In the run-up to Budget 2010, many estate agents reported potential buyers holding off on purchasing a new home in the hope of some change or incentive to aid their investment.  While a significant number of Sale Agreed signs appeared in suburban neighbourhoods, sale completions were on hold pending the outcome of the budget.

Granted Budget 2010 extended mortgage interest relief for first time buyers to 2017, but effectively the budget did nothing to stimulate the housing market and unintentionally may have led to further uncertainty with the proposed introduction of a property tax at some point in the future with no further detail. What makes this particularly problematic is that the relationship between the property tax and stamp duty is unclear, the latter being a particular stumbling block to residential mobility at present. Stamp duty in Ireland in relation to other European countries is currently very high and is impacting on the market in a number of ways.

Firstly, in a normally functioning housing market it might be expected that homeowners would build up some equity in their property that would then go on to form a full or partial deposit for their next home. In the current market, anyone who purchased in the last 7/8 years, is now in a negative equity situation which means that in order to move on, they must be able to sell their house/apartment at a loss and repay their lender. Given that this could be conservatively somewhere in the order of 10% of their mortgage value, finding another 10% as a downpayment on the next property is no easy task. Added to that, the homeowner will become liable for stamp duty on a new home as they no longer qualify for stamp duty exemption. Stamp duty on a normal 3 bed family home in the Dublin market could range from €10,000-20,000 and thus acts as the final nail in the coffin in terms of mobility.

In those rare circumstances where individuals may be lucky enough to access these sums of cash, the proposed additional burden of a property tax is a disincentive to trading up/down. Without any indication of its scale, assessment criteria or timeframe, this may simply be a cost too far for many families.  So what could be done?

One suggestion may be that Government immediately indicate that stamp duty and property taxes will become aligned and integrated. The easiest way to do this might be to suggest that for anyone moving now, their stamp duty liability can be paid over the next 10 years rather than in one lump sum on the day of purchase. Thus in our example above, the buyer would pay close to €1600 per year for the next ten years. Once the proposed property tax is introduced, two things could be done.

  • In Scenario 1, the purchaser above continues paying their €1600 per year stamp duty until the 10 years is up and then switches over to paying the property tax. There is no double taxation at any time.
  • In Scenario 2, the purchaser above continues paying their €1600 per year stamp duty until the property tax is introduced. They then pay the greater sum – either continuing as in Scenario 1 above or switching to the property tax  if that is appropriate. Again, there is no double taxation at any time.

Doing something along these lines will achieve two things. Firstly, it will give greater certainty to those contemplating a move that they will not be taxed multiple time on the same property. However more importantly, it removes the immediate burden of a family finding a large stamp duty lump sum at a time when credit is tight and they may already have significant difficulty in finding the cash to finance the deposit on a new home.

While the price of housing has dramatically fallen and economists and estate agents talk about the best affordability in the market for many years, this is only so for first time buyers. For those who entered the market in the last decade, there is a crisis unfolding. Affordability has not improved when the wider costs associated with moving are taken into account, mobility has been restricted and many families may have become fixed in place through little fault of their own.

Niamh Moore