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Sunday, 22 July 2012

Irish Property Tax Of €1,000 !

Next big hot potato is property tax of up to €1,000...

There's little hope of a property tax being fair and equitable on the already squeezed middle classes, says Daniel McConnell.

Can you afford to pay €1,000 a year in a property tax? Well, according to the man charged with designing such a tax, that is what we will, on average, all pay once it is introduced.

Don Thornhill, a career civil servant who describes himself now as a consultant "who advises on strategy and policy to a number of leading Irish organisations" has recently presented his report to Minister Phil Hogan recommending how such a property tax should work.

Politically toxic and highly unpopular, the lack of enthusiasm of either Fine Gael or Labour to discuss the matter is a clear sign of the trepidation that surrounds the idea of lumping the extra burden on the shoulders of the Irish taxpayer, but in particular the "squeezed middle classes".

Phil Hogan's department is saying nothing other than they have received the report and will consider it.

Even Thornhill himself declined to comment on the matter when asked.

So what is going on?

The Government, clearly spooked by the €100 Household Charge debacle earlier this year, is caught in a dilemma.

Unwilling to increase income taxes, as promised in the Programme for Government, its options are limited and Thornhill has long argued that common sense dictates that Ireland should have a property tax.

"It must be remembered that Ireland stands unique in the developed world in that it does not have an annual recurring tax on land or on buildings," Thornhill and Donal de Buitleir wrote in an October 2008 report called: "The Agenda for Tax Reform: Playing to and developing our strengths."

WHY A PROPERTY TAX?

"Proposals for tax reform are potentially unpopular -- this is certainly the case for our proposals for a recurring property tax," Thornhill himself wrote previously.

Advocating such a tax, the duo said in contrast to increasing income tax, which has an adverse impact on people getting back into, or staying in, the workforce, property taxes do not have the same negative impact.

Many of the same points are restated in his new report to Phil Hogan.

"Recurring annual taxes on land and buildings (especially residential) are generally thought to have minimal negative effects on economic performance. This arises because a recurrent tax, particularly on residential, is a fixed sum. It has a zero marginal rate and does not negatively effect decisions on whether or not to seek work or to invest in further education or in business expansion," they wrote.

Thornhill says most of the opposition for property taxes is driven by the lack of opportunity to evade it when a system is up and running.

Essentially, it is a wealth tax, the bigger the house you have the more you will pay.

"A recurring property tax on residences would be very unpopular. This may have something to do with the difficulty of evading a tax on a very visible base and because payment of the tax was traditionally demanded in lump sums," he argued.

"The tax base is also stable and predictable. Another attraction from a government point of view is that recurring taxes on property are difficult to avoid or evade because the tax base is so visible. This last feature may explain their unpopularity," they added.

In January 2010, Thornhill argued that a property tax should be based on a combination of the size and location of a house -- not its market value.

"The tax would be based on a combination of the floor area and a valuation band, which would differ from one district to another. Differences in prices between districts vary less than actual prices themselves," he said.

If such a tax was levied, the Central Bank said it would average out at €1,000 per household raising €1.5bn a year.

But, if the average is €1,000, by definition many people would be paying more than that, while many other would be paying less than that.

The real fear is that once again, the squeezed middle classes -- those who earn between €50,000 and €150,000 a year -- will be hit hardest.

Labour's Anne Ferris said that any suggestion of €1,000 charges on average houses "wouldn't wash" with people and that any tax would have to be fair. "No way could I stand over a charge like that. Maybe it might be that for those living on the hill of Howth, but I mean €200 or €300 for average homes."

Thornhill and De Buitleir recognised the political toxicity of such a tax and referred to softening measures like waivers for the old and the poor could be factored in.

They also sought to recognise the plight of those who had paid high levels of stamp duty during the last decade.

"A variety of transition measures can also be introduced to provide relief for individuals and households who have recently paid large amounts of stamp duty. Income tax credits, deductions or reliefs could also be introduced to address concerns about increasing the overall burden of taxation," they said.

WHY NOT INCOME TAX/STAMP DUTY INCREASES?

Advising against increasing income taxes, Thornhill is pressing the case to Hogan that income taxes affect both job creation and people's ability to spend in the economy."

Lower income taxes increase consumer spending thus stimulating the economy. If income taxes go too high, they become a barrier to consumer spending, but also jobs.

VAT and other consumption taxes are thought to have a less negative impact on economic performance and consumer spending as they do not distort decisions to work or to invest.

In contrast, taxes on property transactions (stamp duties) are highly distortionary -- by for example reducing liquidity in the housing market. The yield is also highly volatile.

* * * * *

"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things," Thornhill quoted Niccolo Machiavelli's Prince.

How apt that is.

Following the major fallout of the household debacle, where almost half the population refused or failed to pay on time. Even now, only 60 per cent -- or €97m out of a total estimated €160m -- has been collected.

Coalition tensions were then raised last month when it was reported that Thornhill had called for the property tax to be taken directly from the pay packets of PAYE workers in his report to Hogan.

This approach was one of the key recommendations of a report by Thornhill and Donal de Buitleir in 2008.

Following loud calls of outrage from some within the Labour party, most vocal was party chairman Colm Keaveney, Phil Hogan was forced to deny this would happen.

Fine Gael backbenchers too have their concerns. In particular they are anxious that any property tax will not increase the financial burden on the so-called "coping or squeezed middle classes".

But it was Thornhill himself in 2009, who pointed out the greatest threat to the equity and fairness of a property tax.

"People are naturally afraid of the return of rates because it was so badly administered. Any system that is introduced had better be equitable and had better be simple," he said.

He hit the nail on the head.

The absence of one centralised universal database leaves any new property tax regime vulnerable to charges that certain sectors will be unduly burdened.

A perception has taken hold that the PAYE worker in that middle-income bracket will once again be hammered while the self-employed, the farmer, the immigrant, the working class, the old, the sick will all have means of avoiding the charge.

Given the difficulties of implementing such a property tax a political fudge appears to be under way.

In recent days and weeks, Hogan's department has written to county councils, saying they will be fined if they fail to get the compliance rates up to some sort of a respectable level.

If, say, come the Budget in December, over 80 per cent of people have paid the charge and registered, Hogan could then argue to retain the household charge, albeit at a higher rate, say the €200 or €300 referred to by Anne Ferris above for another year or two, thus kicking the can down the road.

However, the Troika may take issue with any move to delay the targets and commitments it has set for the Government. The key to the household charge was not the fee, but the register which was to be the basis of the property tax.

Following the backlash it suffered earlier in the year, the Government cannot afford any mistakes on the introduction of property tax.

If it does, then Machiavelli's ominous words will be ringing loudly in their ears as they go back before the people.

Report - Sunday Independent

Thursday, 12 July 2012

Property Price Register Mystery...

Property price register pushed out until late September...

THE LONG-AWAITED property price register, detailing the sale price of residential properties here, looks like it’s now going to miss its expected summer deadline.

Despite being eagerly anticipated by estate agents, homeowners and buyers, and a recent call from the head of Nama to develop a commercial equivalent, the property price register has yet to materialise. So why the delay?

The property price database first made the headlines in early 2010 and since then there has been much talk but little action. In December of last year, the register was provided for by legislation, and at the time, it was understood that the register would appear six months later.

However, according to Tom Lynch, chief executive of the Property Services Regulatory Authority (PSRA), the register was never going to be ready for June, despite this date being widely reported at the time.

“I never said it was June,” he says, adding that the register was supposed to be established six months after the establishment of the authority, and while the Act was signed into law in December, the authority did not get up and running until April. This, he says, might have led to the confusion.

Lynch was, however, quoted in this newspaper last November saying he “would be very surprised if the Authority didn’t have it out before then”, referring to the June date for the establishment of the register.

In any case, “it will be up by the end of September,” he now says, adding that the PSRA is currently working on licensing of estate agents, and the database is the authority’s next priority. According to Lynch, it will provide details on all properties sold from January 2010.

There is an obvious need for price certainty in the property market given the volatility in recent years.

Estate agents are precluded from divulging sale prices unless they have the express permission of both parties to the sale, which means that the information available has come mainly from auction sales – many of which are for distressed properties which are sold for cash.

Given that one would expect an additional discount to be factored into these prices, they are not a wholly accurate picture of the market, which means that sellers can struggle to fix a sale price, and bidders can offer unrealistically low bids. And price indices such as that from the Central Statistics Office are not seen as wholly representative of the market.

Minister for Finance Michael Noonan pointed out the difficulties himself at the recent Property Industry Ireland conference, when he noted that “different organisations produce different results on an average house price in Dublin and the rest of the country”.

The new register, he said, will “hopefully put an end to the divergence in estimates of an average house price”.

However, its delay has made some industry members a little frustrated.

“How many times have we heard about this?” asks Ronan O’Driscoll, head of residential sales with Savills. “I believe it will happen; but when I just don’t know.”

Given the delays the project has met to date, there is concern that, as some people have suggested, this date will be pushed out once more.

Report by FIONA REDDAN - Irish Times

Wednesday, 11 July 2012

Russians Buy Irish Apartments...

Russians ride in to rescue Irish apartments in Bulgaria...

UP TO 50 Irish-owned apartments in Bulgaria have been bought by Russian property prospectors in the first six months of this year, a Dublin-based property business has said.

An estimated 30,000 Irish citizens currently sit on more than €1bn of bad property investments in Bulgaria.

Dylan Cullen, head of Appreciating Assets, said growing demand from the former Soviet country for the Bulgarian resorts means Irish people are finally able to offload their unwanted properties.

Since the peak of the Bulgarian property-buying frenzy, from 2005 to 2008, Black Sea prices have fallen by between 35pc and 45pc, depending on location. But the Russians and Ukrainians, the two biggest buyer groups, have formed a view that this market looks to be near the bottom. Buyers are back looking at the Black Sea for holiday homes.

"The Russians are becoming wealthier and as their middle class expands they want holiday homes," said Mr Cullen. We're talking about a country of almost 150 million people.

"To them the Black Sea is like Spain to the Irish and British. Unlike the Irish, however, the Russians are not so naive to buy off plans. They're looking for new -- or nearly new but tested -- apartments at fair market prices.

"As it happens, most of these are now owned by the British and the Irish, many of whom want to sell them. Prices have fallen hard in Bulgaria, but unlike Ireland, there are now plenty of willing buyers at current market prices."

Mr Cullen's company, which has an office in Dublin, London and two in Bulgaria, acts as a link between the Irish, British and a network of 1,500 estate agencies across Russia.

The agency charges 3pc to the buyer of the property, who will also typically be paying between 2pc and 10pc to the Russian estate agents.

The firms act for both British and Irish vendors, with his sales split almost evenly this year among both countries.

Sterling

"In many ways the British are the Irish apartment owner's biggest competition. Sterling has strengthened significantly against the euro in recent years with the result that a British apartment owner can sell up at an overall loss in euros but can still make a profit in sterling.

"Most Irish buyers are selling at a loss, but some are breaking even. The real sea change we are witnessing is that Irish owners are realising the relative value of property at home. Some Irish apartments are selling for the same price as in Sofia. At 10pc, the yields are much more attractive at home.

"The interesting thing is that those who seemed somehow ashamed of buying in Bulgaria during the boom are now realising that they'd have lost a hell of a lot more had they bought a second home in Ireland."

Compared with an average loss of 40pc in Bulgaria, Irish investors would have lost 60pc at home and larger amounts, give that Irish properties were more expensive.

Separately, Mr Cullen's company is now seeking to open an office in Spain where property prices have fallen by 30pc so far and may end up shedding 50pc.

"We go wherever Russian demand goes and we're increasingly getting inquiries about Spain."

While the wealthiest of Russian oligarchs are busy buying up London's posh homes, so far Ireland's best streets don't even register. "They're not interested in Ireland at all," said Mr Cullen.

Report by Mark Keenan - Irish Independent