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.
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
October 22, 2010 at 9:52 am
Excellent!
Will the Irish Times publish this? Send it to them!!!
NOW!
October 22, 2010 at 3:41 pm
This post parallels another article in the Irish Independent which asserts that; “Ghost estate builders got €870m tax breaks”.
Everyone ought to be aware that in most instances the tax breaks were not absorbed by the developers but instead were taken by the banks!
This is why many loan arrangements involved the banks taking equity in the developments – so that the Banks could then avail of the Tax Breaks.
The builders / developers were merely (as most of them would ruefully confirm) “working for the Banks”
October 22, 2010 at 5:05 pm
Either way, the tax breaks were adding fuel to the fire.
October 23, 2010 at 8:22 am
In the words of the accountant from Neil Gaiman’s Anansi Boys;
“Absatively!”
And it’s worth reading the novel to see his fate.
October 23, 2010 at 6:11 am
Excellent.
re. “…we learn the lessons of excessive property tax incentives.”
While the horse has now well and truly bolted, dragging us all long, surely it now essential to implement Judge Kenny’s 1973 recommendations on controlling the price of building land (It is long out of print, but is available here
http://www.irishlabour.com/dublinopinion/Kenny_Report_1974.pdf). My understanding is that Kenny’s thinking was influenced by practice in some continental countries eg. Netherlands.
Implementing the Kenny report has been the policy of various parties since 1973, including the current Green Party.
Perhaps this crisis and the implications will set the report implemented, as the basis of “if we want to change the results, we have to change the approach”
In my reaction to the introduction of the bank guarantee in September 2008, I did suggest immediate implementation of that report (text of letter in Examiner on 4 October 2008 below).
However,it is now claimed said that NAMA will make a profit. Would implementing the Kenny report now mean that a profitable NAMA would be less likely?
“THE crisis in Irish financial institutions is an opportunity to end the malign influence of property development/speculation on how we are governed.
This long-running source of economic and political instability has now resulted in the citizens of this Republic being loaded with unknown liabilities that may last for years, just as we are still paying levies on insurance premia 25 years later arising from the collapse of PMPA.
The current weakness of Irish-owned financial institutions due to lending for property development is a factor driving the Government deposit/loan guarantee scheme.
At the same time, Government’s smug dependence on taxes arising from property transactions (VAT, stamp duty, PAYE/PRSI from a bloated house-building workforce and capital gains tax) has undermined public finances with a speed that has shocked the governing class. Low standards arising from ‘softness’ on property development (eg, the Mahon Tribunal, the Telecom affair, tax-breaks) pervades much else directly under the control of local and national government, eg, house-building standards, provision of clean water, planning primary schools.
It is now time to change the view that we can build a common prosperity by selling land and buildings to one another.
Fortunately, part of the solution has already been worked out for us.
In 1971, the then Fianna Fáil government appointed Judge John Kenny to consider, in the interests of the common good, possible measures for
(a) Controlling the price of land required for housing and other forms of development, and
(b) Ensuring that all or a substantial part of the increase in the value of land attributable to the decisions and the operations of public authorities… shall be secured for the benefit of the community.
Let us limit the scope for excess by government and financial institutions by controlling the price of building as Judge Kenny recommended. If it needs a referendum to copperfasten the constitutionality of any legislation for the measures needed, then this is just as important as another on the Lisbon Treaty.
This is the least the ruling class can do now that we, through the Government, have given huge guarantees to sectors that have over-reached their abilities. We do not deserve the hard landing that the self-satisfied networks of Government, financial institutions and property development have now made for us.”
http://www.irishexaminer.com/archives/2008/1004/opinion/end-malign-influence-of-property-speculation-on-the-way-we-are-governed-73915.html#ixzz139qVD6zu
October 23, 2010 at 9:11 pm
I think it was Prof Geary who first demonstrated that if you want to stimulate the Irish Economy then you should invest in Construction (Irish Input-output Tables 1960’s). Why therefore is anyone surprised that the Government is in the builder’s pockets?
NAMAWINELAKE demonstrates that less than 20 (builders/developers) control all of the development land in Capitol City.
We must watch what happens to the “Twenty” …