The latest Daft.ie House Price Report was released this morning. Its headline finding is that asking prices fell by a further 4% during the second quarter of the year. Overall, prices are now 40% below the peak in Dublin and 34% below the peak elsewhere.
Three years into the property downturn, how should we take its findings? Economists think about prices and quantities. On both prices and quantities, pessimists and optimists will find fodder. In relation to prices, pessimists will point out that this is a larger fall than what was seen in the first three months of the year. Optimists will point out that the falls in 2010 are smaller (in percentage and in euro terms) than those seen in late 2008 and throughout 2009.
Prices are just one half of the equation. While there is plenty of debate about whether the sustainable level of prices is above or below where we are now, everyone is I’m sure in agreement that the sustainable level of transactions is well above what we’re currently seeing. If a steady volume of transactions is good news, optimists will point to the fact that one in four properties posted in April is already either sold or sale agreed, while about half of properties listed in January are already sold or sale agreed. Pessimists, however, will point to the total stock of properties for sale – over 60,000 – and point out as well that the stock for sale has risen again since the start of the year.
Here are couple of other facts that strike me about the latest report:
- Falling (more) slowly: The year-on-year rate of falls, while still sharply negative (-16.4%), is at its slowest in 15 months.
- On again, off again: In a number of parts of the country, sellers seem to have adopted a strategy of cut-twice-a-year, with substantial cuts in one quarter followed by largely static prices in the next. This quarter, prices in Laois, Offaly, Clare, Cavan and Donegal fell, after being largely stable in the first quarter. Meanwhile, Carlow, Louth, Tipperary and Galway are taking relative breathers in their descent, following sharpers falls in the first quarter.
- Culchies vs. jackeens: Prices in Dublin city centre are now almost 50% down from peak levels – the full average fall is 48.4%. By contrast, asking prices in many rural parts of Munster are down just 26% from peak levels. This suggests that Dublin and its relatively more active market may be acting as a national pace-setter. It also strengthens my suspicion that Dublin in particular and the cities in general will bottom out before other parts of the market.
The commentary on the report is given by Jim Power. Jim gives a frank assessment of the challenges facing the Irish economy. In particular he talks towards the end about the need for a property tax, a phrase that seems to send shivers down the spines of many in Ireland. Based on what was reported last week, Chris Andrews, a Fianna Fail TD representing some of the wealthiest citizens in the country, appears to have convinced the Government to shelve their plans for a property tax to replace stamp duty.
Those arguing against a property tax are essentially saying that the Government should not respond to the virtual disappearance of what was at the peak close to €10bn in revenues from the property market, across VAT, stamp duties and capital taxes. The graph below shows estimated tax revenues from the property market from 2001 to this year. Revenues rose from €3bn in 2001-2002 to €9bn in 2006-2007. Since then, they have collapsed and look like coming in below €2bn this year. The graph also shows an estimate of the all-in income tax rate in Ireland over the same period.
It’s worth recapping what the over-reliance on property tax revenues did for the rest of the taxation system. Each year, the OECD calculates the all-in average tax rate for workers, across four stylised households all earning the median industrial wage (single no kids, single two kids, married no kids, married two kids). In 2001, the average tax paid by those four households in Ireland was just under 9%. With the OECD average at over 20%, this made Ireland a very attractive place to work. Over the coming years, however, Ireland’s taxation system went from attractive to kamikaze. By 2007, the average tax rate paid by our four households was negative: -0.2%! While people often talk about having to bring the low paid back into the tax net, really the focus should be on ensuring those on average pay in Ireland contribute. It looks like the crisis has finally woken the Government up to this.
The reason that the Government was in a position to do this was because Ireland’s property-led boom was masking the increasing unsustainability of Ireland’s income tax system. Property-related tax revenues increased by almost €7bn between 2001 and 2006. Income tax, which gave three times as much revenue to the State at the start of the decade, increased in the same period by only half that amount. The result was that, of the €45.5bn taken in in taxes in 2006, property taxes contributed almost as much as income taxes!
This is clearly no way to run a taxation system. Naturally, there is going to be some element of cyclicality about taxes. In fact, a well designed taxation system will have some element of automatic stabilisation, where tax revenues fall in hard times to give the economy some breathing space. However, a collapse of €8bn in tax revenues from the property market is a signal, if ever we needed one, that we got it wrong.
Let’s leave VAT revenues from the property market aside for the moment. (That should have been a lot more stable than it was – but for a completely different reason, namely better management of Ireland’s housing output.) Figures from the OECD suggest that a little less than 10% of core tax revenues (excluding social insurance) comes from property taxes in most developed countries.
I think it’s reasonable to say that the government’s aim should be to get the Irish government finances looking a little more like a regular OECD economy’s, over the coming five years. Also, it will be trying to raise its core tax revenues up from their current 2003 level of €31bn to perhaps €40bn, which is more or less the 2005 level. Therefore, bearing in mind the contribution that capital taxes could make in a healthy market (probably about €0.75bn), we should be looking to have a property tax contribute somewhere close to €3bn.
A year ago, I outlined a number of reasons why Ireland should adopt an Obama-esque “Yes We Can” attitude to property taxes – as well as how to deal with issues like those who have paid a lot in stamp duty recently. At the time, I made a case – based on the sheer arithmetic of it all – for a very straightforward tax on the value of a property. The Department of Finance is understood to favour a variant of such a tax, namely a set tax for prices within particular bands. One argument against property taxes is that they would take a long time to implement. This type of tax could realistically be put in, complete with valuation website where people can find out an estimate of how much their property is worth right now, in the space of a week.
My opinion now, though, is that Ireland needs to put in place a smarter tax, one that doesn’t mess with the incentive people should have to invest in their home and make it worth more. For this, Ireland needs to put in place a land value tax. A land value tax, where you pay an annual amount based on the value of the land you hold, not the value of what’s on the land, is the fairest way of implementing a tax. It also prevents land-hoarding and should reduce the likelihood of further property bubbles. A land value tax could be brought in perhaps not overnight, but also relatively quickly.
There are a range of other reasons why Ireland needs a property tax sooner, rather than later.
- For example, if people suspect a property tax will come in, they are more likely hold off buying property, raising the prospect of a longer than necessary hiatus in Ireland’s property market and even over-shooting of prices on the way down.
- Secondly, money is limited and if the Government doesn’t bring a property tax in, the money has to come from elsewhere – even higher income taxes or more cuts to public expenditure.
Ultimately, people should be suspicious of TDs in wealthy constituencies calling for no property taxes. If we don’t bring in a property tax, the rest of the country will essentially be subsidising a small pocket of voters in the most affluent areas of Dublin.