In a country that is only 4% urbanized to have a scarcity of land for building takes quite some doing. It takes generations, generations in which the political class, and those who elect them, ignored best interests of long-term planning; The budget next week as an opportunity to begin to undo some of this, but is vanishingly unlikely that will do so.
Any asset bubble, arises when the price of the assets deviates in a persistent way from the underlying fundamentals. In that context we might be careful about calling the Dublin house situation a formal bubble. There is by every single account a vast scarcity of supply. In a situation where supply is limited, or growing more slowly than demand, prices will inevitably rise. That said, year-on-year price increases of 20% plus must surely be a bubble in all -practical terms. It is a bubble in that it cannot continue in even the medium term. The numbers of planning permissions have slumped, to approximately 3 to 4000 per quarter, the level last seen in the 1980s. Within that proportion of extensions vs newbuilds has increased significantly. New dwellings are at their lowest since the CSO database began in 1977.
In Dublin, the epicentre of the house price problem, permissions for new houses, whether in estates or as one-offs, are at a quarter of what they were 15 years ago. The situation in regards to apartments is even more stark, with an average of 116 apartments being planned each quarter over the last 8 quarters, as composed to over 2000 per quarter in the first two years of the millennium.
There is clearly a supply problem. The oversupply of property built during the latter stages of the bubble is not by and large located in the areas where the economy is now taking off. This does not mean that we should engage in widespread tax-based initiatives to build shoeboxes in Dublin, Cork, Limerick, Galway. Nor does it mean relaxing standards to allow tigeens, as the housing agency suggested. It does suggest that some means needs to be found to undertake three interlinked initiatives.
We need property developers. But we don’t need that kind of developments that we saw during the boom. We need to see properly structured corporate, with adequate working capital, combined with the growth of large numbers of not-for-profit housing associations. Property development should not longer be seen as a get rich quick scheme. It should be seen as just another business. We are better off and having smaller number of larger scale constructors than the plethora of small operations that we saw grew up during the boom.
The second issue is that we need to investigate how we can dampen down temporarily the housing market. All of the evidence is that not only conditions in the credit market but also expectations of future rises are key determinants of future house price rises. We do not have a functioning credit market for houses. The mortgage market is still dead. But what we do have happening is the return of the idea that now is the best time to buy, we should get on the housing ladder, buy before it’s too late etc. Once people have an expectation of double-digit house price rises that gets built into their own bidding processes. In this context the new initiative from the central bank in relation to loan to value ratios on loan to income ratios is welcome. However the evidence from such supply-side macro prudential initiatives is that they are at best limited. They typically slow down, or perhaps temporarily halt, property appreciation. But this may only last six months to a year. The only way that has been found in international studies of stopping property bubbles dead, absent choking off credit, is via the tax system
Next week the government has an opportunity to put in place an aggressive tax policy on property. This should have two prongs.
The first should be that there should be a punitive, penal, vicious, tax regime for serviced land that is not being built upon. There is a proposal in the new planning Bill to allow councils to have a 3% per annum levy on un build land. Dublin City Council in 2013 identified over 60 ha of land serviced but vacant in the city centre. Based on recent developments that would allow for up to 12,000 apartments and townhouses. There is no reason, other than a combination of greed and sloth, why these have remained vacant for decades. Along with the “use it or lose it” changes proposed to the planning commission system this levy would help. However, the record of our elected councillors in relation to facing down property developers is, to put it mildly, dismal. It is much more effective to have such powers in the hands of somebody who the developers fear, and that means revenue. A 30% per annum mandatory levy on the development potential value on all zoned serviced land where development does not take place within 18 months of planning permission would surely incentivise developers to either start building themselves or to sell to somebody who could.
The second prong relates to the principal private dwelling. The commission on taxation noted that the exemption of principal private dwellings from capital gains tax, East in 2006 house values, amounted to the loss of some 2 billion per annum. Introducing capital gains tax on the principle private dwelling would therefore, even in these times yield a significant sum. There is absolutely no chance whatsoever of this happening of course, despite the fact that it makes economic sense. The budget next week will be an election budget. It will mark the start of a bidding for our votes for 2016. In an economy still running a significant budget deficit, with double-digit unemployment, with continued immigration, and with a massive debt to GDP ratio, the evidence is that we prefer to vote ourselves tax cuts planned to vote for improved services or, heaven forbid, a stable economic future.
This is a version of an oped in the Irish Examiner