Irish politicians have long been amongst the worst sufferers in the world of that great political pandemic: do-something-itis.
When ever there is a crisis, something must swiftly be done, to demonstrate to the public that the politicians understand the crisis, and have a plan. Last night, just days after the public outrage about investment funds buying homes in bulk, and after days of media coverage declaring that something must be done, the politicians discovered something, and did it:
THE DÁIL HAS approved the government’s proposal of 10% stamp duty for bulk purchases of 10 or more properties.
Cabinet agreed the measure yesterday which is aimed at tackling so-called cuckoo funds buying up housing developments from first-time buyers.
It will include exemptions for local authorities and approved housing bodies.
This higher charge, as well as apply to bulk purchases, will also apply to a situation where a person acquires 10 or more units on a cumulative basis over a 12 month period
Once triggered, the 10% rate will apply to all houses acquired in that 12 month period, including the first nine purchases.
It is, on its face, the perfect bit of tinkering with the property market. It targets the villains directly, by taking money out of their pocket, and giving it to the Government to spend on housing, or its other priorities. It discourages purchases in bulk by penalising them. The ordinary person, who simply wants to buy one home, is unaffected.
It is, in short, the perfect thing for backbench TDs to take with them to the doorstep. “We took decisive action”, they can say.
It is also an entirely terrible idea, and likely to be ineffective.
These companies, remember, are not purchasing these homes simply so that they can own them and live in them. No, they are purchasing them so that they can rent them out to Irish people. It is a retail transaction: They are the retailer, you, the renter, are the purchaser.
The idea behind the tax is that with the extra stamp duty, this activity will be less profitable. Buying ten homes, at €400,000 each, used to cost €4,000,000. It will now cost €4,400,000. Of course, by only buying nine homes, you can avoid the extra tax altogether. Basically, under this proposal, the cost of the tenth home becomes €800,000, rather than €400,000. The others are priced just as they were before.
Of course, every tax can be avoided. A clever property fund will just create sub-funds, separate companies that it owns, and have those companies all purchase nine homes each. Creating five subsidiary entities might cost a little money (not much), but by doing so, the parent company can still buy 45 homes and avoid paying €1.6million in stamp duty.
What’s more, the cost can, and most likely will, be passed on to the renter. Right now, a property fund that buys ten homes for a total price of €4million, assuming each home brings in an average €2,000 per month, will earn the €4million back in 16 years. With the extra tax, if the rent stays the same, the time to get a return on that investment rises to 18 years. But if the rent rises just a little bit, to, say, €2,250 per month, we are right back down to 16 years again. Increase the rent by 10%, and you have covered your losses. Increase it a little more, and you are making more profit, sooner, than you were.
Sinn Fein’s Pearse Doherty was quite right when he told the Dáil that this “isn’t going to make a difference, and you damn well know it”.
What it does do, though, is give the Government some kind of a message on housing. And boy, do they need it. They did something. And for the purposes of the media pressure they’ve been under, doing something is the most important bit.