An article in today’s Irish Times starts thus:

The government has rejected suggestions that tax breaks which encouraged residential development during the boom years fuelled the construction of more than 2,800 so-called “ghost estates”.

Minister of State for Housing Michael Finneran said: “This thing about tax breaks really needs to be put into perspective. If you look at the figures, less than 10 per cent of all of the developments, of all of the unfinished estates, are in the tax break areas.”

I have no idea why Michael Finneran is  in denial about the effects of property tax breaks in fuelling the boom years in Ireland.  The data show that they clearly did have a significant impact.  It is also simply not true that less than 10 per cent of all developments are in tax break areas.   To take just one such tax break area.  The Upper Shannon Rural Renewal Scheme (1999-2008) has 529 unfinished estates (Cavan 147, Longford 77, Leitrim 96, Roscommon 118, Sligo 91) – 18.6% of the 2,846 such estates in the country.  Those 529 estates are made up of 14,814 units – 12.2% of 121,248 national total.  In the 2006 census, these five counties had 5.9% of all households in the state.  As our post yesterday showed, when standardised against number of households in a county, the five rural renewal counties clearly have the highest number of estates vis-a-vis existing household numbers.

The effect of the rural renewal scheme is obvious when one looks at Figure 1, which shows housing completion rates (1970-2009) for the five counties. Housing growth explodes after the introduction of the scheme, far in excess of household growth.  Between the 1996 and 2006 censuses 30,695 houses were built in these counties, but household numbers only grew by 18,896.  Between 2002 and 2009, the five RRS counties increased their housing stock by 45,053 (49.8%), from 90,491 to 135,544 dwellings.  88% of tax relief in the RRS was for residential development, the vast majority for new build rather than renovation.

House completions in the five counties included in the Upper Shannon Rural Renewal Scheme (source: DEHLG)

It is perhaps unsurprising then that in 2006 Goodbody (in a report for the Dept of Finance) concluded that the RSS had had little impact on economic activity in rural areas; a large proportion of housing output was built speculatively and/or constituted ‘deadweight’; excessively large dwellings were built in many cases; it was poor value for money; and that it had produced an oversupply of dwellings.

The RRS was not the only tax incentive scheme operating.  Section 23 tax relief was also accessible through the Town Renewal Scheme (100 towns throughout the state), Living Over the Shop (LOTS) scheme and the Seaside Resort Scheme (15 towns covered).  A large percentage of the unfinished estates will fall within the 115 TRS and SRS areas.  In fact, it is likely that relatively few estates are outside the various tax incentive scheme areas, particularly outside of the principal cities.

Tax incentive schemes are meant to stimulate activity to then be turned off once activity has commenced and is up and running (a bit like a choke on a car – once the engine is warmed up it is usually turned off as it no longer needs extra stimulus).  In Ireland the schemes were allowed to run for far too long, well after the activity had been initially stimulated.  As a result, it is simply not credible to state that tax incentive schemes had little effect on residential development and the housing bubble.  They were a significant contributor to the unfinished estates phenomenon, with many estates the legacy of the last minute stampede to get in the schemes before they closed to new entrants.  To conclude they had little effect is to simply live in denial.  We need to get past the denial phase and move towards making sure we learn the lessons of excessive property tax incentives.

Rob Kitchin