I am grateful to the Seanad for taking this Bill and facilitating its speedy enactment. There is general consensus that the recent Government action in response to developments in the housing sector was required. Consequently, the measures contained in this Bill are a necessary and speedy response to ensuring that balance is restored to this market and that, more importantly, the sharp increase in house prices can be addressed and defused. I would like to stress that aspect of balance — there are winners and losers from the changes in the Bill. That is inevitable in tackling an overheated market such as the property market at the moment. Indeed, there are signs that the Bill has already had a dampening effect on house price inflation.
Before dealing with the specific provisions of the Bill, the legislative consequences of the Government's action, I would like to set out the motivation behind the Government 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 pick and choose. Each element 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.
There has also been evidence of the growth in unacceptable practices designed to ratchet up prices to the detriment of purchasers. As both Minister Molloy and I have said in the last few days, this Bill will help remove the driving force behind such sharp practices — that is, excess market demand.
As the House knows, the Government late last year commissioned a comprehensive study of the housing situation. 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 key priorities that Government must address regarding housing. First, the question of affordability of housing, especially for lower income groups needed to be tackled. I have made it clear 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 Bill is not anti-investor or anti-rental sector. It will certainly rebalance matters in favour of owner occupiers but demand for rented property and a fair return to investors will still remain.
The consultants' report has given clear recognition to the key priorities which I have just mentioned. 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, namely, the expectation of further major price increases. The very publication of the report itself together with the Government's speedy response has, as I said, taken 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, i.e., 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 threefold approach.
First, measures to increase the potential supply of housing — this 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 also 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.
The Government is not seeking in this Bill to undo the property market or to harm market participants. Even with the removal of interest deductibility there will still be a basic and strong demand for residential accommodation. To suggest that the demand for accommodation is entirely tax driven is not sustainable. Tax reliefs have played their part in stimulating demand and reviving the property market when it was flat. However, the case for continued favourable tax reliefs at the time of a property boom is far less convincing. The Bacon study makes it clear that:
. there are certain measures which if taken, would result in a better balance between demand and supply in the short term. In essence, rebalancing of existing fiscal incentives, which currently support investment demand in a number of respects, towards the promotion of housing supply to the end of the market where affordability pressures are greatest, is considered both desirable and feasible. there is evidence that changing patterns of housing demand are sufficient to support a growing and more diversified rented sector, for example, rental values appear to be well underpinned. What is in doubt is the need to encourage this demand by means of fiscal incentives, especially when the revenue foregone in this direction could be focused better towards increasing supply and choice to first time buyers who are facing affordability strain.
It is important to note that the proposals in the report were designed to allow investment in residential property to be determined by underlying market demand for additional rented accommodation, at a time when economic and social changes are leading to an increase in the depth and breadth of demand for such accommodation. Senators will know that I believe in such market forces. Where there is strong demand there is no need to add to this by distorting demand by unnecessary tax reliefs.
Clearly there are arguments and concerns about what we are doing. I am convinced that the dire prognostications of some in regard to the rental sector are overstated. There is a demand for rented accommodation; not just a notional demand but an effective demand. What there will not be are super normal profits. To the extent that those currently renting can now afford to buy as a result of this package, this will free up a certain amount of the existing stock of rental property. What we are doing is changing the balance of demand in the market while pursuing measures also to increase supply.
I would now like to turn to the specific taxation measures contained in the Bill. A number of amendments were made to the Bill in the Dáil and I will refer also to those. 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 totally against the thrust of housing policy objectives accepted over recent decades.
However, as is only reasonable, 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 calendar months at any one time. However, this latter exclusion will 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 the State and investment within the State will be treated in the same way. However, in the case of rented residential property outside the State the restriction will not 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 would have run counter to the whole thrust of these measures, i.e., to restore some balance in the housing market between investor and owner-occupier. I believe these arrangements are fair and reasonable in the circumstances.
Section 2, which was tightened up by an amendment in the Dáil, 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, then a person could have obtained tax relief on interest on the borrowed money invested in the company or partnership, which 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 in order 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. In my view this is a transparent way of implementing the Government decision. Therefore, in order 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 residential development being obtained, then this temporary reduction in the rate of CGT will not apply.
This section also provides for a new 60 per cent rate of capital gains tax to apply from 6 April 2002 to disposals made from that date of development land which is 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.
Section 3 also applies the 20 per cent rate to land with no planning permission acquired by local authorities. I made this amendment in the Dáil to ensure that such land would continue to be made available to local authorities at the right price. Not to have done so could have meant that owners might otherwise seek planning permission in order to get the 20 per cent CGT rate in which case the price could go up and there would be a delay factor in local authorities acquiring land.
On the issue of planning permission, there have been concerns that the requirement to have a planning permission for residential development to qualify for the lower rate capital gains tax will delay the release of land to the market. However, it will be sufficient in nearly all cases simply to obtain outline permission.
The requirements for documentation to accompany an application for outline permission are not very onerous. Only such particulars as are necessary for the planning authority to make a decision in regard to siting and layout are required. Therefore, a fully designed scheme is not necessary.
Where land is zoned for residential development and the necessary services are available, there should be no difficulty in acquiring outline permission. The existence of outline permission should make it easier for the purchaser to obtain approval for development as the issues of principle will have been decided at outline stage. Given that planning permissions only have a life of five years, linking the relief to planning permission will help to ensure that serviced residentially zoned land is actually developed which is, after all, our objective.
More than 70 per cent of planning applications are decided by planning authorities within two months. In the event of an appeal, there will of course be a delay. The average time taken by An Bord Pleanála to decide appeals is now running at 18 weeks. My colleague, the Minister for the Environment and Local Government, is taking action to ensure that in 1999, 90 per cent of appeals will be decided within four months.
Section 4 is designed to bring into effect, from 1 June 1998, the section 23 relief for the rural renewal area provided for in the 1998 Finance Act. While other reliefs for the area of a commercial nature require EU Commission approval, residential based reliefs are not of concern to the Commission. There is no reason, therefore, not to proceed now with section 23 reliefs in this case. I have also preserved, in section 1, interest deductibility for this region in regard to all residential rental income and I am sure few would begrudge this extra concession to this area. Whatever the causes of house price inflation, it certainly did not start in Leitrim and the surrounding areas.
Part 2 of the Bill contains the stamp duty provisions of the Government package. These measures were contained in the Financial Resolution passed by the Dáil on 28 April 1998, subject to one change in the case of pipeline cases. However, I will briefly outline the changes in the stamp duty code.
Section 5 of the Bill is a definitions section. Section 6 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 7 and the Schedule to the Bill impose the new rates of stamp duty for residential property. These new rates are nil for residential properties valued at up to £60,000; 3 per cent for properties valued between £60,000 and £100,000; 4 per cent between £100,000 and £170,000; 5 per cent from £170,000 to £250,000; 7 per cent between £250,000 and half a million and 9 per cent for properties valued in excess of that amount.
Section 8 deals with the transfer of mixed property, namely, property which has both 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 9 and 10 provide for the apportionment of the consideration on a just and reasonable basis in the case of mixed properties. Section 11 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 their only, or main, place of residence, then stamp duty will apply at the appropriate residential rate.
Sections 12 and 14 deal with larger new housing units. If the purchaser is an owner-occupier, then 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. However, if the purchaser is not an owner-occupier then stamp duty at the appropriate rate on the full amount of the transaction will be charged.
Section 13 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. Finally, sections 15 and 16 in Part 3 deal with the usual "care and management" provisions and to the short title of the Bill, respectively.
At the outset I said that this Government has acted in a decisive and considered manner. While criticisms have been made about certain aspects of the Government's proposals, I am happy that the measures contained in this special Finance Bill are an appropriate response by Government and must be viewed, together with the other measures being taken, as an overall package.
The suggestion that building activity will cease because of these measures is unfounded. I have taken heart from media reports, as recent as yesterday, of sales of properties to owner-occupiers where, in previous schemes, a significant percentage of the 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 am sure Senators will be anxious to speak on this important measure and I am pleased to commend the Bill to the House.
