The abolition of first-time home buyers' grants has tilted the housing market even further in favour of investors championed by Charlie McCreevy, writes Frank McDonald, Environment Editor
Investors in residential property have been described by Mr Éamon Gilmore, the Labour Party spokesman on the environment, as "the big winners" as a result of the Government's decision last week to abolish the first-time home-buyers' grants with immediate effect.
Any independent observer would agree.
Though the relatively small €3,800 grant had simply been factored into rising house prices in recent years, it is clear that its abolition will tilt the housing market still further in favour of usually well-heeled investors.
In the Government's last Budget, full mortgage interest relief on the acquisition of residential property for letting was restored to investors after being abolished in the 1998 Finance Bill on foot of the publication of the first Bacon report on house price inflation.
Since the relief was restored, ostensibly to reinvigorate the private rented sector, investors in new housing throughout the State have been able to offset mortgage repayments against their tax liability; for ordinary homeowners, such relief is capped.
Mr Tommy Horgan, a director of MMPI mortgage brokers in Donnybrook, Dublin, said most investors were effectively paying no tax on the acquisition of apartments or houses because mortgage interest could be fully offset against their rental income.
In the case of a two-bedroom apartment costing €300,000, an investor - like an owner-occupier - would be able to raise a mortgage for 90 per cent of the sale price, on which interest repayments would amount to €12,690 per annum at a rate of 4.7 per cent.
Unlike an owner-occupier, however, whose mortgage interest relief is capped at €3,174 per annum, the investor can claim the full amount against a likely rental income of €14,400 per annum (€1,200 a month) as well as "set-up costs", such as furnishing.
"Any accountant would be able to reduce tax liability by at least €1,000 for set-up costs alone," Mr Horgan said, "and since the investor is also entitled to offset management charges, including insurance, against his rental income, he would end up paying little or no tax."
By contrast, tenants in the private rented sector receive only limited relief. For a single person, it amounts to a tax credit of €254 per annum (or double that figure for a married couple). Social welfare recipients are entitled to claim rental subsidies.
In designated urban renewal areas, investors are doubly favoured. Not only can they claim full mortgage interest relief, they are also entitled to write off a large bulk of the cost of acquiring apartments or houses for letting against their rental income from all sources.
Using the example of a €300,000 two-bedroom apartment, an investor could typically write off 70 per cent of purchase price (the sale price minus the unit site cost), amounting to €210,000 - in effect, acquiring a capital asset largely at the State's expense.
The richer you are, the more you can write off. Anyone with a tax liability of €210,000 could claim the full section 23 relief in the first year.
Alternatively, if the tax liability is lower, it could be spread out over a number of years or for as long as it takes to use up.
For those with a brace of investment properties packed with tenants paying rent, the relief is a godsend. Some of them will never pay any tax on rental income for the rest of their lives even as they acquire and enjoy the benefit of appreciating capital assets. Indeed, a few are so flush that they can afford to pay cash for their investments.
However, as Mr Horgan pointed out, it is more attractive to have a mortgage, especially with interest rates so low and the facility is available to claim full relief on interest repayments. Despite the long-standing objective of promoting home ownership, those people buying homes for themselves are much less favourably treated.
Not only has the first-time buyers' grant been abolished, but mortgage interest relief is capped at €3,174 per annum.
Thus, in the case of a 90 per cent mortgage on a €300,000 apartment, first-time purchasers must fund three-quarters of the repayments from their own resources.
The relief they are entitled to claim would be worth a paltry €53 a month.
Second-time purchasers fare even worse. They are only permitted to claim 80 per cent of the mortgage interest relief available to first-time buyers - and only at the lower 20 per cent income tax rate. On a €300,000 apartment, it would be worth €41 a month.
The only substantial relief for owner-occupiers applies to homes in designated areas, where they may write off some 70 per cent of the purchase price against their tax liability over 10 years.
For a €300,000 apartment, this would be worth €700 a month.
No firm figures are available on the cost to the Exchequer of such reliefs, but it is obviously substantial, running into hundreds of millions of euros per annum.
By contrast, it is estimated that the abolition of first-time buyers' grants will save €40 million annually.
LAST Friday, Éamon Gilmore complained that the Minister for Finance, Mr McCreevy, "can always be relied upon to favour the rich".
He repeated this charge yesterday when the Labour Party tabled a Dáil motion seeking to reinstate the first-time buyers' grant.
Even though rents have taken a knock this year and are likely to fall still further in 2003 as more rental housing comes on the market, investors still enjoy the benefit of tax shelters as they build up nest-eggs - at public expense - for a comfortable retirement.
Economist Mr Jim Power of Friends First suggested on RTÉ radio yesterday that Mr McCreevy might sweeten the bitter pill of abolishing the first-time buyers' grant by allowing them to claim double relief on interest repayments for the first five years of a mortgage.
The construction industry, which has been on the pig's back for the past five years, might also show some generosity. It could start by making concessions to first-time buyers - furniture allowances, for example - just as office developers offer inducements to tenants in tough times.