The traditionalists say that increasing the supply of housing would help reduce house prices, which is what you would expect, but some bright spark then points out that there was a lot of new construction going on in Ireland and Spain (as well as parts of the USA) and that there were house price bubbles there as well.
Hmm. I'd always assumed that what kick started the Irish house price bubble was the fall in interest rates when they joined the Euro, together with all the EU money that was pouring in, and that once it got going it was self-perpetuating, which is far from a complete explanation.
I have now stumbled across one of the missing pieces of the jigsaw to explain the discrepancy, namely, the tax breaks. From a fine article in The Independent:
A jaw-dropping amount of State-subsidised tax bonanzas were attached to everything from multi-storey carparks, hotels and housing estates -- to holiday camps, private hospitals and holiday homes... At €7bn by 2005, the cost of various tax breaks to the Exchequer was three times bigger than income tax receipts. As much as €3bn of that may have been property related. That's 75 per cent of what needs to be found in Budget 2010.
Well worth a read.
As I have discussed before, taxes on property or rents do not increase the price of property or rents; what increases property prices and rents are subsidies, like Housing Benefit for example. It's the same with tax-breaks - if a building would otherwise be worth EUR 100,000, but you get tax breaks with a net present value of EUR 30,000 when you buy it, the selling price of the building goes up to EUR 130,000, it's called tax arbitrage.
So the investor pays EUR 30,000 for a tax break worth EUR 30,000. The builder can add the EUR 30,000 to the selling price, but it doesn't show up as extra profits to the builder, because he in turn has to buy the land from somebody, and so the landowner adds EUR 30,000 to the selling price of each plot. Subsidies always filter back to - and taxes are always borne by - the least elastic factor of production.
Tuesday, 20 July 2010
Tax breaks for construction in Ireland
Subscribe to:
Post Comments (Atom)
6 comments:
I still maintain it's easier and more effective to put interest rates up. One little thing and the whole rest of the horrible mess sorts itself out.
"Subsidies always filter back to - and taxes are always borne by - the least elastic factor of production." Precisely. And so my father taught me. Though I doubt if "least elastic" was the term he used, it was certainly the concept. It's not difficult, this - any bright thirteen year-old can grasp it.
B, a govt. shouldn't interfere with interest rates, and there would be a lot of collateral damage on businesses. Apart from that, agreed.
D, yup, I pinched that wording from one of your comments from a while back. I've filed it along with "Good for us but not good for the country".
"and there would be a lot of collateral damage on businesses"
True, sadly, far too many of them are operating on borrowed money instead of shareholders' capital, yet another reason why high house prices are good for the banksters, but bad for everyone else.
But, you know, there are an awful lot of people out there - like this parasite - who consider that "privatising" taxpayers' money somehow "creates" national wealth rather than what it is in reality ie legal theft and a negative sum-game.
B, it's a free world, there's no iron rule that says you are better off being funded by share capital rather than loans. But we are where we are.
U, yup, more rent-seeking from the corporatists and large landowners in the name of Greenie-ism. Even my mortal foes, the NIMBYs, are against windmills.
But isn't all land 'ownership' just rent-seeking, as I have been saying for ages?
Post a Comment