Elimination of TRS (mortgage interest relief) for new buyers-prices should drop €20k

Caspero

Mortgage interest relief makes a huge difference to monthly payments, especially in the early years of a mortgage when interest can make up the majority of monthly payments. The amount of relief depends on the amount of interest, but at the highest it adds up to over €31,000 over 7 years. The proposal for Government 2011 has indicated that it will be eliminated for new buyers from June 2011. That date has passed without implementation and it is unclear whether it will now apply to new buyers from Budget 2012 on, or whether new buyers from June 2011 on will enjoy it this year and not from Budget 2012.

I looked into this last week and found the following:

1. In budget 2010 the interest relief was scheduled to reduced for new buyers in 2012 and abolished for new buyers from then on, as per here: http://www.revenue.ie/en/tax/it/reliefs/tax-relief-source-mortgage-rates.html. Note that existing mortgage holders will continue to get relief until 2017 as per the table at that site.

2. The program for government proposed to give extra tax relief to 2004-2008 buyers by abolishing the relief for new buyers from June 2011 on instead of abolishing it for buyers from 2013 on (see page 14 here http://www.finegael.ie/upload/ProgrammeforGovernmentFinal.pdf). Cue internet message board fury over idiots who bought during the bubble being bailed out at the expense of the smart who waited until it burst.

3. Michael Noonan said in the Dáil that this will not come into effect until Budget 2012: http://debates.oireachtas.ie/dail/2011/05/11/00051.asp


Noonan's statement seems ambiguous to me. It isn't clear whether:
a. That buyers from budget 2012 onwards will not enjoy the relief (but those who buy from today until the end of 2011 will) or
b. That budget 2012 will introduce changes that will abolish the relief for buyers from June 2011 onwards.

I called Revenue today to seek clarification and they could not help because they have not been told by the Department of Finance which he meant. At the moment they are allowing interest relief for house purchases between June 2011 and today but that could change in the budget. I also called the Department of Finance and was told that the issue is under consideration and they can not yet say one way or another. My guess is we won't know for sure until the budget comes out.

I see this having the following implications:

1. Whenever this does come into effect, house prices will drop by over €20,000 because the elimination of this tax relief has the same impact as higher interest rates - it makes peoples' monthly payments higher, making housing less affordable. The resulting drop in prices should equal the net present value of the tax relief, which depending on how big your mortgage is, could be north of €20,000.

2. Buyers should postpone purchases until there is clarity on this matter because if they buy now they could be stuck without the relief next year and also fail to enjoy the c. €20,000 price drop which will come when people realize the impact of the removal of the tax break. I think the drop will happen when people go to the bank and are told what their monthly payments will be excluding the break - i.e. at the beginning of next year once Budget 2012 is implemented.

3. There was commentary in the media that some people had accelerated house purchases this year so that they would buy before June 2011 and so be certain of enjoying mortgage interest relief. If that is true, demand will be a bit lower over the next few months because those buyers will be gone from the market. The result will be downward pressure on prices. To look at it another way, if that extra demand hadn't been present in the last few months, prices would have dropped even more than they actually did (which was pretty bad anyway according to the Q2 Daft report!).

If you've read down to here you must have a pretty good attention span not to have fallen asleep by now so I value your opinion . I would like to know:

1. If you have inquired about the implementation date of TRS abolishment and received a less ambiguous answer than I did?
2. Do you agree with my conclusions or not?

The_Conductor

I agree in the main with your assessment- but I have one query for you- why do you reckon that TRS is only supporting property prices to the tune of 20k?

By the way- I'm not sure why the Department were so ambiguous with you regarding TRS, because the Revenue Commissioners link that you've quoted is pretty definitive about this is to be managed.

The government can change their minds until the cows come home about how they implement this scheme- however it will involve an amendment to the Finance Bill, or a direct budgetary provision- neither of which have occurred. There is no framework in place to modify the scheme, as detailed on the Revenue Commissioners website at present.

Clarity on TRS won't necessarily have the impact on buyers that you're imagining- I don't think there is a cadre of potential buyers hanging around out there, wondering cad e an sceil faoi. There are two issues at play- 1. people can't get credit and 2- why bother buying when prices are falling between 1 and 1.5% month on month- with no indication of any slowdown in the rates of decline (and international commentators suggesting our prices are still 50% above their fundamental value levels........)

If you really want to buy- be my guest- but TRS is the least of your worries........

Caspero

Hi smccarrick, thanks for your response and thoughts.

but I have one query for you- why do you reckon that TRS is only supporting property prices to the tune of 20k?

Trying to be conservative here, could be more. Arrived at that conservative estimate as follows: I figure the max benefit over 7 years is just over €31,000 at the most, reduce that a bit because not everyone has a mortgage that big and discount it back and you come out somewhere around 20k.

By the way- I'm not sure why the Department were so ambiguous with you regarding TRS, because the Revenue Commissioners link that you've quoted is pretty definitive about this is to be managed.

Yes its definitive on the changes implemented in budget 2010, but the program for government proposed changes from June 2011, which weren't implemented then, but will be with the budget, ambiguity being whether purchases from June 2011 to end of the year will get the full benefit from 2012-2017 or just the benefit this year.

The government can change their minds until the cows come home about how they implement this scheme- however it will involve an amendment to the Finance Bill, or a direct budgetary provision- neither of which have occurred. There is no framework in place to modify the scheme, as detailed on the Revenue Commissioners website at present

Yes my understanding is that this is the reason they're waiting until the next budget to bring in the measures.

Clarity on TRS won't necessarily have the impact on buyers that you're imagining- I don't think there is a cadre of potential buyers hanging around out there, wondering cad e an sceil faoi. There are two issues at play- 1. people can't get credit and 2- why bother buying when prices are falling between 1 and 1.5% month on month- with no indication of any slowdown in the rates of decline (and international commentators suggesting our prices are still 50% above their fundamental value levels........)

Perhaps, but there are at least some transactions happening at the moment. My argument is that the few who can get credit and are willing to buy look at their monthly payment as one of the key determinants in deciding whether the mortgage is affordable. To the extent that the abolishment of the tax relief raises the monthly payments, the payments become higher and the house less affordable.

If you really want to buy- be my guest- but TRS is the least of your worries........

Not sure if this was addressed at me or 'you' as in 'one' but if the former then I don't, unless I can find something really compelling at distressed prices today. If the latter, yeah true but the other issues (houses falling 1.5% per month) have been discussed pretty extensively elsewhere whereas I think this one-time c. 10% hit coming next year hasn't as much.

Victor

So, will people be making bids subject to TRS?

Senna

Cant see to many people using TRS as a "will i" "wont i" deal breaker. If your going to buy in the next 6 months then you will probably look to have it completed before the next budget so you do get TRS. But i cant see too many buying now just because the TRS will expire next year.

Caspero

Senna wrote: »

If your going to buy in the next 6 months then you will probably look to have it completed before the next budget so you do get TRS.

You do get it this year, but there is uncertainty as to whether you get it from the budget onwards, as per the above. I called the Revenue and the Department of Finance to inquire about this. Revenue said: 'we haven't told been by the Department of Finance yet whether buyers from June 2011 onwards will continue to get relief after the budget'. The Department of Finance said: 'this is under consideration'.

My sense is that you are correct and that it is the intention of the government to only abolish the tax for buyers from the budget onwards instead of from June 2011 as the program for Government outlined. However I wouldn't want to bet €31,500 on it without being certain. That's how much is at stake if the buyer today doesn't get the tax break from next year on.

The_Conductor

Pertinent to this is the pledge the government inherited to remove market supports from the residential housing market, and the views the Troika may have on this scheme.....

Personally I believe that the supports (TRS, Mortgage Interest for landlords etc) will all be done away by the 2017 deadline- despite the hurt its going to cause many.......

D3PO

OP whilst I understand the logic of your post I dont buy it.

Firstly most persons in the current market wouldnt get 20 grand in TRS over the 7 year period. Infact most people wouldnt get close to it.

secondly it is very different than interest rate rises in terms of its impact on house prices. Primarilary down to the most basic premise

banks dont count TRS into mortgage applications as income so it doesnt impact negatively in what a person or couple can drawdown, however as interest rates affect monthly mortgage payments this consideration is taken into account when identifying what mortgage offer to make to somebody.

a not to dissimilar comparrison would be the government scrappage scheme on cars that just ended. Using a similar logic to TRS abolishment Car prices should have to drop to counter to lose of such a positive thing for buyers. this of course isnt the case.

Of course there are people who would budget TRS income into their budget pre house purchase, but even in an environment where the buyer is perhaps a little more educated than those buying houses in the boom on a whole the majority wouldnt put any consideration on TRS when it comes to a house purchase.

Victor

D3PO wrote: »

Of course there are people who would budget TRS income into their budget pre house purchase, but even in an environment where the buyer is perhaps a little more educated than those buying houses in the boom on a whole the majority wouldnt put any consideration on TRS when it comes to a house purchase.

I disagree. It directly affects affordability.

D3PO

Victor wrote: »

I disagree. It directly affects affordability.

Everybody will have their own opinion but I think your wrong Victor.

If you use this forum for anecdotal evidence you will still find most FTB's on here have not considered future interest rate rises when considering buying.

If somebody doesnt even do that to properly calculate their affordability to think they would do so for TRS isnt credible

ongarboy

I think TRS should not be factored into affordability by FTBs (even if many do this). Future rate rises have a far bigger impact on affordability and with the ECB on the way up again, interest is going to shoot up. I wonder how many FTBs factor this in. Sure, TRS does help but I'd hate to be so dependent on it that it was the difference between me comfortably paying my mortgage and struggling. I would just have to opt for a cheaper home or lower mortgage if I was a FTB rather than push myself to the max limit as long as I had TRS.


Secondly, I have no qualms about TRS being scrapped for FTBs in today's environment where house prices are almost half what they were in 2007. Which would you rather, a 300k mortgage with 150 TRS each month (eg tiny apartment circa 2006) or a 150K mortgage with no TRS (eg nice suburban semi d today). I think the answer is obvious.

Victor

But you have to admit, it's there to help first time buyers to afford property and that some people will use it.

fricatus

Victor wrote: »

But you have to admit, it's there to help first time buyers to afford property and that some people will use it.

Ostensibly yes, but if nobody received it, then house prices would adjust accordingly, or people might change their buying behaviour (e.g. buying a smaller, cheaper house, then building up equity in it before moving on to a bigger place).

The market can do without it. It's a subsidy from the taxpayer to the building industry, and while I benefit from it (and gladly accept it), I still think it's a bad idea and ought to be scrapped.

Supercell

Victor wrote: »

So, will people be making bids subject to TRS?

To right they will!
We are hoping to buy this year and all offers will be subject to TRS applying . Which to us means close by December 2012 or we will be guzundering.