Irish Property Tax Fun

The first article from July 2011 is about Ireland's first attempt at a property tax, which was to be a flat €100 per household, i.e. rather less than the TV licence fee in the UK (i.e. a kind of Poll Tax) and which didn't go down too well in certain quarters.

The second article from December 2011 explains that the Irish government has binned this idea, and will have something more similar to Domestic Rates in Northern Ireland (which is a tax of about 0.7% per annum on each house's selling price as at 1 January 2005), albeit only a quarter as high (the average bill will be €312.50). The list of exemptions is so long as to be meaningless and to partly defeat the object:

It is likely that the 400,000 households currently due to get exemptions from the household charge will also be exempted from the property tax. They include those renting houses from local authorities or private landlords and those living in 1,300 ghost estates. And the 18,000 people who are getting Mortgage Interest Supplement from the state to help them pay their mortgages will not be liable."
------------------------------------
But what cheered me up was this bit from the first article:

The minister for the environment says the tax is an interim measure, set at the lowest possible level, and will hold for just two years when... some other form of property tax is introduced. But this is predicated on systems being in place to make that possible ... a register of house sale prices and the introduction of postcodes in Ireland, which [ Limerick University economist Stephen] Kinsella describes as "the absolute bedrock" of a fair property tax.

Either he's been reading my 'blog or great minds think alike. As I've always said, doing the valuations is a doddle, as HM Land Registry has all this information and it is already all computerised and readily useable. Information on selling prices (which we can use as a proxy for rental values, see iv) is also publicly available, and is available at Rightmove (and probably plenty of other places, but theirs works quickest out of the ones I've tried).

For simplicity, let's assume that we replace just about all taxes (except duties and income tax on a narrow class of payments from the government, such as civil service pensions, PFI stuff etc) with LVT. And no doubt HM Land Registry/The Valuation Office would be able to do these workings in a couple of hours, if they haven't done them already...

i. Rightmove allows you to search by postcode district (e.g. NW3), postcode sector (e.g. NW3 5) or postcode unit (NW3 5TY). All things considered, I think it is best to use postcode sectors with a couple of thousand dwellings - that's small enough to give accurate relative values and big enough to have a representative sample of recent sales.

ii. It will tell you the average prices paid for flats, terraced, semi-detached and detached dwellings. I prefer using semi-detached houses, because these are the most homogeneous in size and style across the country.

iii. It will tell you the average price paid over the last 1, 2, 5 or 7 years, it doesn't really matter which one you choose as long as you are consistent - it is only relative and not absolute values that matter. For example, the average price paid for a semi in my sector over the last seven years is £427,000 and over the last year it's £486,000. If the tax in my sector turns out to be £30,000 for an average semi (i.e. £75 per square yard), whether we express the tax as 7.0% of the former or 6.2% of the latter comes to exactly the same thing*.

iv. Purist LVT is on the site only rental value excluding buildings. HM Land Registry know exactly what the size of the plots were on which the average semi-detached houses stand, so in my area, the £30,000 mentioned above can be seen as a tax of (say) £75 per square yard per year (so small houses on smaller plots automatically pay less than large houses on larger plots,and an average house on a 400 sq yd plot pays £30,000). But before we divide by plot sizes, we can fairly easily convert selling prices to rental values of the whole house (including the buildings) by multiplying the selling prices by a percentage.

v. As Sobers has pointed out often enough, it's not enough to apply the same flat % rate to all houses, because the gross rental yield on selling prices of expensive houses in expensive areas tends to be lower than for cheaper houses in cheaper areas. This is because of four further factors:

- Council Tax, which is more or less flat on all houses, so tends to push down rental yields on houses in cheap areas.
- Housing Benefit, which sets a floor on rents in cheaper areas, so tends to push them up
- The costs of maintenance, insurance and depreciation of houses (which has to come out of gross rents after council tax) are much the same wherever the house is (tends to level out gross rents by setting a floor under rents in cheaper areas - if the gross rent doesn't even cover these costs, the house will be abandoned).
Let's assume these effects cancel out.
- Finally, landlords apply a lower discount rate to the location element of the rent than to the bricks+mortar element, because the former tends to increase but the latter depreciates. So the more expensive the area, the larger the 'location element' and the higher the selling price relative to gross rent (and hence the lower the yield relative to selling price).

vi. We can sweep all these up when converting gross rental value to site-only rental value to a single net adjustment, which boils down to either
- deducting a large figure (i.e. rebuild cost/value) from the purchase price before applying the final percentage, or
- by applying the percentage to the selling price and then deducting a smaller figure (the maintenance, depreciation costs) from the result.

vii. The big unknown is of course what will happen to the rental value of land when all other taxes are scrapped. We'd need to raise (say) £300 billion a year from LVT but the notional site-only rental value of all UK land at the moment is only (say) £150 billion a year. The gimmick here is that a large part of the cuts in taxes on earnings, output and profits of (say) £300 billion will flow straight through into higher rental values. Let's ignore Citizen's Income for now, because this is not an increase in total cash welfare payments/tax reliefs, it's just spreading out existing cash welfare payments/tax reliefs more evenly. So if two-thirds those income tax cuts go into higher rental values, that still gives us a tax base of £350 billion a year, so with an LVT rate of 85% we are all sorted.
--------------------------------------
* Let's assume that £30,000 a year is pretty close to the average tax paid by all the households living in semi-detached houses in my sector - less than what recent purchasers or tenants are currently paying/bearing and more than what semi-retired people who bought their houses decades ago are currently paying/bearing.

For recent purchasers, the calculation is thus: one working adult buys a £486,000 house with a 20% deposit and a mortgage of four times income. Gross income is £97,000 on which income tax and Er's NIC is £34,000, Er's NIC is £12,000, VAT is approx. 7% of gross income = £7,000, plus £3,000 for council tax, TV licence, insurance premium tax etc etc = £56,000. If there are two working adults with equal wages, the corresponding figures are 2 x £13,500; 2 x £5,500, £7,000 and £3,000 = £48,000.

Other couples might be paying next to nothing, so the average is (say) £24,000. If we knock off the £7,000-odd Citizen's Income which each couple will be getting from the £30,000 LVT they will be paying, this gives us a tax bill of £23,000 a year, only everybody pays the same or similar.

Continuing the workings for my hypothetical two-earner recent-purchaser couple, after mortgage repayments of £20,000 a year, they have £29,000 disposable income for fun stuff like food, clothing, utility bills, Tube tickets etc. So just to keep our minds active, let's work backwards from that £29,000 figure to see how high your income would have to be to be able to buy in my sector once LVT came in and still have the same living standards.

£29,000's worth of goods and services today will be reduced by the £7,000 VAT = £22,000, house prices and mortgage repayments will be halved to £10,000, plus LVT £30,000 minus £7,000 Citizen's Income, so in future, a couple with earned income of £55,000 would be able to buy, so instead of my sector only being affordable for the top 1% or 2% of households, it would now be affordable for the top 5% or even 10%.