Will stamp duty changes get the property market moving?

Rates of stamp duty are presently zero on values below €125,000, 7% on the next €875,000 and 9% on the balance above €1m.  In today’s budget, it was announced that the rate of stamp duty on residential property will be reduced to 1% on all properties valued up to €1 million, and 2% on the balance above €1m.  All stamp duty reliefs and exemptions on residential property are to be abolished with immediate effect (I can’t see anything on stamp duty on land, so assume these remain as is).  Abolitions include:

• First time buyer relief
• Exemption for new houses under 125 sq m in size
• Relief on new houses over 125 sq m in size
• Exemption for residential property transfers valued under €127,000

New and secondhand properties, regardless of size and price, are now liable to stamp duty for all buyers.

For first time buyers a new barrier to entry has been put in place.  On a property costing €250,000 they will have to pay €2,500 stamp duty.  Not an insignificant sum given they will also need a need a minimum of a €25,000 deposit given no lender is offering above a 90% mortgage, plus solicitor and other fees (this is more than off-set by the drop in the value of the property they are purchasing, the issue though is immediate cash in hand for a new additional expense).  For developers seeking to sell brand new properties, stamp duty is also now liable, again also potentially placing an additional barrier to sale (though again drops in prices off-set this).

For secondhand sellers and buyers the situation is a little different, with a significant reduction in the amount of stamp duty liable.  For a house valued at €250,000, stamp duty drops from €8,750 to €2,500, a significant saving.

Is this likely to get the housing market moving?  For those looking at trading up or down then the changes may well get things moving, especially at properties valued at over half a million where stamp duty costs were prohibitive (for example, a house costing €1m incurred €61,250 stamp duty; it’ll now cost €10,000).  The big issue for this group is whether they are in negative equity and therefore feel able to trade down if desired in order to reduce their overall level of debt.  For those outside of negative equity, with prices falling the price gap for trading up might remain relative in percentage terms but lowers in real terms and thus becomes more affordable.  For example, a household’s own house might have fallen 40% in value from 300K to 180K, but the house they are interested in buying has fallen 40% from 500K to 300K, with the difference dropping from 200K+26K stamp duty to 120K+3K.

The stamp duty changes then will potentially get some of the market moving into both new and secondhand homes – those that are already home owners and are not in negative equity – it will potentially slow down, however, first time buyers from entering the market (despite the increased affordability of property overall).  The big question and uncertainty for buyers, however, is the forthcoming site-property tax and how trading up might be affect household expenditure on an annualised basis, rather than a one-off payment.  For the property market to really get going – other than the economy starting to recover, people returning to work, and credit starting to flow – potential buyers will need to know where they stand with respect to future property tax payments.

Rob Kitchin

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Why relying on indirect, cyclical taxes is a folly: The stamp duty slump

At the height of the boom, indirect, cyclical property taxes – stamp duty, capital gains tax and VAT – were contributing17% of the total tax intake, up from 5% in 1998 (see figure 1).   Revenues from stamp duty on all property transactions were c. €2.98b in 2006 alone, up from 387m in 1998, and there were c. €3.2b in VAT receipts.  Residential stamp duty in 2006 was €1.3bn on 52,901 transactions.

Figure 1: Property related tax revenue Ireland 1997-2009

Since the height of the boom these taxes have fallen off a cliff.  A piece in the Irish Times yesterday (no online version) revealed that in the 2010 the residential stamp duty take will be less than €100m, a fall of 92% from the peak.  Residential transactions liable for stamp duty is set to fall below 10,000 in 2010 (see Figure 2).  The fall in stamp duty is clearly due to a slump in both house prices and sales, and also a change in the constitution of buyers, with around 50% of those buying at the minute being first time buyers (who are not liable for the tax).  Non-residential stamp duty has suffered a similar collapse and combined residential and non-residential stamp duty now only accounts for 0.6% of overall tax receipts.  What was a minor, but significant, contributor to the overall tax intake has withered away to insignificance due to its cyclical nature.

Residential stamp duty and transactions, Ireland 2003-2010 (left axis yield €m, right axis no. of transactions)

Relying on indirect forms of taxation, such as stamp duty, is a folly because they are cyclical.  Direct forms of property tax, in contrast, have the benefit of being sustainable and robust to the boom and bust cycles of the market.  They might not be popular, but they are necessary if we want to minimise the depth and severity of this and future fiscal crises.  The abolition of property taxes for short term political gain was political vandalism – they should have been reformed or restructured to make them equitable, but not taken off the books.

The present debate concerning the re-introduction of property taxes needs to move from being whether to do so, to what forms of property tax will be introduced and whether they will include primary residences or only second, investment and commercial properties; whether those that have paid huge sums of stamp duty in the last number of years will be included, or included on a phased basis; how to deal with asset rich/income poor households or whether households below certain income thresholds or certain benefits will be included, etc.  Yes, any property tax will be deeply unpopular, but it will be sustainable and non-cyclical and it has to be better than the austerity measures we are presently suffering.  Not introducing them suggests a lack of political will to take unpopular but necessary decisions address the present crisis head-on and create a more robust taxation system.  The stamp duty slump illustrates perfectly the fiscal problem if we stick to present policy.

Rob Kitchin

 

When is a property a new property?

Here’s another normative question as per the land banking post last week.  When is a new property a new property?  The question arises because cash-strapped developers have been renting out the properties they have been unable to sell (see here for more details).  As far as the Revenue Commissioners are concerned this means that the property now becomes ‘second-hand’ and therefore liable for stamp duty except for first-time buyers.  It seems that the stamp duty exemption only applies if the property is sold immediately after construction or are not lived in prior to sale.  The CIF and the developers it represents wants a change so that the properties are considered ‘new’ up until the first time they are sold.  Their argument is that it penalises developers for trying to find a cashflow and make ends meet by making the units less attractive to buyers (who have to pay the duty).  And by default, it penalises buyers who previously wouldn’t have been liable for the duty.  The flip side is that the property is clearly not ‘new’ in the sense that people have been living in it and, at a time when the state needs all the revenue it can generate, any change in the rules will deny a source of duty.   So, the question is – at what point does an unsold property stop being a new property?  When it is first lived in or when it is first sold?

Rob Kitchin

 

Budget 2010 adds uncertainty and further immobilises the housing market

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