Hat tip: MT. I have a friend who is about to take the plunge into the blogosohere and start his own blog. I believe he will make a significant contribution to the intelligent and critical left side of the 'sphere. He sent me a mail today giving a sample of the likely issues he wants to get stuck into. As he is not quite up and running yet I think it fitting that I post his correspondence in full.
With Brian Cowen dampening expectations over cuts in stamp duties, it is clear that the PDs and Fine Gael intend to exploit the issue in the run-up to the general election. The Right will cynically use the issue of stamp duties - which suits their tax cutting agenda - to divert attention away from the real issue of providing affordable accommodation for people (something which doesn't fit in so well).
Let’s put to one side issues of social, affordable and special needs housing and focus on the private housing market. Historically, policy has discriminated in favour of first time buyers in two ways: first, exempting 1st time buyers from stamp duties on all new houses (barring large ones) and, secondly, levying a lower rate on second hand houses. If the objective is to give extra assistance for people to get on the property ladder, this is appropriate.
Now, that policy focus is becoming blurred. Of course, any cuts in stamp duties will have no affect on 1st time buyers buying new houses because they are already exempt. So how many of these buyers purchasing in the second hand market will be affected? According to a recent Parliamentary Question answered by the Minister for Finance, less than 3,000. In 2005 there were only 2,830 1st time buyers purchasing 2nd hand houses and obtaining reduced stamp duty level. There are relatively very few 1st time buyers that would be affected by any change in the stamp duty regime.
Michael McDowell, when lamenting high stamp duties, used the example of a ‘modest house’ on the Dublin Southside attracting a duty of €64,000. If a 1st time buyer were purchasing this modest second hand house, it would mean a sale price of over €700,000. How many 1st time buyers purchased such houses in 2005? According the Minister’s answer, exactly none. Mr. McDowell is lamenting a fiction.
The fact is that stamp duties are progressive. A substantial amount is paid by investors and purchasers of second houses – which by definition puts them in higher income categories. But just as importantly, the DEHLG's Annual Housing Review shows that 50% of households borrowing for second-hand houses had incomes of €70,000 a year or higher. This puts them in the top 20% income bracket. Conversely, only 7% of borrowers have household incomes of €40,000 or less. It is clear that general cuts in stamp duties will be highly regressive and do little for average and low-income earners.
Stamp duties have played only a minor part in the steep rise in housing prices. Since 2001 average second hand house prices in Dublin rose by over €44,000 per year. Stamp duties on those same houses rose by less than €3,400 per year. So lets put some perspective in this debate. What commentators have labelled as ‘crippling’ stamp duties pales into insignificance compared to the growth in housing prices. The Right are pulling off a brilliant PR manoeuvre – directing the agenda towards the mouse in the room (stamp duties) while ignoring the elephant (house prices).
The depressing fact is that we have been down this road before. Governments have been slashing rates and increasing thresholds and housing is becoming ever more unaffordable (in 2001 a €300,000 second hand house would have attracted a 6% duty, today it is exempt). There are many reasons for this but thrown into the mix is that if you fuel demand in a short-supply situation, inflationary pressures will build. That is why many analysts are warning against cutting stamp duties, as it will only drive up prices. There is historical evidence to back this up: in 2004 2nd hand houses rose by €49,000 but after the Government’s stamp duty cut, houses rose by €73,000 in 2005. Did the stamp duty cut contribute to this? Common sense and hudreds of real estate agents around the country say yes. The Right are offering us more of the same - more cuts, higher prices.
It’s not just that proposals by the PDs and Fine Gael would drive prices up (something which they surely must be aware of which suggests just how cynical they are), primarily benefit high-income groups and hardly any 1st time buyer. It’s that they have nothing to offer people who can’t get into the market or only under great financial burden. And they will get away with it unless the Left can put forward a coherent alternative that actually addresses the real problems in housing – land price control, social and affordable housing, the enhancement of the rental sector along continental lines, sustainable physical planning and a reform of the myriad tax incentives that feed into inflation. If the Left can’t do this then it will be forced on the backfoot and, ironically, be seen to be defending high prices. And the Right will have succeeded in turning the non-issue of stamp duties into an issue, thus hiding the real issue of affordable accommodation.
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