is a serious danger that the Minister's proposals, particularly in respect of rented accommodation, will not work out as planned. A bad situation could be made worse.

I have serious doubts about the Minister's changes in the way interest relief on rented accommodated will be treated for taxation purposes. Up to now a person borrowing to buy a property for rental purposes could write off the cost of the interest against the borrowing. This provided a good rental market which is necessary. There is no point pretending everybody will own their home or that many young people at some time will not be in rented accommodation. I fear the Minister's proposals will cause a serious problem very quickly and rented accommodation will no longer be available in the market.

Rented accommodation is, by and large, provided by persons who have an occupation. The provision of rented accommodation is not their primary profession. A small number of people specialise in buying and converting property into bedsits, flats and apartments, but that is not the general position. Frequently, people who reach the point where their families are reared and their mortgage is paid buy a second house and rent it out to young people. There is no great market in private rented accommodation for married couples with children. This area has never been developed. It is a single person's market. The Minister is introducing a severe measure which will discourage people from investing in second houses for rental purposes. In terms of the arithmetic of the proposal, people who traditionally would have bought a second house in a housing estate to rent to nurses in the local hospital will no longer do so because it will not make economic sense. By turning off the tap completely, the Minister will cause a serious problem.

There are 100,000 people in the greater urban area of my city of Limerick and approximately 10,000 are in university or third level colleges. Students make up 10 per cent of the total population and they will not become owner occupiers. They need rented accommodation. In addition, young people in the information technology industry require accommodation. It was announced recently that 3,000 people will be employed by Dell in Limerick. Some of these are residents of the city already and will live at home with their families, but many people will move to Limerick. There is a major demand for rented accommodation, including from people returning to Ireland after periods abroad.

We hear much about bright young third level graduates with experience abroad returning to Dublin to work in the financial services industry and the new high tech industries. They are in the market for rented accommodation in the first instance. The Minister's measures will cause a serious problem in the rental market. Ultimately, we face a housing and accommodation problem which cannot be segmented. It cannot be said that there is only a problem for owner occupiers and there is no difficulty with accommodation for people who rent.

The Minister's proposals will put pressure on the rented market. This pressure will be caused immediately and will become acute when students returning to college seek accommodation in September and also in the run up to Christmas. The ordinary investor will switch off from buying rental accommodation.

In the western part of Dublin, the Leixlip and Maynooth areas and out towards the Minister's constituency, there is a major demand for rented accommodation due to the location of the university in Maynooth and many industries, including Intel in Leixlip. This demand is supplied by ordinary women and men who have paid off their mortgages or are in a position to raise a second mortgage for a rental property. It does not involve big investors or major capitalism. It is the smaller end of the market and it will no longer make economic sense if the interest cannot be written off. It is a serious mistake on the Minister's part. I understand he is trying to dampen down one specific sector. However, he has gone too far and I intend to move an amendment on Committee Stage to allow interest at the standard rate. A case can be made that owner occupiers can only get interest on a mortgage at the standard rate. Consequently it would be unfair on a person renting accommodation to be able to get interest relief at the marginal rate. A better proposal to dampen down the market as the Minister intends would be to apply the interest at the standard rate rather than the marginal rate. This would not cause the rental crisis I expect and the Minister should consider it.

There are many fine old houses in areas such as Ranelagh, Rathmines and Rathgar that are converted to bedsits. When these houses are sold there is a tendency to restore them to single owner-occupier residences. That tendency will now be magnified and when such properties come on the market it is likely that they will be bought for a single owner-occupier rather than for rental purposes. In Leinster Road, for example, where there may be nine or ten apartments in a house, a great deal of rental accommodation will be lost with every house that is bought by a single owner-occupier. I will move another amendment which proposes that the purchaser of a house for letting purposes will be allowed interest if it is already converted to apartments or flats.

The Minister's second taxation measure proposes that the rate of capital gains tax in certain disposals of development land will be reduced from 40 per cent to 20 per cent. Much of the difficulty in the housing market since Christmas is due to the Minister's reduction of capital gains tax from 40 per cent to 20 per cent which applied to house property as well as all other disposable assets. Many people rushed into the housing market then for capital gains purposes rather than acquiring an investment income. People thought that if they bought in January on a rising price trajectory and sold in March they would make a killing that would be taxed at 20 per cent rather than 40 per cent. That was a serious mistake and we have stated why on other occasions. All Members are in favour of lower tax rates, but lowering any tax rate from 40 per cent to 20 per cent will distort the market. One of the key factors in driving the property market crazy in the first quarter of 1998 was that measure.

All finance spokespersons are aware that developers lobbied strongly to remove the only exception the Minister included in the Finance Bill and to extend this provision to development land. The Minister has effectively conceded this. He is giving in to a lobby and using the cover of the housing crisis to allow development land to be included.

Mr. McCreevy

The Bacon report recommended that.

Mr. Noonan

I know that but Bacon and Associates were selling the report on the radio so it was an unusual report. I presume they were in contact with the Department of Finance, the Revenue Commissioners and politicians before the report came through.

Mr. McCreevy

They were not.

Mr. Noonan

If one took the report as being totally independent, there is a carrot in the reduction of capital gains tax and a stick in the threat of taxation at 60 per cent if development land is not disposed of in four years. If the report is taken on its merits, its method of introduction is the height of foolishness because there have obviously been second thoughts about this measure in the Department of Finance at official, if not political level.

The Minister is now tying this to the planning process. Rather than making extra land available, this measure will restrict its availability. Traditionally, there was a landowner, usually a farmer, a developer and a builder. The developer and builder were sometimes the same person. The Minister is now proposing a 20 per cent rate of capital gains tax on disposal of land provided that land has planning permission. When he announced this measure originally I thought he was referring to zoned land or other land which had the potential to be built on. If one did not have an ideological problem with someone making a killing that would be taxed at 20 per cent, it might bring extra land on to the market and relieve the supply of land for houses. However, by tying it to the planning process the Minister has handcuffed the system. Traditionally the landowner did not look for planning permission before disposing of land. The land went on the market and the developer or developer-builder bought it and sought planning permission. Now people who do not have the first idea about development will be forced through the planning process before availing of 20 per cent capital gains tax relief.

Tying this to the planning process makes this a very restrictive measure. No local authority will consider a planning application for development land unless it has been zoned first. The Bacon report states that not enough land has been zoned, but the Minister is being restrictive. Rather than extending zoning to increase the supply of building land, his capital gains tax proposal means that not only will the land have to be zoned for housing, but there will have to be planning permission for it before the 20 per cent rate applies at disposal. The landowner, developer and builder all want to maximise their profits and the Minister has brought about a situation whereby landowners will be advised by their solicitors and accountants to apply for planning permission before disposing of lands. The situation has been made dramatically worse. By definition, no planning authority will grant planning permission unless land has been zoned for housing first. An application will not be considered unless the area is zoned for housing. There is a zoning restriction on supply and the Minister is superimposing a further restriction with the necessity for planning permission. There seems to be agreement that there is a supply and demand problem and that that is due to the lack of suitable land for housing. The Minister has brought in a tax incentive intended to free up the market but it will do the reverse. Rather than bringing land on to the market quickly it will hold the process up.

Many Members have served on local authorities. It might be possible to get a planning permission in eight weeks for one house, but someone looking for permission for 100 or 200 houses will encounter toing and froing between the proposer and the planning office. It starts with the developer's architect bringing plans to the planning office, and eight weeks later the planning office sends a letter requesting information to the developer. A list of questions is sent to the developer eight weeks after that. Does the Minister believe that a local farmer will get involved in this kind of detail before his land can be put on the market? It is a daft proposal, though I can see the Minister's problem. He will be subject to political criticism for not only encouraging further windfall profits but for providing that the taxpayer gets little return from those profits. When the rate was 40 per cent the taxpayer got something from windfall profits which accrue principally to developers as a result of taxpayers' money being spent on services. The Minister had a political problem justifying this when bringing the capital gains tax to 20 per cent, but by tying it to the planning process he will cause problems. The Bacon report suggested loosening the market, providing more land for building and doing so quickly. The Minister is ensuring the process will be slowed down.

Much of the land now zoned will not come on the market unless it is already in the hands of developers and builders. Land where there is planning permission for housing estates is in the hands of developers or builders and is being dealt with through the system. With the present push in the market that land is not being held back. The difficulty arises in respect of zoned land, which people are holding on to and which has not been used for building, and land outside zoned areas in respect of which there is an expectation of zoning. The Minister should think again about tying this into the planning process because by doing so he would further distort the market rather than free it up.

I commented at length previously on the provisions on stamp duty. In the third paragraph of the Minister's speech he said the rapid escalation of house prices over the past few years has had serious adverse implications for first time buyers. My main objection to the provisions of the Bill is they do not target first time buyers. They do not do anything unique for them. All the measures are universal provisions. The person who is trading up and buying a second property will have a much bigger reduction in real terms from the new schedule of stamp duty than the first time buyer.

I revert to the proposal I put forward when the Finance Bill passed through the House earlier this year. The stamp duty provisions should target first time buyers. I will introduce an amendment which will propose first time buyers of second-hand houses should be exempt from stamp duty up to and including the first £100,000 of the purchase price. Those who buy a house for £100,000 or less should be exempt from stamp duty and those who buy a house for more than that price should have the nominal stamp duty on £100,000 offset against their stamp duty bill. That is a better proposal, favours first time buyers of second-hand houses and will do something for young couples entering the market for the first time.

There is nothing in the rescheduling of stamp duty which does anything for first time buyers above and beyond what it does for everyone else. The Minister will probably point out there is an exemption from stamp duty up to £60,000, but where can one buy a house for £60,000 or less in Dublin or other urban areas? Lest people in their innocence believe stamp duty would apply to the balance of the purchase price over £60,000, the position is once the value of the property exceeds £60,000 the 3 per cent stamp duty rate will apply to the total value of the property, not only to the balance of the purchase price over £60,000.

A serious problem with the Minister's proposal is that nothing specific is being done for first time buyers. I do not believe the set of proposals he has brought forward will meet the obvious need that exists. My party will oppose the Bill on Second Stage and on tomorrow's Committee Stage I will propose amendments along the lines of the proposals I have made in the course of my remarks.

Mr. McDowell

This is the second Finance Bill to come before the House this year. This is the second opportunity the House has to make changes in tax law aimed at dealing with what has become a serious housing crisis. We should not have needed two bites of the cherry. The measures we take this week should have been taken three or six months ago. Some of the measures in the Bill before us were advocated by me and other Opposition spokespersons many months ago. I refer in particular to the reduction in stamp duty on second-hand houses and the application of stamp duty to purchases of new houses by people other than owner-occupiers. These measures should have been taken months ago and not now.

In the six months since the Bacon report was commissioned housing prices in this city have increased by nearly 20 per cent. Many young people in Dublin, Galway and Cork who could have afforded to buy a house last autumn cannot do so now. Those people have the Minister and his colleagues to thank for the predicament in which they now find themselves.

Dr. Bacon produced an interesting and useful report, but I wonder whether it was necessary or advisable to suspend all action until such time as this report was available. Perhaps the Minister could let us know how much this report cost. I suspect it cost a great deal and that we could employ quite a few senior civil servants full-time for the amount it cost us to pay Dr. Bacon and his associates. I do not intend to be frivolous and I certainly do not intend that as a direct criticism of Dr. Bacon and his work, but this is a serious issue.

It is reasonable to use outside consultancy if the expertise needed is not readily available in the Civil Service. It is advisable to use outside consultancy when seeking to evaluate work done in the Civil Service, but it is neither necessary nor desirable to farm out work, however important, which could be done perfectly adequately in the Civil Service and in respect of which there is an urgency. It does not make any sense if the consultant in question spends much of his or her time consulting the civil servants who would have made the recommendations in the first place. In those circumstances it is reasonable to ask what additional expertise has been brought to bear which would not otherwise have been available in the Civil Service. If there is no tick-tacking between the civil servants and the Minister who commissioned the report, one runs the risk of coming up with recommendations that are unpalatable or unacceptable. That is precisely what happened to the Government in case of the Atkins report. His recommendations have been entirely supplanted by the work done by a single policy adviser to the Progressive Democrats.

Dr. Bacon has done a great deal of good work and good analysis. I find the analysis interesting and useful and I agree with quite a few of his recommendations but by no means all of them. I sometimes find it difficult to make the connection between the analysis and the recommendations. Suffice to say Dr. Bacon has done a good day's work and he deserves our thanks. *sam The scale of the housing crisis is difficult to overstate. It is particularly acute in Dublin and Galway, but it is also serious in many of our major cities and towns. The crisis in Dublin is having serious spillover effects as far away as Portlaoise and Drogheda. Demand for housing is rising at an unprecedented rate. It is being driven at least in part by demographic changes. There are a larger number of smaller household units requiring a greater number of dwelling units. In addition, as Deputy Noonan said, large numbers of people in the house buying age bracket are returning from abroad and are looking to buy houses for the first time. Demand is also being pushed by people who want to invest in property.

It is important to acknowledge the supply of new houses has been increasing quite considerably for some years. The total number of units of apartments and houses completed last year was almost double that of five years ago, but it has not met the demand and there is a need to increase the supply further. However, we will never be able to satisfy the demand for houses and apartments as long as that demand continues to be made up in ever greater measure by people who want to buy property as an investment. I have no problem, in principle, with people who want to build up a nest egg for their retirement or with people who want to make a profit from trading in property, but I have a problem with investment in property if it is having the effect, as it is, of driving first time buyers out of the market.

Single people who want to buy an average new house in Dublin would need to be earning £30,000 before they could reasonably afford to do so. That is assuming they are willing to borrow more than three times their annual income and commit themselves to a high level of repayments for much of their working lives. The truth is most people cannot afford to do this even if they wanted to. The result is people are obliged to live with their parents, in rented accommodation or to move to areas of the city or beyond it where they would not otherwise choose to live. Do we want to help these people and are we willing to intervene in the market to give that help? The answer to that question should be a resounding yes.

The measures proposed today and by Bacon should be judged according to one criterion — the extent to which they help the first time buyer. It would be nice to be able to help those who want to trade up and those who want to invest for long-term gain, but ultimately our priority is clear. It must be to help those who have not yet got their feet on the bottom rung of the ladder, to help those who are otherwise being priced out of the housing market.

I want to consider in detail some of the proposals in the Bill. The Bill gives effect to the changes in stamp duty set out in the resolution discussed in this House on 28 April last. I indicated my attitude to those changes in that debate and I do not intend to labour the point today. The rates and thresholds for stamp duty purposes were set out many years ago. They should have been index linked but were not. The thresholds for CAT purposes are index linked, as were those for RPT purposes. The fact that the thresholds for stamp duty purposes were not linked in this way has meant that virtually all transactions have, until recently, been chargeable at a rate originally intended for larger or luxury houses only. This was unintended and inequitable and it is right it should be changed. For that reason I supported it when we discussed the financial resolution.

I have two criticisms of the stamp duty changes. First, they will ultimately be of primary benefit to the vendor, not the purchaser. I know the Minister shares this view because he expressed it when he replied to the Second Stage debate on the financial resolution. In effect, we are giving all purchasers, without discrimination, an additional few thousand pounds to play with. This will inevitably result in bidding up the price of houses by a few thousand pounds. This is exactly what happened to the first time buyer's grant. The reality is that most bidders increase the price of houses by a few thousand pounds more than they might otherwise have been increased. Many builders have put schemes in place whereby they can effectively arrange for the direct payment of the new house grant to them. It is likely that something similar will happen as a result of a reduction in stamp duty rates. I have heard nothing from the Minister or Dr. Bacon to persuade me otherwise.

My second criticism relates to the Minister's failure to target stamp duty relief at first time buyers, who are surely the people we wish to help. It is of no help to first time buyers if those against whom they are competing for a property have been similarly helped by the Minister's measures. Targeted help is needed, not the scattergun approach we got.

The Minister will claim that the reduction in stamp duty and the consequent reduction in transaction costs is intended to bring more houses, specifically second-hand ones, into the market. It is likely that this will lead to a greater number of transactions. However, in the final analysis this does not solve the basic problem of too many buyers trying to buy too few houses. This problem can only be solved by increasing the supply of houses and taking some buyers out of the market. The reduction in stamp duty will do neither.

I wish to look at some of the measures proposed by Dr. Bacon intended to increase the supply of houses. His survey of building land in the major cities is quite impressive and persuasive. He sets out in detail the needs of the greater Dublin region. He details specific infrastructural projects such as sewerage schemes, which he believes need to be carried through if we are to improve the supply of serviced building land. He identifies potential sources of building land and suggests some reasons the supply of land is so inelastic, despite considerable price changes.

Dr. Bacon suggests that some of these projects can be accomplished by means of public-private partnerships. From my experience on the Finance and General Affairs Committee in the last Dáil, I know that Dr. Bacon has done some work on PFIs or PPPs. IBEC has been looking at these issues in recent months, as a matter of some urgency. On behalf of the Labour Party, I endorse in principle the concept of public-private partnerships and the issue is worthy of a debate in itself.

The notion that the State could, should and must always fund to the last penny all major infrastructural projects and manage them indefinitely is clearly no longer tenable or desirable. That does not mean the traditional model is wrong or that it may not be appropriate in some cases in the future. However, alternative models must also be looked at. There are instances where it will be appropriate for a particular project to be farmed out to the private sector. There are projects which can and should be jointly financed between the private and public sectors. Likewise, future management of projects, such as a sewerage scheme or an electricity generator, could be done entirely by the public sector, entirely by the private sector or a combination of both.

PPPs or PFIs are not a panacea and there are times when they may be inappropriate or wrong. The private sector will always demand a return on its money and there are times when it would it be inappropriate to grant this when the level demanded is excessive. These are issues of principle and practice which will have to be teased out in years to come. In my view, and in that of my party, the use of PPPs to facilitate development needed to sustain housing is appropriate, provided it is properly set up and managed.

Dr. Bacon and his associates identified the lack of infrastructural development as the primary reason serviced lands or lands zoned for housing have been slow to come on the market. I agree with this cogent argument. However, he then goes on, in a fashion which I do not understand, to make a conclusion with which I do not agree. He believes that the short-term supply of land can be increased by offering a rebate of CGT to be financed by a clawback of CGT in a few years.

The Government, in part for administrative reasons, alters the Bacon recommendations by providing for a 50 per cent reduction in CGT now and an increase in CGT on development land to 60 per cent in four years. This conclusion is bizarre. We know from Dr. Bacon's analysis that the profits made by landowners dealing in development land have increased enormously in recent years.

Landowners and those trading in building land have been the great beneficiaries of the increase in house prices. Their profit margins have shot up to levels which are downright immoral. I say this because of the nature of the profit involved. The profit comes about, not because of any major investment made by the landowner but because the land was rezoned by the local authority and it has granted or may grant planning permission for the development of houses. There is no requirement on the landowner to make any investment or to do any work. He or she is making a fortuitous windfall gain brought about largely by the actions of local authorities.

Our tax code has long taken the view that the windfall gain accruing to landowners or the speculative gain accruing to people who deal in development land should be taxed at a rate in excess of that which is normally chargeable. For many years, CGT on development land was at a very high rate. I assume the Minister was persuaded by this argument as he left the rate of CGT on development land at 40 per cent when he reduced the rate on everything else to 20 per cent in his budget last December. Landowners and speculators of development land are already making an enormous profit. We will not increase the supply of available land if we further add to what is already a supernormal profit.

It can be argued — and the Minister probably will — that this is a carrot and stick approach and the 20 per cent rate must be matched against the 60 per cent rate in four years' time. Perhaps this approach would work if both parts of the proposal were equally credible. The problem is that the proposal to increase the CGT rate to 60 per cent in four years' time is incredible. Is the Minister seriously telling us he will increase the rate of CGT on development land to 60 per cent in three to four years' time? Will he really be able to tell this House the housing crisis is over, the supply of housing land is adequate and he will therefore treble the rate of CGT from 20 per cent to 60 per cent? Any Minister in any Government at any time would find this difficult to do. Coming from this Minister, the proposition is beyond belief and absurd.

It is not difficult to imagine the arguments which will be made in three years' time. We will be told that the supply of building land will completely dry up if we treble the rate of CGT. We will be told that landowners will hold on to their land until the penal rate of tax is reduced in the future. We will be told that landowners will increase the price of land to make up for the loss of profit and that this in turn will increase the price of houses. I do not believe it will be possible for this or any Government to increase CGT threefold in four years' time. If the stick is not credible and the carrot is not necessary, the whole operation should be ditched now.

The most controversial aspect of this Bill relates to the treatment of property for investment purposes. I wish to compliment the Minister. When we discussed the financial resolution dealing with stamp duty, I expressed some doubt that he would follow through on his expressed determination to make provisions in this Bill for the deductibility of interest. I expected a furore from people with a vested interest. I was not disappointed in that regard and I am sure the Minister's phone has been hopping in the meantime. However, the Minister has done well. Unless something unusual happens in the next 24 hours, it seems that the commitments given will be followed through. The Minister added to this by reducing capital gains tax by 50 per cent last December. That reduction can only have been intended to encourage people to invest in property and certainly it has had that effect.

Is it not strange the Minister is now taking a number of actions clearly intended to drive these same people out of the housing market? He believes in the free market and does not tire of telling us so. He believes in letting the market rip, but in this instance he has contributed in no small way to letting the genie out of the bottle. He added fuel to the fire of rising house prices by cutting capital gains tax and now predictably and inevitably he is taking dramatically opposite measures to dampen the fire. The Minister and his colleagues contributed to this fire by their action and inaction in recent times. They have been too slow to do anything about it, nonetheless action now is better than no action at all and I support the measures proposed.

Much has been said and written about the alleged dangers to the housing market, particularly the rented sector. It has been suggested that the supply of apartments will dry up as builders get out of that sector or get out of the business altogether. I find that proposition strange. The cost of building materials and labour has scarcely increased in the past two years. The price of new houses and apartments has increased because landowners are making more money and builders are making more profits. Dr. Bacon in his report set out several practices such as the phased release of developments and gazumping which has clearly added to builders' profits. There have been many examples in this city and elsewhere — we have seen examples in the past few days — where the first house built in an estate was substantially cheaper than the last house. Nobody can seriously suggest that the cost to the builder has increased significantly in the meantime. What has happened is very simple — builders have taken the opportunity to make a windfall profit. They have made a killing.

If the measures proposed by the Minister are effective they will reduce the opportunity for supernormal profits. If they do not have this effect, they will have failed. To suggest that this would make it unprofitable to build apartment blocks or other units designed for rental use is patently absurd. The profits available will still continue to be considerable for the foreseeable future. It is possible that the demand for apartments will reduce as speculators look elsewhere.

It is also likely that the demand for apartments will reduce as people currently in the rental sector seek to buy houses. All of us are agreed that the number of people seeking to rent as a matter of choice is increasing. It is highly likely that the capital value of apartments — in simple terms, the price — will stabilise very quickly and could even fall, but surely that is not bad. It will make apartments more affordable to the average purchaser and, more importantly, it will burst the speculative bubble before it has the opportunity to grow to an even more dangerous size.

All of us are aware that the current position has become unsustainable. Prices which are already high are being fed by the expectation of higher prices in the future. This spiral was added to in no small measure by a series of untargeted, unfocused incentives paid for by the taxpayer. The position had become not only unsustainable but unconscionable. The Minister is right to intervene and I support him in the measures he proposes in that regard.

I said a couple of weeks ago that this country needs entrepreneurs. It needs people who are willing to risk their money in order to manufacture goods, provide services and create jobs or allow others to do so. We need risk takers, but passive investment in property involves no risk taking. The person borrows money, buys property and rents it out. The interest costs are written off against income tax and the tenants pay the mortgage, with perhaps a little left over. In the meantime the capital value of the property is appreciating and the person makes quite a few shillings when the property is sold. That is not risk taking. It is not the investment we should encourage, and I support the Minister in his measures to take those people, at least temporarily, out of the housing market.

The Minister for Finance and the Minister for the Environment and Local Government have said that the intention is to make targeted and limited use of section 23 relief in future years. I accept the bona fides of the Minister for Finance in that regard. He is right to make that statement, but in doing so he is stirring up trouble for his Department and the Department of the Environment and Local Government. All of us know from experience of local authorities what will happen. All authorities, be they local authorities or development authorities, will seek to have section 23 available to them. All the applications will build up on the desks of the Ministers for Finance and the Environment and Local Government and expectations will have to be dampened down. It would have been simpler and more straightforward to say that from now on, with perhaps one or two exceptions, section 23 relief or its equivalent will not be available in the future.

This Bill is a mixed bag. I agree with some sections but not with others. The measure to discourage passive investment in property is appropriate for the moment, although it may not be appropriate long term. There may be occasions in the future when once again the tax incentives that have been helpful to development in the past will be required. Clearly those tax incentives are not currently necessary. They have the opposite effect to what was intended. I support the Minister in his measures to deal with that matter.

The measures proposed to deal with stamp duty are badly focused and targeted. They should have been targeted at first time buyers and I will move an amendment to that effect. As a matter of principle, the thresholds for stamp duty purposes should be index linked and I will also move an amendment to that effect. Section 23 relief should have been abolished and in that regard also I intend to move an amendment.

Dr. Bacon has done us a considerable service in carrying out a significant analysis of the housing market, what is driving demand and limiting supply. The Minister has taken significant measures which will have limited success. They could have been better focused and targeted. I sincerely hope that the overall effect of these measures will be positive.

Mr. O'Flynn

I express my support for the Government's initiative in introducing this legislation to reduce stamp duty on homes. I agree with many of the positive steps taken to tackle house prices. This Bill gives effect to those measures announced on 23 April. It involves several remedial measures such as increased funding under the serviced land initiative to local authorities, reduction in investor demand and assistance for lower income buyers.

As a nation we are unique in our desire to own our own homes. There is a much higher percentage of private home ownership here than elsewhere in Europe. Families of all income levels buy houses and apartments rather than rent them, and we must enable today's families to purchase their own homes, as their parents did. Many of those who invest in their own homes take an onus off the State. They provide houses for their families out of their own resources. The number of houses built by local authorities is very much short of demand and this is influenced by the cost factor. There are massive backlogs on housing lists, but they would be substantially greater if many of our people did not build or purchase their own homes. This tradition ensures the demands on local authorities are kept within limits.

Everybody knows how much it costs to build a house in 1998. It has become an intolerable financial burden to embark upon home ownership. Most people finance 5 to 10 per cent of the cost of a new house from their savings. They borrow 90 to 95 per cent and some take out a separate loan to pay the deposit. Current housing costs result in astronomical repayments for the duration of the working lives of those who have the courage to take out a mortgage. The burden is much greater in this decade than in previous decades. This climate of massive financial commitment must inevitably influence the thinking of those who wish to buy their own homes. It will bring about major change in our collective thinking on home ownership, which now accounts for 80 per cent of all private residences. We are pricing ourselves out of the era of the residential home owner. There is no room in the Celtic tiger economy for the stay at home parent. In the light of today's price structures both partners must be gainfully employed if they wish to keep their mortgage payments up to date and their heads above water. A large slice of their combined income is committed to home repayments. The result is severe financial pressure and related stress and tension in marriages and partnerships. This is a major social problem and any deferral of positive action could have catastrophic consequences.

With regard to the unrestricted availability of money from institutions for home buyers, far more strict procedures should be in place to ensure that borrowers have the capacity to repay their loans in the coming years, particularly in the event of a slow down in the economy. Otherwise I forecast repossessions on a large scale. I agree with the recommendations of Members that financial institutions must offer 35 year mortgages with longer fixed interest rates at affordable levels.

I note the views aired by Members of the Opposition. They were vocal on the Government's delay in taking remedial action when they spoke on the stamp duty debate two weeks ago. I remind them that the Government took office last June and commissioned the Bacon report last November. It has acted quickly and correctly. Many Members on the Opposition benches were in Government up to last June and they had ample opportunity to take action on this issue. House prices did not spiral out of control after 26 June last year, they have been out of control for a considerable time.

The Opposition also expressed strong doubts whether the moves will make houses cheaper. I cannot gauge the final impact of the package of measures in the Bill on the affordability of homes. However, we must give credit to the Fianna Fáil led Government for taking the first step to tackle the problems. I hope the measures being introduced will tackle the problem and lead to a reduction in house prices. We may have to take more action to help reduce the price of homes if these measures do not work. If that proves necessary I am sure the Government will act. This medicine may be hard to swallow for the vested interests.

House prices are fuelled by the high demand from people who wish to own their own homes and this causes a supply problem. The cost of sites and construction, the easy availability of money and the builder's profit element are all factors. The builders and investors are not happy with the proposals to reduce radically the tax breaks for property investors who choose areas not in the integrated area plan areas which will be determined by the end of July. People may decide to leave their investments in building societies, banks, the post office or insurance policies. They may not bother with property investment in the future. Some investors are investing in properties in the UK.

People will find alternative ways to ensure a return on their capital and this could have a negative impact on building and the availability of rented accommodation. At present there is a high demand for rented residential properties for people leaving home at an earlier age, people moving to work in the main urban areas, students and people returning to work in Ireland. Rental prices may increase if less accommodation is available due to a lack of investment in residential property. I have been advised that 780 new residential units are needed each year in the Cork area to keep new entrants to the market supplied with rental accommodation. The proposed abolition of interest relief would not only prevent these units coming on the market each year, it could also cause a depletion of the existing stock. We may see the loss of 1,000 rental units in Cork as a result of these measures.

I made proposals to the Minister, Deputy McCreevy, but I did not realise he was as tough as he is. I suggested that he allow investors to continue to invest in apartments outside the IAP areas and to offset interest on borrowings allowable on a specific property against the rental income from that property. I suggested as an alternative that he consider the introduction of a phased interest deductibility scheme over a five year sliding scale period. I do not know whether I will be able to crack the Minister but I will not fall on my sword on this issue.

I appreciate the measures the Minister is introducing and I am sure the Members opposite also appreciate his efforts. I hope they will be successful and that investors will not be driven out of the market. We may need to revisit this matter in a couple of years' time and examine new measures. However, I appreciate what the Minister seeks to achieve in taking the heat out of the market.

There are some who maintain that builders and speculators are making massive profits and the legislation is being introduced because of the greed of some speculators. They have looked for too much and have caused the market to go out of control. I have been contacted by some builders and I know that this is the case in Dublin, which is the cause of the problem. It does not exist to the same extent in other parts of the country. The greed is in Dublin. I wish we could introduce legislation for Dublin alone but that would be unconstitutional.

Builders have told me that their pricing levels have been strongly influenced by the cost of land. They may have bought land at a reasonable price some years ago but if they are developing it they must consider their next purchase of land which will be at a higher price. I am informed that the cost of labour has increased by 25 per cent because it is difficult to find labour. Builders must compete in the labour market. Materials have increased in price by 10 per cent and more for materials sourced in the UK given the strength of sterling. The builders must pay their employees more to prevent them going elsewhere. Some builders have told me that they have increased pay levels to all operatives in the trade by 25 per cent over the last 12 months.

In Cork a house measuring 1,200 square feet costs about £67,000. An apartment in Cork costs about £120 per square foot whereas in Dublin it costs about £300 per square foot. The prices in the capital are ludicrous. Developers in Dublin are making huge profits.

Many builders consider that the rezoning of agricultural land on the peripheries of urban areas should be undertaken immediately. I agree strongly. The availability of banks of cheaper land will inevitably decrease the price of building land and homes. The local authorities are not blameless. They must bear a burden of responsibility for contributing to the problem that exists. Land must be rezoned on the peripheries of urban areas where there is high demand. This is essential to reduce house prices. I am in favour of the preservation of the countryside but this must not be done at the expense of citizens. That is happening in the functional areas of Cork County Council. The Cork Corporation area is surrounded by the county council area and it will not let the corporation expand. All of the services are at the edge of the city but the county council has imposed a green belt right around the city and will not allow expansion or development of the functional area of Cork Corporation.

Much employment is in the major urban areas, and people want to live near their employment. However, Cork County Council planners prohibit the building of a home if the applicant for planning does not live within a radius of a mile and a half of the proposed site, that is in an A3 zone, and will grant building permission only to those who are direct descendants of the person who owns the land. This is most restrictive and possibly unconstitutional. I hope somebody will test it in the courts. Such planning laws must be changed and changed quickly.

Cork County Council has also said that if one lives in the county area, in a housing estate adjoining the city, one cannot move to an A3 zone, one and a half miles out, because one is not considered to be living in the county area. This is ludicrous. The Minister for the Environment and Local Government should urgently review the county development plans with a view to allowing for city extensions and the freeing up of land banks. Local authorities have an important role to play. It is all very well to throw £30 million at the local authorities to service land, but if the planning policies are wrong and do not free up large tracts of land around cities, money will not solve the problem. The focus should be on the local authorities and the role they must play.

I repeat my support for this timely legislation. These measures are important. I hope even at this late hour, the Minister will take on board some of the points I made. Will he look carefully at the planning and development plans of local authorities throughout the country, particularly those whose functional areas are outside large centres of population, and ensure that their plans include large tracts of rezoned land, even purchased by the local authorities and sold on to people so that they can build their own houses on it, so that more development can take place?

Mr. Rabbitte

I am not entirely sure whether Deputy O'Flynn is arguing for a reversal of engines by the Minister in respect of Cork alone or whether he would apply the setting off of interest against borrowings in the rental sector to the rest of the jurisdiction. It seems to be a plea for Cork and I have no doubt it will go down very well there. However, I support the Minister. The measures relating to the rental sector are essential and I am not persuaded by predictions from either side of the House of a nightmare in that sector a little way up the road. I cannot see what would prevent the Minister returning to this issue should such a crisis emerge. If there is one thing we have established over the past 15 years, it is that whenever money is tax sheltered there is a response from people who have money to provide accommodation of the kind we are talking about here. The Minister has control in relation to reverting to that in due course.

In the short-term this measure is absolutely necessary. My regret is that it has taken the Minister and the Government so long to appreciate the extent and nature of the housing crisis. It is a remarkable thing about Governments that it takes them so long to respond on major issues of public policy. Deputy O'Flynn is not being fair. It is true and accurate to say that this problem has escalated since 26 June. There was price escalation before 26 June, but what we have seen in the past six or seven months is unprecedented even in the neighbouring island when there was a similar boom under Mrs. Thatcher with tragic consequences for very many people. It is a recent phenomenon, and it really is remarkable that the measures proposed in relation to stamp duty and in respect of section 23 relief were not introduced in the budget. That was the place and the time to do it. I am quite sure the Minister's advisers did not need Peter Bacon's proposals to make them aware of that.

It is extremely regrettable that the Minister is now trying to catch up with the runaway horse. Deputy O'Flynn said that developers in this city, meaning Dublin, are making huge profits. Nobody can gainsay that. The extent of profiteering is something we have never before experienced. We have the tangible example of yesterday's High Court case involving a young couple in my constituency who bought a house — thought they had bought a house — off the plans for £129,000, to be built in a part of my constituency in Tallaght. Some three and a half months later they were advised by the builder that the cost of that house would now be £165,000. That is an increase of £36,000 or 28 per cent. Nobody could seriously try to justify such an increase in less than four months.

Deputy O'Flynn is wrong about labour costs and about the effect of the fluctuating pound. The whole merit of the building industry is that materials for it are substantially sourced in the domestic economy. The extent to which the strength of sterling affects that is minimal enough. To suggest that in a climate of pay restraint and Partnership 2000 there are labour cost increases of 20 per cent is nonsense. The house price building index to end of December l997 shows a figure of 3.8 per cent. How that can be set against the kind of profiteering we are seeing, I do not know. There is no explanation for it other than profit taking of an order we have never seen before. One of the Sunday newspapers — I cannot remember which — had an article about a recent auction where the builder went down along the queue, and by the time he had got halfway down the queue the price of the house had gone up by £10,000. That is unconscionable activity, and it is going on.

In my constituency experience, yesterday's decision in the High Court was not in respect of one house or one builder. That practice is more widespread and Mr. Justice McCracken and the Director of Consumer Affairs have since acknowledged this to be the case. Nothing in the package of measures brought in by the Minister for the Environment and Local Government, Deputy Dempsey, or the Minister for Finance in this Bill will deal with that phenomenon. The Government is avoiding its responsibility in not addressing it. It is straightforward opportunist profit taking to such an excessive extent it ought to be outlawed.

A number of auctioneers have been in touch with me since the decision in the High Court and they said some auctioneers deliberately set out to circumvent the normal provisions of contract law in terms of the manner in which they construct the paperwork for taking deposits or booking fees. If the Minister offers to sell me his house at a certain consideration and I accept that, there is normally a contract if I pay a deposit, which is usually capable of being enforced in the courts. However, in this case the auctioneers set out in writing to expressly exclude the existence of a contract by indicating the booking fee was no more than an indication of interest. The Minister cannot permit that situation to continue as it is intolerable. Auctioneers who engage in that practice for excessive profit taking ought to be the subject of whatever measures the Government thinks most appropriate.

The Bacon report hints at widening the scope of the office of the Director of Consumer Affairs and, perhaps, that is the way to go. At the rate we are going in terms of supervising banks and auctioneers the office of the Director of Consumer Affairs will be the largest regulatory office in the State very shortly. Whenever the Cabinet gets into trouble over a bank helping itself to one's few bob and the Director of Consumer Affairs is seen on television, he constitutes the main part of the Government response in subsequent press statements. Mr. William Fagan is the main hope between us and such profiteering.

However, in this regard using the director is the correct approach. Will the Minister put himself in the position of a young couple who genuinely believed they purchased a house, entered into a valid contract and that the booking deposit was part of that contract? Will he further imagine their disappointment when four months later they find out no contract existed and that in the interim the price spiralled by 28 per cent? That is an unconscionable position and is not addressed in the Bill.

I refer to the supply and demand analysis. It does not allow for the consideration that the distortion of demand is very significant as a result of the extent of the proportion of purchase for investment purposes. Not even the Bacon report can tell us the huge proportion involved, which is estimated to be between 25 per cent and 40 per cent. It is not a supply phenomenon and the other factor not taken into account by the analysis is the extent to which these purchases are made with cash. Any individual with his or her ears open around town can tell the Minister stories about that. That was fuelled significantly by the Minister through his decision to cut capital gains tax in the budget from 40 per cent to 20 per cent.

That freed up money and people to realise their assets paying half the tax for which they normally would have been liable and as a result they entered the market in such a fashion that they now provide serious competition for genuine home seekers who, in many cases, are first time buyers. It is a huge proportion of the market and distorts demand. It is not taken into account by simply saying it is a demand and supply problem and more land and houses must be made available. It is not that simple and the CGT decision has driven this investor phenomenon.

It is remarkable that at budget time the Minister explained the merits of his unprecedented reduction in capital gains tax. It is an area where he will get full credit because it will emerge in time that his officials and the Department never advocated such a measure. Incidentally, no other body advocated it in public either. It will be seen as a "McCreevyism" and there is no doubt the Minister will get paternity of it. Of course, he has supporters for that very reason but it was a mistake. He set out the rationale for it in the House in response to speeches by Deputy Higgins (Dublin West) and others by stating development was not included under this provision because huge profits were already being made on such land. He is on the record several times inside and outside the House making that point.

A few months later development is included and we are aware of the lobby that sprung up among developers as to why they were not included when this measure was announced. Now, it transpires they are included.

Mr. McCreevy

Bacon recommended it.

Mr. Rabbitte

That does not influence me in the slightest. Many consultants have made many recommendations, including one from Atkins at Cabinet last week and that was not acted upon.

Mr. McCreevy

If a developer in the construction business has taken up development land, its sale is a tradable activity and, thereby, subject to corporation tax at the relevant rate. Therefore, the reduction in capital gains tax from 40 per cent to 20 per cent is no benefit to such a developer.

Mr. Rabbitte

In this instance, we are talking about land banks which are in the ownership of the original farmer——

Mr. McCreevy

That is different.

Mr. Rabbitte

Yes, but I thought the merit of this was that land banks were being made available for house building purposes, which would in turn control the rate of acceleration in prices.

Mr. McCreevy

Correct, but the Deputy is entering the area of developers also. It is of no benefit to a developer because it is a tradable activity and, thereby, subject to corporation tax at the appropriate rate, which is more than 20 per cent. It is of benefit to those to whom the Deputy now refers if they comply with this Bill.

Mr. McDowell

The Minster and the Revenue Commissioners have been unable to tell us in recent months to what extent trading in property is taxed because they say they cannot produce figures for it. It would facilitate tomorrow's Committee Stage debate if that matter were clarified.

Acting Chairman (Mr. Kirk)

Deputy McDowell, please allow Deputy Rabbitte to continue.

Mr. McCreevy

Deputy Rabbitte has intervened in my contributions on many occasions, but this is the first time I have asked him to allow me intervene.

Mr. Rabbitte

I welcome the Minister's intervention and stand corrected for my too loose use of the term "developer" as distinct from "owner".

Deputy Noonan raised an interesting point about the number of cases where the owner is the developer. I am not persuaded by his argument that tying the concession to the planning process is wrong. We must have some yardstick. Tying it to the planning process will not prove as awkward as Deputy Noonan suggested. I was chairman of the largest local authority in the country at one stage, Dublin County Council, where we would rezone more land in one day than Deputy O'Flynn would rezone in the whole of Cork in a year. Of course some people on the council believed we should not rezone any land, but that is impractical in an expanding city with demographic changes and increased employment. Enormous profits are made at the rezoning stage.

Mr. McCreevy

That is correct.

Mr. Rabbitte

I fail to understand why people who have been the beneficiaries of enormous windfall profits at the rezoning stage should also qualify for a halving of their capital gains tax liability. I presume Deputy Noonan will elaborate on his point on Committee Stage, but the farmers with whom I dealt when I was chairman of Dublin County Council are not as backward as one might infer from Deputy Noonan's contribution. They are as aware as most developers of the prospect of a hotel on a field and will have no difficulty finding a partner. There is plenty of expertise around the city and in this House to guide them down that road. While the Minister is probably correct to link this concession to the planning process, he should not revisit capital gains tax to do nothing more than confer yet another windfall of profit on landowners. I will not get involved in another semantic dispute about developers and owners; it will become a blurred area when this Bill is enacted.

The Minister said he introduced this measure because Dr. Bacon recommended it. He also recommended the abolition of stamp duty on second-hand houses for first time buyers, but the Minister failed to do that. I do not know what kind of a bothán he thinks one could buy for £60,000. It is not possible to buy a house for that price in this city.

There is a deliberate conspiracy between certain large auctioneers and property developers to skew the market away from home ownership to the rental sector, and the Minister's intervention in that regard is welcome. I would let this measure run until the shoe pinches, but I do not know if that will happen. There is a move towards the continental style of a greater proportion of rental accommodation than home ownership, but it is not necessarily good for society.

Mr. Deenihan

I welcome the provisions of the Bill which will have the effect of providing cheaper housing and more land for development. We have one of the highest levels of home ownership in the world. The Minister stated that the goal of home ownership might be pushed beyond the reach of a significant portion of people who aspire to own their own houses and the Government is not prepared to countenance this. I agree with that aspiration and if the Bill has that effect, it must be welcomed.

The Bill is designed to allow first time buyers easier access to the market and to free up second-hand homes for sale. In other words, it will increase housing affordability. According to the April-May edition of Housing Times, housing affordability is approaching 1992 levels. In other words, it is becoming more difficult to afford a house, as was the case in 1992. However, the factors underlying the current low levels of affordability are different from those that prevailed in 1992 when there were high interest rates during the currency crisis.

There are a number of reasons for the current low levels of affordability. The significant increase in the demand for housing has not been met by a sufficient increase in supply. This is placing an upward pressure on prices. Increasing employment opportunities, particularly in Dublin, competition for skilled labour and the tendency of large multinationals to headhunt technical experts have resulted in increased incomes and opportunities for people. If people have more disposable income they can afford to pay higher prices. The recent tax cuts, targeted mainly at middle and upper income earners, will also enable people to buy more expensive houses and thus push up prices. As referred to in the Bacon report and by Deputy Noonan, there has been an increase in the number of people in the 25 to 45 age category where the demand for housing is highest. The baby boom of the 1960s and 1970s is affecting the housing market, education and so on. Also, many of our emigrants who went to America and England in the 1980s, when there was large-scale emigration, are returning to buy licensed premises, shops and houses. They are investing the money they earned abroad for their security when they return. That is another factor pushing up prices.

We should also look at the effect of interest rates. In 1992 a large number of people could not afford to buy houses because interest rates soared after the currency crisis. Matters are now different and by the time the euro in introduced in January 1999 our interest rates will have to reach the lower levels prevailing in continental Europe. This has given rise to an overall expectation of lower interest rates and, therefore, lower borrowing costs, which is fuelling the high prices being paid for houses. The euro has been sold to us on the basis that there would be lower interest rates, which is one reason the nation and all sides of the House have accepted it so positively. People are confident this will happen and they are factoring it into their budgeting for the future.

The Minister highlighted the shortage of serviced land, which means the housing supply is not keeping pace with the growth in demand, which in turn leads to rises in house prices. Some economic commentators suggest that 46,000 new houses per annum will be needed to cope with the increase in demand but in 1997 there were only 38,384 house completions, which was the highest ever figure. If we do not have enough serviced land to meet this demand, which we do not, the problem will get worse. I welcome the measures contained in the overall package to provide incentives for people to service sites, etc., and the partnership approach adopted by local authorities and private investors. However, there may not be enough serviced land, as opposed to rezoned land, available. It is one thing to rezone land but another to service it, and that is a problem throughout the country. Today's debate has concentrated on Dublin and the larger urban areas but there are many villages which could provide cheaper housing and sites if they had sewerage services, for instance. It should be national policy to provide sewage treatment works throughout the country because it is important for rural development. Such development may be inhibited by the absence of proper sewage treatment facilities, as the land may not be suitable for large tanks or septic tanks may not be allowed.

As I said, housing affordability this year and next will be largely influenced by the lower interest rates which will result from the introduction of the euro. I have some reservations about the Bill but its provisions, coupled with lower interest rates, will make housing more affordable and one hopes they will reverse the current trend whereby prices are getting out of reach.

Reputable sources feel the proposal to abolish interest relief on mortgages taken out for the purpose of residential investment will have consequences for the national economy, the building industry and the rental market. It could undermine the potential benefits of the measures I have welcomed. It has been stated Government policy for many years to improve the standard and supply of private rented accommodation. The private sector has responded positively to this policy, in both the designated and the non-designated areas. Much of the development in our larger urban areas has been driven by private investors, but for whom accommodation would not be available to many young people, students, nurses, etc. The new proposal will set the sector back by diminishing the incentives — it will act as a discouragement. When the rental spiral commences as a result of the inevitable supply shortage it will be difficult to retrieve the position. The Minister's party and some of his supporters in the building industry are spinning the line that we can revisit this in a year's time and that after house price rises have been dampened and the market has stabilised, we can reverse some of these proposals. However, when provisions are put in place it is hard to reverse them and unless they are modified on Committee Stage we will have to live with them for some time.

There is an established requirement of a minimum of 11,000 new residential units on the letting market each year. Over 3,000 of these are in Dublin. They meet the demands of such groups as emigrants returning to take up employment, people from Ireland and abroad working on short-term contracts, students, young people setting up home and retired people selling family homes. Many of these people rent by choice, others out of necessity. Almost everyone enters the rental market at some point and it is particularly prevalent at the moment.

I am in general agreement with the Bill but it is not right to kill off investors. The proposed abolition of interest reliefs will make it uneconomic for them to become involved in residential property in future. Perhaps the Minister could do something to allay their fears when replying to Second Stage. The statistics are discouraging because when borrowings are considered this will become a loss making activity — a loss of £32,000 will be incurred on a £100,000 property over a 15 year period if this provision is enacted. Even the Bacon report admits that, given changing patterns of demand for private rented accommodation, it is desirable that investors should enter the market and provide greater range and depth to this segment of the housing market than was previously available.

The emergence of broadly based investment interest in the housing market has had very beneficial results in terms of broadening the range and quality of rented accommodation. There is a conflict in what the Minister is trying to do and the effect it could have on the people who have been providing necessary accommodation in the past. If the investors do not provide the 11,000 new residential units needed this year and each subsequent year, who will? From where will this investment come? Because of these provisions, will people provide this accommodation for themselves without the influence of any investor?

As has been mentioned by a number of speakers, immediate pressure will be put on local authority housing lists and on State funding and involvement. Deputies who are members of local authorities will know — I am no longer a member of a local authority — that the housing budget for this year has been decreased in most local authorities. Fewer houses have been provided this year than in the past three years. That is certainly the case in Kerry and I am sure it is uniform for the rest of the country. There is no framework in place to deal with this problem if it has the effect to which I referred on investors in new residential units.

As Deputy Noonan pointed out this morning, the shortage in rental accommodation will commence within a few months and could rise rapidly. It is not an exaggeration to say it could double in 18 months. This need not happen if a balanced approach is taken now to the problems in the housing sector. Generally, the Irish investor market is made up of small investors, 95 per cent of whom are ordinary people seeking a type of pension for the future and some security for their families. The vast majority of them are in the market for long-term investment and not short-term gain. I know people have made enormous amounts of money in recent times through speculation but generally the majority of people in this market have not made large sums of money but merely guaranteed their security for the future. It must be recognised that the small investor is playing a vital and unrecognised role in funding the modernisation of our national housing stock. Considerable efforts have been made over the past 17 years in bringing our rental accommodation up to European standards. It is recognised that the job is only 60 per cent completed and that at least 40,000 substandard units need to be replaced with high quality modern accommodation. This provision may dampen that enthusiasm.

To avoid stamp duty first-time buyers must be the owner-occupier of the house for five years. If they decide to rent the house, they will have to pay stamp duty. Also, the current trend is to buy a house and allow a relative or a family friend rent a room to help pay the mortgage. In that event, I understand the first time buyer will have to pay stamp duty. I would like the Minister to clarify the position on that.

Work patterns are changing. People move around a great deal in their work be they public servants, nurses, gardaí, teachers and even those working for multinational companies in Dublin, who may move back to the parent company for a period. This provision will present difficulties for that category of people and I would like the Minister to clarify it. I may be wrong in my interpretation but clarification is needed in relation to stamp duty as it applies to the first-time buyer.

Generally I welcome the provisions in the Bill.

I hope they will dampen the market and allow a large number of the population, especially young people, to have the opportunity to own their own houses, which is very much part of our culture.

Mr. Callely

Most people will welcome achievement of the objectives of the Finance (No. 2) Bill to ensure Ireland continues to enjoy a high level of home ownership. A genuine concern has been expressed about the cost of purchasing a house. I will focus on the constituency I represent, Dublin North Central. House prices have spiralled out of control in recent years and I would welcome any measures that will help slow that escalation and thereby give young people an opportunity to purchase their first home.

The Minister said the measures in the Bill are necessary to ensure a balance is restored to this market and that, more importantly, the sharp increase in house prices is addressed. Most of us will be aware of the debate that has taken place since these measures were announced on 23 April. Some economic consultants have indicated that balance needs to be restored in other markets also. If the Government can address the problems in the housing market, I would like to think it will focus on the other markets also.

A number of issues have been brought to my attention by the Irish Home Builders' Association, and other authorities, with regard to certain aspects of the proposals and their likely impact on the marketplace. When I became involved in public representation in the Dublin area, Dublin was facing a crisis and there was little or no development in the city. The skyline we now enjoy in the city and, more importantly, the confidence of investors to invest is the result of a great deal of hard work, dedication and encouragement. I am concerned that some of the proposals in the Bill may impact on that confidence. If that happens, it will not be easily restored.

Previous speakers referred to the line being used that the proposals will be reversed in the near future, but some clarity is needed. Are these merely short-term measures to be introduced for a certain period? I would welcome the Minister clarifying that aspect.

There is no doubt that the rapid escalation in house prices in recent years has had adverse implications for first time buyers. All of us in this House are familiar with young couples who want to be home owners and who meet the various criteria that heretofore would give them that opportunity but who, because of rising house prices and other criteria imposed by financial institutions, are unable to meet that criteria and purchase their homes. The case has been highlighted of the couple who paid a booking deposit on a house costing £129,000. When they tried to conclude the deal they found the builder sought an increased price for the property.

There are two sides to this coin. If a person enters a contract, a binding agreement, whereby the person cannot walk away from it and the builder was aware the property was sold and that nobody would renege on the deal, the price should not be increased. If, on the other hand, there was a loose arrangement, the individual could walk away and get a return of his or her deposit. Some speakers referred to the need for proper arrangements to be put in place. This could be easily addressed by means of a simple regulation which either the Department of Finance or the Department of the Environment and Local Government might put in place. This would be a standardised agreement whereby people would be aware the booking deposit was non-refundable, in the event of the deal not going ahead, and the agreed purchase price would remain unchanged.

It has been brought to my attention that developers, as in any normal practice, have to maintain a balance between the moneys coming in and those going out to ensure the continued development of their business. I refer to a builder selling a property and buying other property for development purposes. The cost of the green field sites, whether rezoned for residential purposes, has to be tied in to his overall business practices. This is the reason for the increase in house prices. I hope some of the measures regarding supply can address the escalation in site prices which, in turn, had the domino effect of the increase in house prices.

I welcome the two priorities for addressing the housing issue, one of which is the question of affordability of housing, especially for lower income groups. In this instance I refer to the shared ownership scheme which has huge potential. There is a need for more flexibility in respect of the criteria in place. While I appreciate the proposals in the Bill regarding income levels other matters need to be considered.

Last Monday night, as a member of Dublin City Council, I had the opportunity to discuss the matter with the assistant city manager with responsibility for this scheme in Dublin Corporation. The reason I posed the question was that a constituent brought to my attention his application for shared ownership and the rejection of his application by the clerical officer dealing with it at the counter who indicated he was wasting his time in making an application since he had been a previous house owner. In society today we are all too familiar with a number of people, married, single or with a partner, who have had the joyful experience of owning a property and where for one reason or another — a breakdown in a relationship, a change in financial circumstances and so on — the house has to be sold. A number of years later that individual, or one of the partners of a joint venture, has the opportunity to again purchase but because of financial restrictions may be restricted as to the level of mortgage they can repay and thus a shared ownership option would be ideal.

Following my contact with the assistant city manager I was advised to bring the case to his attention and that it would receive favourable consideration. I am concerned that a number of people who go directly to the public offices of local authorities are being advised that because they owned a previous house they cannot be entertained under the shared ownership scheme. That needs to be changed. It may require a direction from the Minister for the Environment and Local Government to all local authorities asking them to show maximum flexibility in relation to the shared ownership option to ensure the optimum potential from the scheme.

The Minister said the publication of the Bacon report, with the Government's speedy response, will help take much of the heat out of the market. Furthermore, it is hoped that this package will restore a degree of clarity between the various market participants, i.e. the owner-occupier and the investor. I have concerns regarding investors in the marketplace and the role they played in the development of Dublin City in recent times and about section 23s. This step will shape the market. It is a mechanism that is blatantly distorting the market, particularly in regard to an investor. The investor has to be recognised as providing accommodation, where currently accommodation is not provided by the statutory authorities, the local authorities, who are charged with the responsibility of providing housing, and the many other categories who avail of housing through the rent supplement scheme. This includes the large number of students who would not be in a position to purchase a property, nor would they wish to because they may need rented accommodation only for job experience, training, college or other short-term requirements. That would not warrant owner-occupier first time buyer house purchase by the individual and they would not be in a financial position to do so. Most of us are aware of people in this category who are in training, temporary employment, attending college etc., and who would join other like-minded individuals in renting a property.

The Minister also referred to areas identified as causing overheating and to bottlenecks and distortions in the housing market. However, while some of these provisions are welcome, they will distort the market. Measures to increase the potential supply of housing, dampen excessive investor demand and help restore a balance between supply and demand are welcome, but I am not sure how the balance between supply and demand can be restored when there is a demand for rental accommodation and where the investor has played an important role in supplying it. The measures taken to improve the position of prospective first time buyers are also welcome, provided they work.

I have discussed the question of deductibility of interest on investment property with the Minister and officials from the Revenue Commissioners. It is regrettable that there has been a move from full to zero deductibility. There was room for manoeuvre here.

The transitional arrangements, originally set for 30 September this year, have now been put back to December. While I welcome this, the changes to these arrangements only relate to the purchase of the property. Most people who purchase a property on the basis of investment have to undertake repairs and alterations. It makes common sense to provide for transitional arrangements. Allowing for the usual legal transactions, which can take four to six weeks, a property purchased in March could be liable for the transitional arrangements, which take effect from 23 April. However, after the person becomes legal owner he is required to undertake repairs and alterations to ensure the property is fit for the rental market. Revenue must recognise that there is a need for appropriate transitional arrangements.

On the question of repair, the explanatory memorandum states the restriction regarding premises purchased for the purpose of rental income does not apply in the case of:

(1) borrowed money employed on or after 23 April, 1998, but before 31 December, 1998, in the purchase of property under a contract evidenced in writing entered into before 23 April, 1998.

(2) borrowed money employed on or after 23 April, 1998 in the improvement or repair of a residential premises which in the 12 months to 23 April, 1998 was a rented premises and which was owned on 23 April, 1998 by the person in receipt of rental income or was purchased by him or her before 31 December, 1998 under a contract evidenced in writing entered into before 23 April, 1998.

Appropriate transitional arrangements, however restricted, must be made which recognise the need for that kind of investment. In addition, I will closely monitor developments in the commercial market, where escalating prices may occur following the distortion in the private home market.

I welcome the alteration in stamp duty rates. The previous Government took a retrograde step when it increased them. I ask the Minister for Finance or the Minister for the Environment and Local Government to join me on a tour of my constituency of Dublin North-Central and show me which of my constituents will benefit from the zero exemption on properties valued up to £60,000. There are none. Given this, and the somewhat unique position of the Dublin area, there should be some recognition of the fact that my constituents cannot avail of that exemption. I hope the provisions on density do not include infill development.

Mr. Shatter

While I have no difficulty with the Government's objectives, I am not sanguine about its approach. The question of affordability of housing, especially for lower income families and young people must be an essential political objective of all Members of this House. The spiralling prices for residential accommodation, be it houses or apartments, in the past 18 months, especially in the city and county of Dublin defies any rational logistical explanation in the context of the building of new houses.

I am concerned that the strategy adopted by the Government is seriously flawed. This legislation is riddled with anomalies which will have to be dramatically amended in next year's Finance Bill. The Bill is being rushed through the House to meet a crisis that could have been addressed in a more considered way by the Minister in the budget and in the Finance Act, 1998. The proposal to take Committee Stage tomorrow is unfortunate because it means there will be no time to reflect on the anomalies, which will create difficulties. They need to be addressed.

While the Bacon report is useful, it is not set in tablets of stone. I do not fully accept all of the analysis set out in the report, nor do I accept that the provisions in this Bill will in any substantial way ease the pressure on house prices or make it easier for young married couples to purchase, especially in the Dublin area with which I am most familiar, although similarly burgeoning problems are arising in Galway, Cork and Limerick and in some of the other growing urban areas, such as Drogheda and Dundalk, which are becoming satellite towns of Dublin. The Bill will not solve these problems.

That the Government has not come to terms with the problems in the marketplace was starkly and sadly shown by the Minister of State, Deputy Molloy, last night in response to the issue raised on the Adjournment by Deputy Rabbitte. It is astonishing that the Minister did not mention this issue in his brief contribution. If the question is the affordability of housing, it must be an objective of this House to ensure developers do not charge prices for the houses they are constructing that are outrageously out of synch with their achieving a reasonable as opposed to exorbitant level of profit.

The case reported in the newspapers yesterday involving the Durkan building group is a stark example of the unacceptable face of the construction industry as we approach the end of the century. The self-serving and insensitive remarks made in justification by the representative of the housing construction industry about the issue in the past 24 hours are an indicator that the industry has no insight into its responsibilities and obligation to behave in a decent way towards its customers. I get the impression it is its view that it should make as much profit and get as much benefit as possible from the current housing market without a reasonable assessment with regard to profit. This is particularly nauseating bearing in mind where we stood five or six years ago when the industry had difficulties and looked to this House to put in place specific special legislative measures to stimulate the market. Deputies were told — this was acknowledged — that they had a responsibility in this area. In boom times the industry has its duties and obligations which extend to behaving in a decent and reasonable way towards its customers and, in particular, not gazumping young people seeking to buy houses. It is clear from all the comments made in the past 24 hours that there is an urgent need for legislation in this area, a need which the Government has yet to accept or acknowledge.

The Minister of State, Deputy Molloy, appeared to suggest last night and the Minister implied in his contribution that the proposed measures will in some way place the customer, the potential purchaser of a new house, in a position of greater equality than builders. That is nonsense. In the construction industry there is a capacity to build and make available on existing zoned residential land far more residential houses than are currently being put on the market. Builders are deliberately staggering developments, putting small numbers of houses on the market to create and stimulate hysteria about a housing shortage and up prices to levels for which there is no justification. Why are they doing this? The Bacon report has not identified all the reasons. It does not derive from the fact that housing investors are in the market. While I have no doubt that the availability of section 23 relief has resulted in too many properties in section 23 developments going to investors, there was huge resistance on the part of young people to buy accommodation for occupation in city centre areas. Much of the regeneration which has taken place along the quays, Temple Bar and elsewhere would not have come about without investors.

The housing market is being fuelled by a combination of historically low interest rates which are set to fall even lower, a population bulge of a nature we have not experienced for many years and an economy in which the vast majority of young people are staying at home to obtain jobs. A substantial number of emigrants are returning, a considerable number from the United Kingdom for whom housing in Ireland is much cheaper because of the punt-sterling differential. In the past 12 months the cost has been between 15 per cent and 20 per cent lower. This social demographic and financial environment will continue to fuel the housing market.

The price of new houses, particularly in Dublin, will not fall as a result of the proposed measures. I would be happy to be proved wrong in that prediction. It may be the case that in what are perceived to be the less desirable parts of the city no new apartments will be built — some of these developments were aimed at investors only, not owner-occupiers — but when it comes to young people gaining access to new houses there will not be a dramatic or steady reduction in the cost which will continue to rise throughout the year and the proposed measures will not have an impact.

I have always been very much in favour of a free market but people are now being exploited to an unacceptable degree. We should consider measures that would allow reasonable profits to be made by those constructing new houses but which would prevent them exploiting their dominant position by artificially controlling the number of new houses coming on the market thereby adding to the continuing upsurge in prices.

Legislation must be introduced to deal with the scandal spotlighted by the case involving the Durkan building group. Young people are asked on building sites to pay booking deposits which are sought by developers in the knowledge that the persons putting down the deposits are not bound to purchase until contracts are signed. The booking deposit was a sign of comfort to a developer putting houses on the market. It gave him an immediate insight into the numbers of people genuinely interested in purchasing houses. A substantially high number of those who put down booking deposits ultimately sign contracts. Within a couple of weeks of booking deposits being handed over — I say this as a solicitor whose firm practices in this area — developers had the facility to have their lawyers send out contracts to be signed. The booking deposit was regarded by young people as a commitment that the developer would furnish the contract within a couple of weeks to purchase the house. They also knew the purchase price.

Booking deposits have played an important role. It is only in recent months that developers have started to a great degree gazumping those who have put down booking deposits. This has not been happening for years. It is a new development over the past 12 months. Up to now developers received booking deposits and their solicitors sent out contracts for purchase. Obviously, if the person who paid the booking deposit did not sign the contract to purchase within a reasonable time, the developer was free to sign contracts with other people and did so. If the prospective purchaser did not sign the contract within a reasonable period after it was sent out, such as a week or a fortnight, a solicitor's letter would be sent to the purchaser's solicitor stating that the contract would be withdrawn if it was not signed within seven days. Everybody had notice of the position. However, this is a new and unacceptable development.

It is unacceptable that people put down booking deposits for a house with a price of £120,000 or £130,000 only to be told two or three months later that if they wanted to buy the house, it would cost them £170,000. The reasons advanced by the Durkan brothers in the recent case in the courts were entirely spurious. There is no question of the cost of building materials or the construction of the house increasing by £34,000 in three months. The company gazumped people who put down booking deposits for no other reason than it saw the market marching on and it wanted to make an even greater profit. I assume a substantial profit was built into the original price of the house for which the booking deposit was paid.

I call on the Government to introduce legislation to ensure that when a sum of money is paid as a booking deposit, the developer who takes it is obliged to furnish contracts for the purchase of the house to the people who paid the deposit within two weeks of receipt of the deposit. The people who paid the deposit and received the contracts for sale should be entitled as a matter of law to purchase the house for the price stated at the time the booking deposit was paid provided they sign the contracts for purchase within three weeks of receiving them. This is a reasonable proposal which will ensure that people who put down booking deposits have the possibility of entering binding legal arrangements within a reasonable time of paying the deposit. It will prevent by statutory provision developers gazumping people as in the recent case. It is outrageous that the Government has not recognised the need for such legislation. It is scandalous that it is so sanguine about this matter.

The Minister for Finance appears to believe this problem will go away. However, it will not go away and I predict the measures in this Bill will not resolve the difficulties. I disagree with the decrease in capital gains tax from 40 per cent to 20 per cent on the sale of development land. This will not make houses cheaper, only allow people to make more profits. No research in the Bacon report indicates that the change in capital gains tax will have any impact on house prices. It is a wish; the Government hopes it will happen. However, it will not happen and the move is not justified when one considers the huge windfall profits made by people when land is rezoned by local authorities. They perform a function in rezoning which is frequently and deliberately misunderstood and about which misleading remarks are made. However, the social justice involved was that ultimately a reasonable sum was paid in capital gains tax. This tax on development land should not be reduced from 40 per cent to 20 per cent. It will not help remotely young house purchasers but it may help supporters of Fianna Fáil in the construction industry. I have no illusions that it may also help supporters of Fine Gael in that industry, but a Fianna Fáil led Government is bringing in this measure under the guise that it will help young house purchasers. That will not be the case.

The legislation is poorly drafted in relation to dealing with people who live in residential accommodation and subsequently decide to rent their houses. There appears to be a perception that if a person has lived in residential accommodation for a number of years and then rents out the property, he or she should be deprived of mortgage interest relief previously received. The Government's rationale for this move is that it wants to help young people to purchase houses. However, there is no connection between the two.

For example, a man working for a multinational company has been living in the family home for six years but the multinational company requires him to go to Oklahoma to work for the next two years and he must take his wife and family with him. He wants to keep his house in Dublin because he intends to return to the city. He does not want to sell the property but he also does not want to leave it unoccupied. What should he do? Thousands of people in this situation rent out their houses while they are abroad. The rental income helps to discharge the mortgage and interest while they are away. In addition, when people go abroad they are usually involved in renting further accommodation.

These people will be deprived of their mortgage interest relief. There is no basis for such a move and it will create an inflexibility in employment. What about civil servants who work for Departments and are posted to Brussels or elsewhere to represent the State on temporary assignments? They rent out their houses because they want to return to Dublin eventually. What about a deserted wife who has a family home for which she is paying a mortgage? She may decide she wants to stay in the house with her young family but she will convert it into two apartments. She and her family will live in one and she will rent out the other. She will be deprived of mortgage interest relief.

The measure is a blunt instrument which has not been thought through. It will create many difficulties for many people. There is no social benefit and it will not remotely help a single young person or married couple to purchase a new house. I urge the Minister to reconsider the provisions between now and Committee Stage because he has not thought them through. Other anomalies and problems arise but I do not have time to deal with them all.

For once I agree with the previous speaker on the Fianna Fáil benches that if we want to help young married couples, particularly in cities, the stamp duty rates should be changed more dramatically. Nobody in Dublin can buy any type of property for £60,000. If we want to help young married couples, the stamp duty rate in Dublin should cover houses up to £120,000 which is now the going rate. Less than three years ago extraordinarily modest houses could have been purchased for between £65,000 and £75,000. I welcome the changes in stamp duty but they do not go far enough. They do not take realistic account of the true price of housing in the cities and main urban centres throughout the country. I have no doubt that it will be necessary to return to this issue in the Finance Bill next year.

Mr. Allen

I wish to share my time with Deputy Timmins and Deputy Joe Higgins.

Acting Chairman (Mr. McGrath)

Is that agreed? Agreed.

Debate adjourned.

Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.

Dáil Éireann debate - Wednesday, 13 May 1998

Finance (No. 2) Bill, 1998: Second Stage.

Dáil Éireann debate -
Wednesday, 13 May 1998