Dáil Éireann debate -
Tuesday, 27 Jun 2000

Vol. 522 No. 2

Finance (No. 2) Bill, 2000: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister for Finance (Mr. McCreevy)

I am pleased to bring this Finance Bill before the House. It provides for the stamp duty measures which were contained in the Financial Resolution passed by this House on Thursday, 15 June, as well as the new anti-speculative housing tax. As I outlined to the House on 15 June, the aim of the taxation measures is to help curb transitory or speculative demand for housing. By doing this, the measures should strengthen in the market the position of first time buyers and other owner-occupiers. The background to the measures is the most recent study of the housing market conducted by Peter Bacon and Associates, Economic Consultants.

The taxation measures, in addition to a number of further measures which my colleagues, the Minister for the Environment and Local Government, Deputy Dempsey, and the Minister of State with responsibility for housing and urban renewal, Deputy Molloy, have announced, are part of the Government's ongoing response to the problems in the housing sector.

This Government has always been proactive on housing policy. It commissioned the previous two Bacon studies and on both occasions responded speedily to the findings. For example, I introduced a number of significant changes to the tax treatment of housing which were incorporated in the Finance (No. 2) Act, 1998, following the findings of the first Bacon report on house prices. I also acted in the Finance Act, 1999, on foot of the second Bacon report.

These previous measures have made an impact on the housing market. The most recent Bacon report concluded that the rates of increase in prices of both new and second hand houses have slowed sharply since the middle of 1998, which is the point when the Government measures to redress market imbalance were implemented. The latest figures received from the Department of the Environment and Local Government show a significant slowdown in 1999 in the rate of price increases for new and second hand houses in and outside Dublin and this has continued into this year.

While the measures which the Government has taken previously have been successful in moderating house price increases, the consultants' report acknowledges that further economic growth in the past two years, together with falling interest rates in 1999 and migration inflows, have added to housing demand. Demand has increased at a greater rate than anticipated two years ago.

In addition, while average house price inflation has moderated, the level of average new house prices is still presenting a problem for lower income groups and in particular first time buyers wishing to enter the market. Government action to improve the supply of housing has shown positive results, as evidenced by the record number of house completions of more than 46,500 in 1999, the fifth consecutive year of record housing output. The further measures being implemented now to increase housing supply will contribute further to the recent moderation in house price increases. Clearly, we are going in the right direction but results take time.

The aim of the Government's measures, in this Bill and in the other responses is to: maximise housing output to meet the continuing strong demand for housing; curb short-term speculative demand; strengthen the position of first-time purchasers in the market; increase the supply of social and affordable housing to meet rising housing needs and improve the institutional arrangements to facilitate the delivery of housing related infrastructure and thereby increase overall housing supply. These measures are a coherent and considered response and will deliver the results that the House desires.

I will turn now to the specific taxation measures in the Bill. Part 1 deals with the new stamp duty measures for residential property. A three tiered rate structure will apply for first time buyers, owner-occupiers other than first time buyers and investors. Section 2 deals with the commencement date of the new stamp duty measures. These measures apply to conveyances dated on or after 15 June 2000. However, pipeline cases disadvantaged under the new structure have been catered for, where a contract in writing was in place before 15 June 2000 to purchase a resi dential property and the conveyance takes place on or before 31 January 2001.

Sections 3 and 4 detail the new stamp duty rates applying to residential property. This now means that: residential property purchased by first-time buyers up to £150,000 will be exempt; for other owner-occupiers properties up to £100,000 will be exempt; first time buyers will benefit from a cut in stamp duty for second hand properties up to £300,000; owner-occupiers will also gain from lower rates for houses up to £300,000 and, in the case of investors, they will see a significant increase in rates. A flat 9% stamp duty charge will apply to all categories of investors buying new or second hand residential property for conveyances executed on or after 15 June 2000. The fundamental aims of the changes to the stamp duty regime are to facilitate first time buyers and to discourage speculative investment in the lower range of the market.

Part 2 deals with the new anti-speculative property tax. This tax will apply to residential property in the State which is acquired on or after 15 June 2000 which is not an individual's principal private residence. This tax is a further measure aimed at discouraging speculative investment in the market. It is not an anti-investor tax. It is essential that we have a vibrant, professionally run private rented sector, but we also need to discourage speculative investment. Exemptions will therefore be available in specific instances.

Section 5 is a definitions section. This section also provides that the tax will not apply in respect of qualifying residential investment properties under section 23 relief, including properties which benefit from a tax incentive under the following schemes: the Custom House docks area scheme; the Temple Bar area scheme; the 1994 urban renewal scheme; the seaside resorts scheme; the islands scheme; the new urban renewal scheme; the rural renewal scheme; the scheme of residential accommodation for certain students; the rented residential accommodation element of the park and ride scheme and the town renewal scheme.

Exemptions will also be provided for certain heritage-type residential properties as well as registered and listed holiday homes. Landlords who comply with certain regulations made under the Housing (Miscellaneous Provisions) Act, 1992, will be exempted from the tax. It is also envisaged that exemptions will be available in future for landlords who comply with the standards and requirements of a new regulatory regime, to be put in place following consideration of the forthcoming report by the Commission on the Private Rented Sector.

Section 6 deals with the charge to the tax. The 2% rate will apply for a period of three years on the market value of all relevant residential property with effect from 6 April 2001. Sections 7, 8, 9, 10 and 11 outline further exemptions applying to this tax. The purchase of a residential property which will be an individual's principal private residence will not give rise to the anti-speculative property tax. However, where an individual changes principal private residence on 9 or after 15 June while retaining ownership of his or her previous residence, the latter property will come within the scope of the tax, even if owned before 15 June 2000. The tax will not apply to residential properties received through inheritance or, in the case of gifts, if the property was owned by the donor before 15 June 2000. Similarly, residential property held in a discretionary trust prior to 15 June 2000 will not be liable to the tax. Residential property built after 14 June 2000 on land which was owned prior to this date will be exempt. The tax will not apply to residential property held by charities.

As with stamp duty there will be transitional provisions for individuals who had entered into written contracts before 15 June to buy a residential investment property. Section 12 provides that the tax will be charged on the market value of the property. Sections 13 to 25 provide for the administrative aspects of the tax. It is a self-assessment tax which will last for three years. Those liable to the tax must make a return and pay the tax to the Revenue Commissioners on or before 1 November of each of the three years up to 2003 when this tax will apply.

The tax due will be 2% of the market value of all non-exempt residential property owned by the person on 6 April each year but where the property was acquired and fully paid for between 15 June 2000 and 6 April 2001, the price paid is taken as the market value of the property on that date. Each person with an ownership interest is liable for the tax to the extent of his or her proportionate interest in the property.

Sections 26 and 27 deal with the care and management provisions and relate to the Short Title, respectively. I have tabled a number of amendments on Committee Stage. If further fine-tuning is needed to the anti-speculative tax before it comes into effect on 6 April, we can do this in next year's Finance Bill. The measures in this Finance Bill are an appropriate response by Government and must be viewed together with the other measures being taken as part of an overall package. I am confident these measures will assist those people who wish to enter the housing market, in particular those who are trying to purchase their first homes.

I have stated 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 people who reasonably aspire to it. As well as the social problems that this would cause, it would present difficulties for the wider economy in the shape of adding to wage demands and in reducing mobility in the labour market. I commend this Bill to the House.

Mr. Noonan

This Government has been in office for almost three years and for almost all that time there has been an astronomical rise in the price of houses. Many young couples can no longer afford to buy their own homes, particularly in the greater Dublin area. People such as teachers, gardaí, nurses and civil servants cannot buy their own homes and are seeking to leave Dublin or planning to commute from far-flung midland towns.

On three occasions the Government has retained the services of Dr. Peter Bacon and on three occasions it has failed to understand the analysis of the housing crisis in the Bacon reports. The relevant Ministers in the Departments of Finance and the Environment and Local Government have either ignored or failed to implement the principal proposals made by Dr. Bacon.

This is Dr. Bacon's third throw of the dice and just as previous actions taken by the Government failed, this measure will fail. The Government, particularly the Ministers for Finance and the Environment and Local Government, do not understand the housing market. They have grasped the notion that there is a mismatch between the supply of and the demand for houses, but have failed to realise that supply and demand are inextricably linked in the housing market and that many of the actions taken to reduce demand also reduce supply as developers adjust to new market conditions.

This point is illustrated by one example from the first Bacon report. Arising from that report, tax relief on mortgages on rented accommodation was abolished. Investors left the market and the supply of rented accommodation remained static, or was marginally reduced. The natural increase in those seeking rented accommodation could not be satisfied. Rents were forced up, the investors came back and the market found a new equilibrium. The measure had no effect on the price of houses which continued to rise, particularly for first time buyers. It was of no benefit, however, because rents rose as it impacted very seriously on the rented sector. As a consequence, the measure had an adverse impact on the housing market.

Two of the principal proposals in the Finance (No. 2) Bill will have a similar effect. The imposition of stamp duty at 9% on residential investment property will have the same effect as the abolition of mortgage interest relief on rented accommodation. Some investors will be driven out of the market but the supply of rented accommodation, which is already scarce, will become even more scarce and rents will increase. The so called speculator tax at 2% will have the same effect.

Not only does the Government not understand the relationship between supply and demand in the housing market, it also fails to realise that the market is seamless. Dr. Bacon has informed it that approximately 55,000 units of accommodation are required each year for the foreseeable future and that the market is only capable of supplying about 45,000 of these units. These figures, however, derive from an estimate of the total number of people seeking to buy houses, persons seeking to rent and those on local authority housing lists. If the Government builds more local authority houses, fewer houses will need to be provided by the private sector. If more people buy their own homes, local authority waiting lists will become shorter and pressure on the rental market will ease. If more people rent satisfactorily, fewer people will need to purchase or be housed by the local authorities.

The converse is also true. Any measure which reduces the supply of new houses, the supply of accommodation available for rent or the supply of local authority houses, not only impacts adversely on that segment of the market but on the whole market, because the market is seamless and young persons in rented accommodation may eventually own their own homes or seek to be housed by a local authority. Prices will only stabilise when supply matches demand. It is quite clear that the principal Ministers involved in the formulation and implementation of housing policy do not understand the implications of this truism. By reducing demand in the rented sector one reduces the total supply of houses. The Government has made this mistake before and it is now making it again.

Fine Gael welcomes the reduction in stamp duty for first time buyers of second-hand houses and welcomes the reduction in stamp duty on lower value houses for persons trading up. These measures are beneficial. They have been advocated by Fine Gael for more than three years, but on the three or four occasions we put the matter to the test, the Minister for Finance rejected any move in this direction.

The reduction in stamp duty in respect of these categories will not have a major impact on the price of houses as young couples faced with a continuing price spiral will tend to use their stamp duty savings to acquire a house costing thousands of pounds more than they can afford at present.

The Government must think again. It must ensure that a sufficient supply of zoned, serviced building land is available in Dublin and throughout the country. Over three years, the Minister for the Environment and Local Government has failed to do so and has even failed to spend the money allocated to him by the Minister for Finance for this purpose.

Ministers in the Department of the Environment and Local Government must stop interfering in an adverse manner and ensure that the practice in local authorities is in line with national policy. At present the national policy is to expand the supply of houses while every local authority is imposing more planning restrictions which reduce the supply. As a result, national policy is going in one direction and local policy is going in the opposite direction. It is ludicrous that Ministers in the Department of the Environment and Local Government, through local authorities, cannot bring national and local policy into line in the middle of a housing crisis. The Department must adopt Fine Gael's proposal which is now con tained in the third Bacon report, namely that strategic planning areas must be designated and delays in planning must be eliminated.

The 2% tax on speculation is a very curious tax. So many types of residential accommodation are excluded in the Bill, the Government would be wise to drop the idea completely. Only 10% of houses which are rented are registered with local authorities. We must conclude that the other 90% of owners are not tax compliant. If these owners are evading income tax it is very unlikely they will subject themselves to this new 2% tax on a self-assessment basis.

It is logical to make the exclusions contained in section 5, in particular to exclude residential developments which the Government encouraged through the use of tax breaks. It would be completely perverse to encourage through tax breaks on the one hand while penalising on the other by way of a speculative tax. The problem is that by the time one comes to the end of the section there is so little left it seems that all we have is a tax on holiday homes built by people out of their own resources, and which are not speculative in any way.

The main victims of this tax will be people who build holiday homes on the south and west coasts. These people do not rent out these homes but stay in them for a month in the summer, a couple of weekends per year and at Christmas. There may be some strange theory that if the small builder from west Cork is not building a holiday home in the area he will transfer to Dublin and build a housing estate, and that this measure will free up transferable resources. That is nonsense. I know from where it comes and I have read the theory, but it has nothing to do with the real world or with small builders on the west coast. This measure is an attack on one of the essential ingredients in the economies of tourism counties on the west and south coasts. Anyone who builds a holiday home after 15 June will have to pay 2% of the market value for the next three years.

The same applies to the other category which does not involve speculation either. Country people, professionals, business people or PAYE taxpayers who buy an apartment in one of the university cities to accommodate their children in college will also be caught by this tax. This activity is not speculative but simply involves people buying accommodation for their children who go to college. Some will have one child but others will be brought in and they will make their own arrangements.They need a roof over their heads when they are at university.

If we go back to first principles and match supply with demand, these students are also taken into account in Dr. Bacon's recommendation of 55,000 units of accommodation every year. It is absolute nonsense to describe retired people, public servants, teachers and those with a fair amount of free time, who invest their savings, lump sum or pension in a holiday home in the west or along the south coast as speculators, hammer them with a 2% tax for the next three years and pretend this will do something for the housing market in Dublin. The same applies in reverse to country people who buy small houses or apartments for their children who are attending college – to dub them speculators is equally nonsensical. These are the two principal categories to whom the 2% tax will apply if they acquire a new holiday home or apartment after 15 June this year.

When the exclusions are taken into account and allowing for the weakness or the non-existence of the anti-avoidance measures in the Bill, the payment of this tax will be honoured more in the breach than the observance. This will be a marginal tax which will stop people from building holiday homes. The electricians and blocklayers in south Kerry or west Cork will not be kept busy and they will probably draw the dole during the winter because there is not much economic activity there anyway. They will not go to Dublin 4 to build townhouses.

The Government's approach to the housing crisis is cosmetic. It fails to understand the housing market. It cannot deal with the problem and now, late in its life, it is trying to pull irons from the fire with ill-conceived cosmetic proposals, which I do not think originated with the Minister. For all his faults and failings, he understands the real Ireland and I doubt these measures came from him.

Mr. McDowell

It is difficult to exaggerate the scale of the Government's failure in relation to the housing market. It is worth looking at some statistics in that regard. Since the Fianna Fáil-Progressive Democrat Government came to power, three years ago this week, the average price of a new house nationwide has almost doubled from just over £70,000 to over £130,000. The average price of a new house in Dublin has increased from £84,000 to more than £160,000. Average rent has nearly doubled and the numbers on the local authority house waiting list have increased to 40,000. The number of people officially recognised as homeless is more than 5,000, many of whom, unfortunately, are children.

This is a lamentable record by any standards, not least because many of the factors which brought it about were entirely foreseeable. Many of the factors which gave rise to increased demand were spelt out with some clarity by Dr. Peter Bacon in his first report just two years ago. What is most remarkable about the third Bacon report is that much of the analysis is exactly the same as the two previous reports. Not only is the analysis the same but so are many of the suggested solutions.

Two years ago, Dr. Bacon identified lack of supply as the primary problem. There was general agreement on that – I agreed and I said so at the time. Dr. Bacon still takes that view and so do I but I think we are entitled to ask what has happened since 1998. Two years ago Dr. Bacon identified infrastructural problems as being at the core of our problem. He argued that we needed to provide the road structure and the public transport infrastructure before we built the houses or at least at the same time. To do this we need a minimum of two measures. We need a national spatial plan and specific plans to deal with the development of the major urban areas such as Dublin, Cork, Galway, and, in deference to Deputy Noonan, Limerick. Two years later there is no sign of either.

The Government has no intention of producing a national spatial plan this side of the next election, taking a rather generous view of when that might be. As recently as last month, the Government acknowledged a national spatial plan will not be in place before the end of 2001. I do not know whether this is a reluctance to grasp some difficult political nettles or simple lethargy, but the end result is the same. A fundamental component of any housing strategy will not be in place for at least another two years.

The same applies, even more unforgivably, to the Dublin plan. First, the Government farmed out the plan to Brady, Shipman and Martin. The brief they were given, not just by the Government but by local authorities and other interested parties, was too narrow because there was too much focus on controlling the expenditure it might entail. The result is a conservative and inadequate plan upon which the Government has so far failed to act. The Department of Public Enterprise is still evaluating many of the proposals with the result that we still do not know what the Government intends to do, much less how and when it intends to do it.

The serviced land initiative is another case in point. The Government trumpeted the initiative two years ago, yet Dr. Bacon reports that not a single additional site came on stream in Dublin last year as a result of the initiative. Dr. Bacon calls this disappointing – I would put it more strongly than that. It is a measure of lamentable failure. This Government has been too slow to recognise the crisis, too slow to identify the reasons for the crisis and far too slow in doing anything about it. The result is that hundreds of thousands of people can no longer expect to own their own homes and many of them will have great difficulty in securing any home at all in the short-term.

What is the position now? We have two related problems. First, the supply of houses is inadequate to meet overall demand. Second, and I say this only in the context of limited supply, the wrong people are getting those units that are available. This Bill looks to address the second of these issues. The Government's defence of its inaction in the past few years usually centres on the deceleration in the rate of increase in house prices, which is repeated in the Bacon report. This lends a note of complacency to the report which is unhelpful but it also plays down the fact that house prices are already far too high for most people to afford.

To afford a 90% mortgage on an average new house in Dublin a young couple would need to be earning more than twice the average industrial wage. It follows that an average young couple cannot afford an average new house and this is reflected in the fact that the average price paid by first time buyers is less than the average price of a new house. This obviously means they are required to lower their sights in terms of what they can afford but it is now clear that even that option will not be available for very much longer. Dr. Bacon importantly points out that the rate of house price inflation experienced by first time buyers is a lot higher than the average increase.

In summary, the people who are losing out most are the most vulnerable, namely the first time buyers. This cannot be allowed to continue. This is not news – it has been obvious for some considerable time. Members on these benches having been saying so for some considerable time. We did not need a third Bacon report to tell us what almost every Deputy in this House knew. Those of us on these benches who have been contributing to debates on housing and finance have been arguing for precisely the measures which the Minister has put before us today. The sad fact is that average house prices are already out of reach for many first time buyers and the Minister's belated efforts will be far less effective now than they would have been a few years ago.

I accept, as I did last week, that it will be necessary to take investors out of the market, at least temporarily, to create space for first time buyers. This will almost inevitably have regrettable consequences, primarily in the rental sector. It is important, therefore, that these measures are seen as temporary crisis measures. The Labour Party has argued for other measures beyond what is contained in the Bacon report and what the Government seems to be willing to contemplate in terms of direct intervention in the compulsory purchase of land, either by a dedicated housing agency or, alternatively, by local authorities.

I want the Minister to address a central question. It has been suggested in this House and elsewhere, including by the Irish Congress of Trade Unions, that a small number of landowners or developers are hoarding land. Dr. Bacon is mute on this and I would be interested to know the Minister's view. If he accepts the thesis that land is being hoarded, he needs to take steps to ensure that land is brought on to the market. There are no such measures in this Bill.

Debate adjourned.