By Paul Molloy
This is an article about giving tax incentives to property developers to build the houses they are not currently building. The whole country is affected by this housing crisis, from couples who can’t get on the property ladder, to tenants with little security and rising rents and most importantly for the “new homeless”.
The Government believe they can solve this crisis. They mean well but they are in denial about the solution that’s needed. You see, they believe that denial is a river in Egypt!
The most positive impact on this crisis would be if builders build the houses we need.
I’m going to discuss three areas.
- The kind of tax incentives – yes tax breaks – that will work to solve the housing crisis.
- I’d like to demonstrate for you exactly how much profit a developer makes on a house.
- I’ll finish with the political environment for tax breaks.
There are two tax breaks that could work.
Section 23 relief was the commonly used term for rented residential relief that were popular in the 90’s and beyond. These were aimed at urban and rural renewal as well as student accommodation.
The cost of buying and building the property could be used against the rental of new properties and rentals from other properties owned by the same person.
What happened? A huge amount of necessary town and rural properties were rebuilt, vital new student accommodation too and yes builders made very good money.
Now dear reader, if you have got this far and you dislike greedy builders, I have just one question for you.
Is it more important to you that builders don’t get tax breaks and the housing crisis continues or could you stomach builders making lots of money again if it meant that people could find new homes, rents fall and the price of houses fall too?
This next tax break may be more palatable for you and it’s the one I believe makes the most sense.
In 2011, then Finance Minister Michael Noonan took 0.6% out of every pension fund in Ireland and used it to fund a reduced VAT rate for the hospitality sector, bringing it down from the 13.5% to 9% that was charged to the customer and returned to the government in tax. This allowed these businesses to charge customers 4.5% less and improve their competitiveness, take the extra 4.5% to reinvest in their businesses or a mixture of both.
Whilst some rural hotels and restaurants are still struggling, in our town centres and particularly in Dublin, business is booming. This measure has led to 30,000 jobs being created in the hospitality sector.
It was a tax relief. It was needed and it worked. It is needed no more.
Now I’d like to tackle the costs and profits of building a house. The Society of Chartered Surveyors produced a report in 2016 into the costs of building a house for a developer. The report assessed the cost of building a 3 bed semi detached house that would sell for €330,000, based on recent data from this market segment.
Construction, site-works and site development 150,000
Professional fees, finance costs and marketing 34,000
Local authority levies and VAT 51,000
Developer profit and deposit for next site 37,000
So the net profit of €37,000 on a house that sells for €330,000. It’s a profit of 11%. Insomnia owner Bobby Kerr makes a profit of 85% on the average cup of coffee.
In the calculation above, the VAT element is €39,000. If the Government were to reduce the VAT rate from 13.5% to 9%, that would be an extra €13,000 for the builder and would take the profit up to €50,000. This would represent a 33% increase on the developer’s margin. This I believe would be a huge incentive to build.
I spoke with a friend of mine two months back about this and showed him the figures. He felt no VAT cut was necessary as €37,000 was plenty. As it turns out that’s what his salary is. So I asked him, if another company was to offer you a two year contract where they would pay you €50,000 each year would you take it? He said he’d jump at the chance. Then I asked him what if the new company was in a volatile industry?
He said he’d still go for it. Then I said, what if the company said to you that they wanted you to borrow the full two years wages, €100,000, before you started, and give it to them. They would use that money to pay you your take home pay and pay the Revenue what was owed and that they would do their best to repay the loan for you if they could in two years time. If they could that is!!
He said there was no way he’d agree to that knowing the debt was hanging over his head with no assurance he could repay the loan to his bank. He said I must be mad. I then said, “But that’s what the developer has to do. He borrows first, and then repays the loan if he can sell the houses at the end of the project”.
Finally, I’d like to talk about the political environment and the appetite for offering tax incentives for the property sector.
Housing reports have been commissioned by then Minister Simon Coveney and new Minister Eoghan Murphy. The proposals around the supply side include penalising vacant sites and forecasts about building more social housing. I canvassed for a Fine Gael candidate in 2016 and I want the Government to be right but I’m very sceptical.
New social housing will help to take people out of the rental sector but our economy and population are growing and there are many individuals and families who won’t qualify for social housing.
In September of this year, Barry Cowen of Fianna Fail, their spokesperson on housing, floated the idea of reducing the VAT rate for the property sector from 13.5% to 9%.
He said “The big issue, and one of the obstacles to houses being constructed, builders will tell you, is that the cost of construction is not allowing them to enter into the construction sector”
He said simply, “Builders build houses”.
This was an unpopular but brave stance. He must have known that he would be attacked politically, given Fianna Fail’s close ties in the past with builders and the Galway tent! I believe he said it because he thought it was the right thing to do.
Cowen wanted this to apply to affordable homes only, about €350,000 to €400,000, for those that don’t qualify for social housing but can’t get on the property ladder. The measure would last for a maximum of three years.
We know the hospitality sector has received significant benefits from their VAT cut. 30,000 jobs is a fine record. But construction is an employment heavy sector also. The Construction Industry Federation has said the measure would be self-financing: the tax cuts received by the industry would be less that the additional PAYE, PRSI and USC that would result from this measure.
I believe that only builders can solve this crisis. They may not be cuddly, lovable types but they know how to build houses.
We need these tax breaks so that people can have houses. It’s not the developers that need this measure; it’s the people of Ireland.
(This is an article based on a presentation made by Paul Molloy, a business consultant, at a Hibernia Forum discussion on housing, held on 29 November http://www.hiberniaforum.ie/evening-discussion-housing-crisis-hosted-hibernia-forum/)