Economics:Uncertainty about stamp duty has had little impact on house prices
The biggest issue of the election campaign to date, and the protracted phoney war that preceded it, has been stamp duty.
By now all the mainstream parties have promised cuts in this tax and the news media have been fixated on the issue for months now.
The attention devoted to stamp duty is a measure of how preoccupied we have become with property and seems entirely out of proportion to the objective magnitude of the matter.
Last year the total yield from the tax was €3.7 billion, of which €1.3 billion came from residential property. The latter figure amounts to less than 1 per cent of GNP and compares with receipts of over €13 billion from VAT, €12 billion from income tax and a total tax take of €45.5 billion.
Another way of contextualising the discussion is to compare the coverage afforded to the stamp duty issue with the amount of time that has been devoted to debating the future of our education system. Spending on education amounted to €7.6 billion (5 per cent of GNP) last year, and the quality of that education will be a key determinant of our economic and social well-being for many years after election 2007 has become a distant memory.
There is another, more particular sense, in which stamp duty has drawn inordinate attention.
Uncertainty about whether it will be cut has been blamed (sometimes to the exclusion of any other factor) for the recent softness in the housing market. Does this take on things make any sense?
To answer this question it is worth distinguishing between the number of transactions in the housing market and prices.
House price growth has clearly run out of steam in recent months. According to the Permanent TSB/ESRI index, prices nationwide fell by 0.6 per cent on average in March, after being flat in February and rising by just 0.1 per cent in the months November through January.
How much of this softness is it reasonable to attribute to uncertainty about stamp duty? Not very much, if any, is the answer.
For starters, there have been other potentially powerful negative factors at work, including a sizeable hike in interest rates and a shift in sentiment.
Moreover, the softening of prices has been as pronounced in the first-time buyer market where stamp duty is effectively a non-issue (first-time buyers accounted for 5 per cent of the total raised in residential stamp duty last year) as it has been elsewhere.
In any event, the chance of lower stamp duty is as likely to deter sellers from placing their houses on the market as it is to deter purchasers.
That being the case, there is no compelling reason to suppose that it has depressed prices, although there is reason to believe that it has depressed the number of transactions in the market.
But even on this score, the damage done by stamp duty uncertainty is apt to be exaggerated.
The volume of transactions tends to decline anyway in an environment of softening prices, so the lower volumes of recent months (they look to be down about 20 per cent on the same period last year- which incidentally was a period of exceptional buoyancy) are partly due to the same factors that explain what's happened to prices.
My judgment, therefore, is that uncertainty about stamp duty has had little or no impact on house prices and probably no more than a modest effect on volumes.
That being the case, it would be wishful thinking to expect that removing that uncertainty will boost prices or have a transformational effect on the volume of business.
Of course, if the removal of uncertainty takes the shape of a significant reduction in duty, a sizeable boost to the number of transactions should result.
Indeed, this is probably the most important economic argument for cutting stamp duty. It is, after all, a tax on transactions which increases transaction costs very significantly at what are by current standards very modest house price levels.
(The 6 per cent rate kicks in at €317,500 and the 9 per cent rate at €635,000, thresholds that correspond to just 75 per cent and 150 per cent of the average Dublin house price.)
A reduction now would be especially timely. It would act as a kind of laxative in a market that might otherwise become constipated by unwilling sellers. A complete assessment of the case for reducing stamp duty would need to consider the question of opportunity cost, in other words whether the tax revenue foregone could be put to better use by government.
I don't have space to do that here today but I have enough space to comment on costings.
Fine Gael/Labour have costed their proposals at €460 million; the PDs have costed theirs at €355 million.
Both estimates are based on the constellation of house prices and sales volumes that obtained in 2006, while neither allows for the likely positive effect of cutting stamp duty on transactions. Both estimates, therefore, are likely to exaggerate the cost, perhaps by a very large margin.
• Jim O'Leary lectures in economics at NUI Maynooth. He can be contacted at jim.oleary@nuim.ie
