There have been 46 tax interventions in Irish housing market since 2013. They haven’t fixed it

This Government and its predecessor have not been slow to introduce new tax incentives aimed at housing. The recent Tax Strategy Group Papers, drawn up in advance of the budget in October, showed that no less than 46 tax measures related to housing have been introduced since 2013, with an annual cost for the major ones put at €1.25 billion. While the papers, drawn up by senior civil servants, did not say as much, it is a fair bet that their inclusion in the Tax Strategy Papers, alongside even more costly spending interventions, was a message to Ministers. They were being reminded of the massive resources being poured into this area and cautioned about adding yet more.Of the 46 measures, 33 were aimed at what might be defined as the “public” – buyers, renters, smaller landlords and people redeveloping properties in certain areas – with the rest directed at developers, many covering corporate tax. (Some of the landlord measures also apply to corporate investors).The total includes different measures in different finance acts, so it counts renewals and extensions of the help-to-buy scheme, the living city initiative, the rent-a-room relief, mortgage interest relief and so on. In terms of the measures aimed at the public, the Help-to-Buy at €250 million this year and the rent tax credit, at €350 million, are the most costly. READ MOREThe problem, in policy terms, is that the multiple interventions tend to become, as the National Economic and Social Council (NESC) put it in a housing report a few years ago, part of “an endless sequence of isolated measures”. All too often, the law of unintended consequences applies – for example, the Help-to-Buy Scheme as well as helping some buyers to get into the market also supports many who do not need assistance. Mazars, in a report on the scheme in 2022, found it had many shortcomings, being poorly-targeted, regressive and out in line with Ireland’s spatial policy – for example promoting development in Dublin’s commuter counties where new semi-detached homes can be built within the €500,000 limit. Echoing the famous “I wouldn’t start from here” directions given to a mythical tourist, the consultants wrote: “A rational approach would not design the scheme as it currently exists, but there are considerable risks with ending the scheme.” It recommended, instead, a phasing out and some alterations to the First Home Scheme, in which the State takes an equity stake in the home, to deal with the issue of home buyers finding it hard to save the deposit. Mazars found “no definitive evidence” that the scheme has pushed up house prices, but it has clearly added to demand in a market in which there is inadequate supply.The Mazars report highlighted initial concerns from the Department of Finance that such incentives, once introduced, are very hard to remove. The Help-to-Buy scheme is one example of this – winding it down in some way or reinventing it, as Mazars suggested, might be the correct thing to do from an economic point of view but it would hit buyers now entering the market and houses built with the incentive in mind. And so it will not happen; it was extended in the 2025 budget until 2029. And now there are demands from backbenchers to increase the price limit of new homes that qualify, or otherwise expand the scheme. With many new buyers availing of this scheme – and also the First Home Scheme – any downturn in the market could make it difficult for them to sell on the property in the years ahead as any future buyer of the home will not qualify for the State schemes which are restricted to those buying newly built properties.Some brokers warn that, unless prices keep rising this could cause difficulties, especially for those on the First Home Scheme who face obligations to repay the State for its equity stake.History does not suggest that these kind of longer-term considerations are given adequate consideration in policy decisions.As an example, a paper published in 2019 in the Administration journal looks at the disastrous decision to allow the continuation of 100 per cent mortgages to new borrowers, which financial institutions started to provide in 2005. While this was a regulatory issue, rather than an incentive provided by the State, the decision process is instructive.The paper, written by Cathal FitzGerald, an economist at the National Economic and Social Council (NESC), found that the Department of Finance decided not to step in, despite concerns being expressed by the Department of the Environment (which was responsible for housing). Rather than pressure from the banks, FitzGerald found that the dominant interest of the Department of Finance “was not to disrupt the economic model” which, at the time, involved increasing house building and strong property-based tax revenues. Undermining confidence in the market was seen as a risk. Ironically, given how things panned out, the department saw the market as “delicately poised”. In replying to Environment, Finance played down the risks of the measure, according to FitzGerald’s paper. Nor did the Central Bank shout stop which, as well as consumer protection, had a mandate to expand the sector internationally.It viewed the opportunity of more people being able to buy homes as positive, as well as encouraging as many players as possible to be active in the market and provide competition. The department, FitzGerald finds, deferred to the regulator, even if the latter felt that – as a policy matter – this was one for the department. Concerns among some officials in the Central Bank were never “surfaced” in the debate. In the end, despite strong warnings from Environment, no intervention was made to stop or limit high loan to value mortgages. While the civil servants may have felt that doing so would not have served the government’s interests, there was no evidence of politicians – or property developers- trying to influence the outcome, beyond the warnings from then environment minister, Noel Ahern. Opinion in the banking sector was divided, though all the big players offered the products to stay competitive, thus, says FitzGerald, feeding into a belief that prices would keep rising and a “soft landing” was on the way. One TD at the time said that banks lending 100 per cent mortgages “shows confidence in the economy”.The ideological backdrop was also vital, with Finance telling Environment that they should “trust the market”. And so the decision to stop the banks offering these products was not taken. Doing so would not have avoided the crash, much of it based on commercial lending, but it would have made it less dramatic and less painful for many households. By 2011, the largest amount of mortgage arrears related to loans taken out in 2006 and 2007. The paper shows that a whole range of institutional factors and the wider policy environment – along with misguided expectations that “things” can continue as they are – can lead to the wrong decisions, or mean that consequences are not properly assessed. As Ireland’s housing market continues to head ever higher, there are important lessons here. The temptation is always to do more to help first-time buyers into the market. And no one could argue that this disadvantaged group does not require assistance. But the law of unintended consequences continues to apply. Those who were caught up in the lending bubble of 2006 and 2007 came out badly. There is no suggestion that a similar style crash is on the way, but no guarantee, either, that Irish house prices will continue ever upwards. Genuinely helping young buyers means providing more homes in the right places and at affordable prices – which requires significant State intervention. Pumping demand even further in an already highly-priced market would carry dangers, including for the very people who the State is trying to help. The dilemma is that not assisting them means they remain locked out of the market.