# VAT should be abolished on new houses



## letitroll (11 Sep 2017)

Brendan,

Undoubtedly this will be inflationary but my view is that the solutions to the housing crisis by their very nature need to increase house prices in the short term thereby increasing participants in the construction of housing. It is the governments job to ensure the number of participants competing to provide that housing isn't artificially constrained by slow planning, infrastructure, access to finance etc. The classic economist view is that increased suppliers will enter into the market compressing margins......nasty few years waiting for that to occur however.

The other pre-budget consideration I feel is the complete removal of VAT on new homes - perhaps for homes below 450,000e if you wanted to target. 

What an insidious tax - one which forces the taxed to borrow to pay for it over 30yrs. Swelling the coffers of the banks, reducing household disposable income (and by extension purchasing power). Again one where the VAT reduction will go at first to swell the pockets of developers but as the fella said its never too late to do the right thing.


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## letitroll (11 Sep 2017)

Purple - VAT is a tax on the purchase of a new home. It is paid for by the purchaser, like any sales tax. The reality of this tax unlike consumption or income led tax is that payer borrows to pay for it. The reality is that on 300k new home, some 40k is VAT, borrowed for 30yrs at say an average rate of 4%, that results in 70k in payments (30k in interest). The industry you could argue that VAT subsides is the banking industry, driving larger borrowings.

If you want more of something, new houses / housing, which we do then you don't tax it but you damn well ensure that competition at a supply level means VAT reductions over time accrue to the customer and not the supplier. Your factory built homes would be a perfect remedy to that and looks very interesting.


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## Purple (11 Sep 2017)

letitroll said:


> Purple - VAT is a tax on the purchase of a new home. It is paid for by the purchaser, like any sales tax. The reality of this tax unlike consumption or income led tax is that payer borrows to pay for it. The reality is that on 300k new home, some 40k is VAT, borrowed for 30yrs at say an average rate of 4%, that results in 70k in payments (30k in interest). The industry you could argue that VAT subsides is the banking industry, driving larger borrowings.
> 
> If you want more of something, new houses / housing, which we do then you don't tax it but you damn well ensure that competition at a supply level means VAT reductions over time accrue to the customer and not the supplier. Your factory built homes would be a perfect remedy to that and looks very interesting.


The market sets the price of the house. If VAT is removed the seller will just end up with more money in their pocket. The only way to reduce price is to increase supply. The rest is just doing things for the sake of being seen to be doing things.


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## letitroll (11 Sep 2017)

Purple said:


> The market sets the price of the house. If VAT is removed the seller will just end up with more money in their pocket. The only way to reduce price is to increase supply. The rest is just doing things for the sake of being seen to be doing things.



How do you increase the supply? Conscript people to enter into the construction industry, force developers to build, unfortunately you can't have ala carte capitalism. People / economic actors have free will.

In a market where demand outstrips supply which from post above you agree is the Irish housing market - Price (in effect the reward for supplying a good) needs to be increased to encourage more participants. That is how you increase the supply of anything. This has been happening all by itself since 2012 - http://www.investopedia.com/university/economics/economics3.asp

Removal of VAT in effect is a way to change the reward dynamics without actually raising the price. A good thing when it comes to housing. Yes the horrible and stomach churning idea that the VAT removal will in the short term go to the incumbent home suppliers has a certain revulsion, I totally get it. This however presumes that they will and forever retain pricing power. The changed profit dynamics will encourage those to enter the industry, incumbents will find their pricing power eroded (that guy building the estate up the road, is selling 3-beds for 10k less which 3-bed are you going to buy?). 

We can go around in circles here as supply & demand is flywheel -

Excess Demand = Higher Price, Higher Prices = Increased Supply, Increased Supply = lower prices. Rinse & Repeat.

at what point you want to jump into that circular equation depends on your personal preference /political & social leanings.

If the price of admission to solve the housing crisis for thousands of families is to see a few new Johnny Ronan's spinning around in Range Rovers sign me up......because as soon as that happens a plethora of Johnny Ronan wannabee's will go into property development but driving Toyota Highlanders and undercutting Johnny.

(Note I'm not claiming this is the 'silver bullet' other things like you and others have mentioned could be done in concert with this but it is simply one of the the most obvious courses of action.)


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## Purple (15 Sep 2017)

letitroll said:


> If the price of admission to solve the housing crisis for thousands of families is to see a few new Johnny Ronan's spinning around in Range Rovers sign me up......because as soon as that happens a plethora of Johnny Ronan wannabee's will go into property development but driving Toyota Highlanders and undercutting Johnny.


Or we'll end up buying back property from the same funds/ people/ companies to which they were sold at a discount by NAMA. Think of the noise that the Paul Murphy's of this world will make when that happens!


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## PMU (15 Sep 2017)

House prices are set by the market; if you are a builder you sell at the market price and make your profit on your efficiency or having lower costs. There is no money to be made in undercutting other builders; particularly if cash is being pumped into the system by Help to Buy initiative, Home Choice loans, and watering down of Central Bank deposit rules and lending criteria.

Also house prices exhibit serial correlation – once you know the price a house has sold for, if you are a seller you will add on say 5 - 10 grand extra to that price, as your selling price, and house prices increase this way incrementally to soak up cash coming into the system. Also unlike equities, nobody ever sold a house because they thought it was overvalued, and there is no downward pressure on prices as you cannot short sell a house. So while increasing supply will meet the housing needs of buyers and those who wish to move from being tenants to homeowners, it won't necessarily reduce house prices. And as other posters have pointed out if you reduce VAT it's just a gift to the construction industry.

My suggestion, for what it's worth, is not to interfere with house prices and market dynamics, but just to increase housing supply by increasing housing density in low density areas. Compensate the residents of these areas by abolishing their Local Property Tax for a period of say 10 years. So you get more houses but not cheaper houses and you don't interfere with house prices, etc.


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## letitroll (16 Sep 2017)

You understand who pays the VAT right, its the house purchaser? They borrow the VAT from a bank to pay it and as I've said before its the most insidious of taxes - 30k of VAT, borrowed for 30yrs @ 4% ends up costing 70k. Nice 40k interest to Bank of Ireland and huge carry cost for the home buyer.

Think you've got it all screwed up. The government should get out of the business of taxing the construction of new homes (we want more of it, so tax it less). Does anybody disagree that if you tax something less you get more it? It also means the government will not again be sucked into spending cyclical tax receipts from building booms like they did in the Celtic tiger years -  a good thing I think you'll agree.

They should focus then on shifting to increasing property taxes to ensure stability in tax receipts but also the the property use cycle that is seen in most other countries is created, where a property tax encourages the use of a home for its optimal purpose. i.e. you have three homes in your life - small apartment starting out, family home when raising kids, downsize when empty nest.

The amount of 4 / 5 bed family homes in Dublin that are currently occupied by a single person or couple who have raised their family is staggering. While the households that needs those homes are pushed further and further afield into ever more expensive family homes in  Dublin's hinterland. A meaningful property tax on homes such as this will incentives its proper use while providing a stable tax base for government going forward. 

Where do these people go, there's no retirement villages or suitable place for empty nesters to go to! I know there isn't but as I've said before its never too late to do the right thing and doing the right thing is seldom easy. Long term however it is the right thing and overtime such communities / solutions will spring up as they've done in the US, Germany etc. and proper


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## letitroll (16 Sep 2017)

PMU said:


> House prices are set by the market; if you are a builder you sell at the market price and make your profit on your efficiency or having lower costs



The ‘market’ is not some arbitrary thing - it’s made up of supply and demand. If supply were to increase beyond demand builders / house sellers would react by undercutting each other.



PMU said:


> Also house prices exhibit serial correlation – once you know the price a house has sold for, if you are a seller you will add on say 5 - 10 grand extra to that price, as your selling price, and house prices increase this way incrementally to soak up cash coming into the system.



The inference here is houses prices can only ever go up. We know this isn't true. A supply shock (which in effect is my suggestion) or a demand shock (a global recession leading to mass unemployment like we had '09) will drive house prices downwards.



PMU said:


> And as other posters have pointed out if you reduce VAT it's just a gift to the construction industry.



Not a gift - simply mechanism through which we can simply and effectively increase supply. Like I've indicated increasing profit margins will attract more participants into the production of new homes. Yes house prices wouldn't go down immediately but I can guarantee you housing construction would go through the roof. This ultimately we can all agree is what we want?? Yes extra profits in the short to medium term will go to the builders, I know everyone hates that idea but lets not be petty and look at the bigger picture. Would you trade the aggregate human misery brought on by the current housing crisis just so you can ensure a measly 0.01% of the population aren't seen to be excessively 'doing well'. I wouldn't.



PMU said:


> My suggestion, for what it's worth, is not to interfere with house prices and market dynamics, but just to increase housing supply by increasing housing density in low density areas.



What is VAT only government interference in the supply and the construction of new homes? I agree the government should remove itself from this critical function of our society.

Increasing housing density in effect is increasing profit margins (a gift) for developers & the construction industry. I AGREE wholeheartedly this is exactly what has to happen.


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## newtothis (16 Sep 2017)

letitroll said:


> The ‘market’ is not some arbitrary thing - it’s made up of supply and demand. If supply were to increase beyond demand builders / house sellers would react by undercutting each other..



The evidence would suggest the opposite: the last time construction surged, prices did too.

The problem with your argument is that it may look fine in an economics 101 textbook, but the real world (or at least in this country) doesn't seem to have read that particular text.

For what it's worth, my suggestion is that if the government wants to increase supply, it should do so by building itself, either directly through local authorities or by funding some body set up specifically for the task. The evidence is that messing with the "market" frequently fails to deliver the desired outcome and equally frequently has undesired outcomes (ghost estates anyone?).


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## letitroll (16 Sep 2017)

newtothis said:


> The evidence would suggest the opposite: the last time construction surged, prices did too.



Yes what happened last time is that building surged. However what also surged was lapsed lending standards and a credit bubble i.e. a demand shock . Those two together are classic idiot booms. The macro prudential rules currently in place (and if they were to remain in place) and trust me they will as the ECB i.e. the German's are in charge of the Paddy's in the Central Bank and the domestic banks who they now directly supervise through the single supervisory mechanism (SSM), will ensure that demand for housing will not rise above its steady state as ultimately the purchasing demand for new homes is driven by household formation & income levels (a function of demographics & productivity/income distribution).

The current Central Bank rules (3.5 x combined income) ultimately cap the pool of purchasers available for any given home at a particular price point. Demand therefore is capped. You want house prices to stabilize or go down you increase supply which isn't capped and is within our control.




newtothis said:


> For what it's worth, my suggestion is that if the government wants to increase supply, it should do so by building itself, either directly through local authorities or by funding some body set up specifically for the task.



I agree - I think they're will always be those in our society that will not have the income level required to secure their housing needs in the private market. We live in a wealthy society and we should look after those peoples housing needs through public housing, constructed directly by the state and local authorities. Indeed the provisioning of state housing to those currently getting rent supplement in the private rental market will increase supply back into the private rental market reducing rents and by extension house prices. A good thing.


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## PMU (17 Sep 2017)

letitroll said:


> The inference here is houses prices can only ever go up.


No. It says that unlike equities, changes in house prices do not follow a random walk.



letitroll said:


> A supply shock (which in effect is my suggestion) or a demand shock (a global recession leading to mass unemployment like we had '09) will drive house prices downwards.


Builders  can't increase supply immediately as the number of houses that can be built is at any point in time is the number for which they have received planning permission. If demand is falling off, you just don't build. If you are foolish enough to build you just run the risk of ending up with a ghost estate (and going bankrupt).   During and after the crash house prices went downwards because the supply of mortgages disappeared or because mortgages became very expensive.  And demand also fell, after all who wants to buy a house and go straightaway into negative equity? Better wait until prices fall further.

As for VAT reductions to builders vs increasing housing density, my suspicion is that builders would just pocket all or most of the VAT reduction.  You may get some reduction in prices initially, but if the Central Bank keeps pumping money into the system, purchasers just bid up the price of houses. But this is a subject for debate.



newtothis said:


> For what it's worth, my suggestion is that if the government wants to increase supply, it should do so by building itself, either directly through local authorities or by funding some body set up specifically for the task. The evidence is that messing with the "market" frequently fails to deliver the desired outcome and equally frequently has undesired outcomes (ghost estates anyone?).


But isn't this what we do at present? Apart from actual construction, housing is the most state controlled part of the economy. The PRA certifies your title; zoning/housing density is controlled by local authorities; housing standards are controlled by the D/Housing; planning permission is controlled by the local authority; housing finance is controlled ultimately by the Central Bank through quantitative restrictions on mortgages and rules on the supply of mortgages. The only thing that the state doesn't control or highly influence is the liquidity the builder needs to start up and the actual construction process itself. If NAMA makes cheap loans available to builders it is providing start up liquidity. So the state is doing and controlling everything except for the construction process. Is this not the problem? Excessive state involvement in housing has failed to deliver decent houses at reasonable prices when people wish to buy them.


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## letitroll (17 Sep 2017)

PMU said:


> Builders can't increase supply immediately as the number of houses that can be built is at any point in time is the number for which they have received planning permission.



Yes of course and increase the rewards to home building and builders will begin planning applications on land which currently has no permission, increased planning permission requests will mean more land likely to be zoned residential by the local authorities etc. etc. and so and so forth. In summary increasing supply -- -a good thing when there is a housing shortage.

What everyone here seems to be forgetting is that supply will be increased in the private housing sector by chiefly one mechanism only. Increasing house prices, leading to increased reward to property developers , leading to increased supply. What we seemed to be resigned to is house prices grinding higher each year to the point where the attraction of the sector is such that substantial profits can be achieved in it. Lets get to that point RIGHT NOW. In effect the argument against is that we should sit idly by and watch year by year house prices rise till the carrying cost of a mortgage consumes a huge proportion of a newly formed households incomes? How much are willing to allow house prices to rise? We are willing to let them rise to the very limit of affordibilty as defined by the Central Bank of Ireland (x 3.5 income) which from international analysis is the very extreme of what is considered safe.

The 13% VAT removal, from a property developers P&L perspective, is the equivalent of a significant level of house price inflation i.e. profit margins will increase overnight. Either you welcome higher house prices as a good thing for soceity or you don't? I don't. The government has an opportunity to cut off years of double digit house price inflation ahead (to the limit of CB affordability) by delivering a rapid and significant supply increase through VAT removal and yes by increasing the rewards to developers. It has the added benefit of ensuring the government will never again be tempted to make long term budgetary commitments based on cyclical tax streams from taxing the production of new homes for its citizens. Bonus benefit! It should get out of that business all together.

The argument against all this amounts to post a Celtic tiger self destructive narrative one in which the public zeitgeist says "I would hate to see property developers / house builders (in a housing shortage crisis) prosper from government actions to stimulate house building."

Politicians of course knows this petulant public attitude to property developers and as Juncker said during the European crisis 'We all know what to do, we just don't know how to get re-elected after we've done it.'. Therefore while I'm a proponent of VAT removal or its significant reduction, I place the probability as low for our spineless politicians who dally on the sidelines when they hold a lightning rod in their hands.



PMU said:


> You may get some reduction in prices initially, but if the Central Bank keeps pumping money into the system, purchasers just bid up the price of houses. But this is a subject for debate.



As covered previously I believe the Central Bank rules (but in effect the ECB's instructions) around affordability will ensure a credit bubble will not occur here for at least a couple of generations or until the institutional memory of the last credit bubble has disappeared from the CBI or ECB.


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## newtothis (18 Sep 2017)

PMU said:


> But isn't this what we do at present? Apart from actual construction, housing is the most state controlled part of the economy. The PRA certifies your title; zoning/housing density is controlled by local authorities; housing standards are controlled by the D/Housing; planning permission is controlled by the local authority; housing finance is controlled ultimately by the Central Bank through quantitative restrictions on mortgages and rules on the supply of mortgages. The only thing that the state doesn't control or highly influence is the liquidity the builder needs to start up and the actual construction process itself. If NAMA makes cheap loans available to builders it is providing start up liquidity. So the state is doing and controlling everything except for the construction process. Is this not the problem? Excessive state involvement in housing has failed to deliver decent houses at reasonable prices when people wish to buy them.



But that's exactly my point: the government has all these levers at its disposal, but none seem to have the desired effect. Rather than try and influence "the market" to produce more housing, which has demonstrably failed, why not just start building? If local authorities started building social housing and some state-backed entity started building to either sell or rent at market rents, apart from the new stock itself, it would relieve pressure elsewhere in the system.


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## Brendan Burgess (18 Sep 2017)

newtothis said:


> Rather than try and influence "the market" to produce more housing, which has demonstrably failed, why not just start building?



You have said this a couple of times. Is it not clear that building is a huge interference in the market? 

If Dublin City Council decides to build 1,000 social houses, they will push up the price of residential land in Dublin City, making it more difficult for those who want to buy houses. They will also push up the cost of building. 

Brendan


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## Purple (18 Sep 2017)

Brendan Burgess said:


> You have said this a couple of times. Is it not clear that building is a huge interference in the market?
> 
> If Dublin City Council decides to build 1,000 social houses, they will push up the price of residential land in Dublin City, making it more difficult for those who want to buy houses. They will also push up the cost of building.
> 
> Brendan


The other issue is who will build them? We have a shortage of construction Tradespeople.


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## newtothis (18 Sep 2017)

Brendan Burgess said:


> If Dublin City Council decides to build 1,000 social houses, they will push up the price of residential land in Dublin City, making it more difficult for those who want to buy houses.



Why? There's plenty of land already state owned that's suitable. See:http://rebuildingireland.ie/news/rebuilding-ireland-land-map/

If DCC build 1,000 social houses, that's 1000 households no longer looking for housing elsewhere. If anything one would expect downward pressure on pricing in the rest of the market.


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