We thank the committee for affording the IPAV the opportunity to make a short presentation on our recent submission on property rights. Afterwards my colleagues and I will be delighted to answer any questions the committee may have.
IPAV was established in 1971 as a representative body for qualified licensed auctioneers, valuers and estate agents throughout the island. Its main aims are to protect, advance and promote professional standards among members and to protect their interests and those of the general public in its dealings with members. IPAV has more than 700 members and 100 full-time students in its main education centres in Dún Laoghaire and Cork. There are a further 300 part-time students in centres in Galway, Limerick, Cork, Waterford, Dublin, Athlone, Derry and Bangor. Full and part-time students may study to diploma and degree levels.
When the committee sought written submissions last April IPAV commissioned economist Jim Power to compile a submission outlining our views on property rights. For mainly historical reasons, property and the ownership of property has always been a central focus of Irish life. Owning one's home has been the first and main aim of the majority of couples starting out in life. While that may have changed somewhat in recent times, it nevertheless continues to be a core objective for most people. The Irish housing market has experienced significant growth over the past decade in terms of housing transactions, completions and prices.
The sharp increase in prices has attracted considerable attention and many would regard the fact that it is now very difficult for young people to get on the housing ladder as a negative legacy of the Celtic tiger era. This is true but it is an unavoidable consequence of the dramatic transformation of the Irish economy. Arguably the evolution of the Irish housing market over the past decade does not represent a deviation from fundamentals. The economy over that period has experienced a fundamental transformation. This was characterised by several factors that created significantly higher demand for housing. These characteristics include strong economic growth, a sharp decline in unemployment, strong net inward migration, strong growth in disposable incomes, a young demographic profile, high household formation, falling household size, sociological factors and strong investor demand. Furthermore, the market received a significant structural boost from a once-off decline in interest rates due to EMU entry.
Supply was initially slow to react to this increase and the result was a sharp adjustment in prices. While there are solid reasons for the rapid increase in house prices and the sharp decrease of mortgage indebtedness on the back of it, the reality is that housing has become extremely expensive and unaffordable for many people.
However, care needs to be taken in any reaction to this situation. Housing is now a very important component of total personal wealth and personal indebtedness in the economy. Consequently, its stability has an important bearing on the overall stability of an economy. A sharp and sudden decline in house prices would have a negative wealth effect and could seriously undermine the economy. This is not desirable. It is, therefore, imperative that all interested parties, particularly Government, work together to pursue policies that will guarantee the overall stability of the housing market. Official interventions in the housing market have had mixed results in the past. The timing of many interventions was cyclically wrong. They have tended to increase volatility of house prices and have generated considerable uncertainty. Market forces generally deliver the most desirable outcome and where possible they should be left to operate as freely as possible.
Imposing a constitutional cap on development land is feasible subject to a referendum, but is not desirable. Article 40.3.2 of the Constitution states:
The State shall, in particular, by its laws protect as best it may from unjust attack and, in the case of injustice done, vindicate the life, person, good name, and property rights of every citizen.
Placing a constitutional cap on land prices would appear to be against the spirit of this constitutional right to private property. In many senses it is now too late to contemplate such a course of action as the major part of the price adjustment has already occurred.
There are now clear signs that the market is reaching a position of equilibrium. The gap between demand and supply has narrowed significantly over the past five years and should narrow further. Housing supply has reacted to strong demand and last year a record number of new units were completed with 57,695 units built. Over the next five years, some of the demand forces will moderate. The key emphasis should be on a further increase of land supply for housing, particularly at the affordable end of the market. Measures to increase land supply should include radical changes to the planning process in order to speed up the building of houses. For affordable housing, the release of the State's land bank for housing construction should be pursued with vigour, particularly the land bank owned by port authorities in many towns and cities.
It is not appropriate to demonise the investor as happened in some quarters in the past couple of years. The investor is a necessary part of a properly functioning housing market and has been instrumental in bringing greater stability to the rental market. It is the investor, at the end of the day, who is taking the risk and at the same time contributing to the supply of rental housing. If the investor were now to pull out of the market for reasons of less favourable tax treatment for example, the overall housing and rental market could become very unstable.
A properly functioning housing and rental market is essential for mobility of labour. Labour mobility is in turn essential for balanced regional economic development. Availability of rental property and greater housing turnover are essential to encourage workers to move around for work, either within or between countries. Research has shown that workers will become more mobile if there is a supply of affordable rental properties and if housing transaction costs are moderate.
The current stamp duty regime is penal and acts as a serious disincentive to turnover of housing. The reduction in capital gains tax from 40% to 20% increased the turnover of capital assets, improved economic efficiency and resulted in a higher tax take under this heading. A reduction in stamp duties on residential property could have a similar effect by leading to older people trading down and freeing up larger properties for families. The increased activity should at least maintain the tax take and, if carefully chosen, a new lower rate could actually result in an increased take. Stamp duties, legal and other transaction costs act as a major disincentive to housing mobility which, in turn, undermines worker mobility.
The removal of the first-time buyer's grant was desirable because there are more effective ways of helping first-time buyers. A further increase in mortgage interest relief would be desirable. The proposal to remove DIRT liability on savings by first-time buyers that will go towards house purchase would represent a positive help to first-time buyers.
Government policy towards rural development needs to focus on creating a vibrant rural economy. This will necessitate heavy investment in physical infrastructure and IT capability. Planning laws need to become less rigid in order to attract people to live in rural Ireland. The decision by some local authorities to prevent people from outside the county building a house is totally unacceptable and should be repealed.
We believe that the financial institutions should play a part in ensuring a more stable and sustainable housing market. We believe, though not legally enforceable, it would be in the best interest of all parties if mortgage providers established a voluntary code of conduct covering areas such as loan to value ratio, the savings record of the borrower and the duration of the loan. It would also be beneficial to agree common standards for stress testing. The encouragement of fixed rate mortgage for a period up to ten years would also provide greater insurance against shocks and reduce risks for borrowers and lenders alike.
We have given a brief outline of the IPAV's views on property rights and how they are related to house prices. I thank the Chairman and the members of the committee for inviting us to make this presentation. We will be willing to answer questions members may have.