[Articles] Property tax needed for 'soft landing' in housing market - IMF

Victor

http://home.eircom.net/content/irelandcom/topstories/4377463?view=Eircomnet

Property tax needed for 'soft landing' in housing market - IMF
From:ireland.com
Friday, 5th November, 2004

The International Monetary Fund has called for the introduction of a property tax to help ensure a soft landing for the housing market. In its annual review of the Irish economy, the institution argues that the "possibility of an abrupt unwinding of the housing boom", was one of two main risks to an otherwise benign outlook for the economy.

"The impact of such an unwinding on employment and private consumption could be significant," according to the body.

To prevent this, the Government should consider "introducing a market-based wealth tax on property, graduated to tax second homes as higher rates", according to the report. ...

The IMF recommendation is expected to be echoed by the National Economic and Social Council in its review of the housing market in the coming weeks. The IMF also called for an end to other subsidies and incentives for home-owners, including mortgage tax relief.

A Department of Finance spokesman said it would not comment on the IMF recommendation given the proximity of the Budget on December 1st. In its review, the IMF calls for a modest tightening in the Budget to avoid fuelling inflation. It also urges the Minister to "resist political pressure for increased spending", given that much of the recent improvement in the public finances is down to once-off factors such as the pursuit of off-shore funds.

The other threat to the economy, identified by the IMF, was a significant further appreciation of the euro, which would erode Irish competitiveness. The body called for an "extended period of wage restraint as well as increased wage flexibility within the social partnership" to "address this potential source of vulnerability". This could be achieved by shortening the duration of national wage agreements from three years, said the IMF. It also called for more competition in the domestic market, particularly in the services sector.

Barring the threats identified in the report, the IMF predicts that the economy will grow by 4.5 per cent this year, accelerating to 5 per cent in 2005. Core inflation will remain around 2 per cent, with interest rates increasing "towards more normal levels".

"Over the medium term, real growth is expected to be in the 4 to 5 per cent range," according to the report.

The Minister for Finance, Mr Cowen, said last night the "messages and challenges" identified by the IMF were in line with those he had been highlighting over the last number of weeks. Speaking at the Institute of Bankers' annual dinner, he said there would have to be an adjustment of expectations in the labour and housing markets as well as in fiscal policy.

http://home.eircom.net/content/unison/national/4377654?view=Eircomnet

IMF advises Cowen to scrap mortgage interest relief
From:The Irish Independent
Friday, 5th November, 2004

THE Government has been told to scrap mortgage interest relief and to introduce a wealth tax on second homes by the respected International Monetary Fund (IMF).

The advice is contained in the latest IMF Public Report on the Irish economy and comes amid growing concern at the continuing property boom here, with prices accelerating despite a huge increase in the number of new homes.

Estimates suggest that a quarter of the 80,000 housing units to be completed here this year are effectively second homes, such as rental accommodation or holiday homes. Mortgage interest relief cost the exchequer some €211m last year, and with the increase in house prices, the saving from the withdrawal of this relief is expected to be even more, possibly in the region of €220m.

While the benefits of mortgage interest relief have been eroded over the years, for first-time buyers it still represents an important part of their financing, said Pat O'Sullivan, Irish Mortgage Council (IMC).

Mortgage relief is allowed at the standard rate of tax, 20pc, and is capped at about €6,700 for a married couple.

Mr O'Sullivan also said that applying a wealth tax on second homes would have a negative impact on the rental market. "We are only now getting to a situation where we have enough homes being built and such a tax would take away the incentive to invest in property," he said.

The IMF recommendations are part of a strategy to engineer a "soft landing" in the housing market, rather than a collapse or sudden drop in prices.

It said that while such an "abrupt unwinding" of prices would not cause instability, it would hurt employment and consumption levels in the economy and needs to be managed.

Looking at the Irish housing market, IMF directors said the strong preference for property ownership by Irish people was a compelling reason "not to provide additional incentives in the form of subsidies to home ownership".

Chief among those subsidies is mortgage interest relief, which the IMF now says should be scrapped.

This together with the introduction of a wealth tax on second homes are seen as keys to the management of a "soft landing" in the housing market.

Figures from the IMC illustrate the rapid growth that has taken place over the past decade. Between 1995 and 2003 the average mortgage rate fell from 8.5pc to 3.6pc but the average house price climbed from €74,000 to €284,000 and the value of outstanding mortgages grew from €12bn to €59bn. Lending to purchasers of family homes accounts for the vast bulk of mortgage lending, at around 75pc of the total, with the balance of 25pc being lent to investors.

A spokesman for Finance Minister Brian Cowen declined to comment on the specific recommendations in the IMF report. He said Mr Cowen welcomed the general findings of the report on the health of the Irish economy - it was in broad agreement with the recent quarterly report from the Central Bank - but would not comment on specific budgetary issues.

The spokesman added that the IMF advice "will be considered" in the run-up to the Budget.

Pat Boyle