Mon Mar 26th, 2007 at 05:39:23 AM EST
As I've mentioned, Sam and I are in the midst of buying a house and
selling ours at the moment. Naturally, we've elected to do it just as
the Irish property market swerves off the road and wraps itself
around a tree. No doubt you're going to start reading stories in the
newspapers about the lessons of the Irish property market for other
markets in the same way that you've been told that the free market
reforms in the Irish economy are responsible for the meteoric growth
rate here while little details like National Development Plans,
centrally negotiated wage agreements and payback on the investment
put in by the EU over the last couple of decades are neglected.
Before anyone starts feeling sorry for us, let's have a quick look at
the consequences of the boom for us: we bought our house three years
ago, well into the boom, for €230,000. We will sell it for at
least €317,500. Not a bad profit over three years, and given
that we've paid off part of the mortgage we'll end up taking €
100,000 out of the deal. Of course, the house we're moving to also
costs much more than it did three years ago, so we don't win in the end.
What drove the boom here? Rapid economic growth in an economy with a
large proportion of young and not-so-young people who needed
somewhere to live coupled with changes in bank practices that made
lending criteria much easier to satisfy. Layer some speculative froth
on top of that from investors and you get the Irish property boom.
Supply couldn't keep up with demand, so prices rose and the investors
got excited so prices rose again.
This time last year we could probably have sold our house for at
least €350,000 - though the new house would also have cost more
- and in fact houses around here were priced at that level for some
time, which killed off the market. That price simply wasn't
supportable for a two-bed terraced house out in the suburbs. You're
talking about a mortgage of about €1,500 a month, which is just
Added to that is the threatened "reform" of stamp duty, which is a
tax paid by the purchaser on the purchase of a house (actually a tax on the contract...if you sell without legal backing or a contract then no stamp duty). There is an
election here this year and several parties are talking about
significantly reforming the tax. So everyone waited until after the
Budget in November, then they waited until after the Finance Bill in
February and now they're waiting until after the election.
Stamp duty rates can be quite high - as high as 9% on anything over €635,000 - and the
way they're calculated makes some price points very hard to sell at.
The consensus between estate agents is that our house is worth €
330,000. However, if you're a "first-time buyer" - someone who has
never owned residential property in Ireland - you are exempt from
stamp duty on properties of €317,500 or less. Thus, if you buy a
property for €317,499 it costs you €317,499. If you buy one
for €317,501 it costs you €327,026. This puts us in a
difficult situation: non-first-time buyers are putting off purchases
until after the election and first-time buyers have to pay an awful
lot more money to buy what is really a starter home. So we end up
selling at the taxation distorted price. Which means I won't be able
to afford a gold plated toilet seat in the new house, about which I'm
Naturally again, the media are gleefully talking up the possibility
of a housing crash, exacerbating the problem and quite likely causing
one. I'm rather expecting our new house to be worth less than we paid
for it for a year after we buy it.
Incidentially, what would you say the consequences of a reduction in
stamp duty are? It will inevitably increase house prices by the
difference. If someone is willing to pay asking price plus stamp duty
then they will be willing to pay asking price plus lower stamp duty
plus the difference.
A lot of the faltering in the Irish property market is down to
electioneering and the details of the Irish tax system. I'm almost
looking forward to seeing what the international press have to say