Tax breaks for construction industry must be considered

It's holiday season and families all around Ireland have been flying in their droves from Dublin, Cork and Shannon airports. Most will have their minds on sun and sangria. Only the very few will be thinking economics. The dismal few, one might say.

Looking down from high above the Irish landscape on a recent excursion, my mind drifted to the hot topic of the Irish housing market. The striking element of the bird’s-eye view is how sparsely populated the country is.

The statistics back up this assertion. Per square kilometre, Ireland has just 69 people on average. This compares to 262 per square kilometre in the UK, while Malta, the most densely populated state in the EU, manages to squeeze more than 1,300 people in such an area.

Abundant supply normally leads to low prices, but despite the relative dispersion, the price of property and land is not overly cheap by international standards, even after the collapse in the 2008-2012 period. Adding to the conundrum, we have a housing shortage in the main economic centre of Dublin, despite there being enough zoned land for five years of supply and enough with planning permission for 18,000 units. Yet, only 4,000 units have been commenced in the last 18 months.

Adequate housing

How can we use our ample land to provide adequate housing in the right areas?

Among the many issues leading to the current housing deficit, it is clear that the cost of building is a major barrier to increased supply. For sure, hard costs (labour, materials) are high in Ireland relative to the rest of Europe, but these tend to be relatively sticky. Soft costs, though, are an important part of the overall cost of building.

For instance, taxes and levies can account for up to 25 per cent of the price of a unit. This area is one over which the Government has direct control. It can implement change quickly and can thus go some way to resolving the issue of the cost of building.

Ireland’s experience with tax breaks for the construction industry has been mixed. Section 23-type schemes were arguably the correct stimulus to kick-start the moribund sector in the 1980s. The problem was that, for political reasons, the incentives were maintained throughout the boom and outlasted their usefulness with disastrous consequences.

That bad outcome should not cloud our judgment as to the benefits that stimulus plans deliver. If tax incentives are timely, targeted and temporary – the three Ts – they can do good.

Previous tax incentives for property did not satisfy these conditions, with some notable exceptions, such as the capital gains tax holiday on property purchases. But a two-year reduction in VAT and development levies for building close to key population centres would satisfy them.

VAT reductions have proven successful in the tourism industry in recent years and the same could happen in the construction sector. Builders and developers need to rebuild their industry today as much as the tourism sector did a few years ago.

That’s the carrot; here’s the stick. The Government should press ahead with plans for a vacant site tax on identified lands. This idea has been mooted before, but it has faced strenuous objections.

However, the merits of such a tax at this point in time are considerable. Taxing vacant sites would discourage the hoarding of land and encourage the most efficient use of this land. This could take the form of a 3 per cent levy on strategically positioned, zoned land.

Rewards and penalties

Such a tax, however, should not just apply to privately owned land. The Government, through Nama and the local authorities, is one of the biggest owners of land in the country. While Nama was wary of flooding the market with supply in the early days of its existence, it is now clear that international funds and well-capitalised Irish builders would welcome the opportunity to get their hands on large landbanks and build units on this land.

There are no easy fixes for solving Ireland’s housing crisis. Some of the options presented here will be unpopular in certain quarters, but without clear rewards and penalties being used to develop our abundant parcels of land, the housing problem will only worsen, with dire social and economic consequences.

One hopes this is something that is taxing the minds of our policymakers on their own summer breaks.

Dermot O’Leary is chief economist with Goodbody