Help-to-buy scheme could push up house prices, warns EU

The Government's interventions in the housing market have been criticised by the European Commission, which has warned they could push up prices and limit housing supply

In its annual analysis of the economy, the commission said that overall the economic outlook remained bright, with growth of 3.4 per cent expected this year.

However, it warned that Brexit and possible changes to multinational tax policy internationally, likely driven by the US, created increasing uncertainties for Ireland in the years ahead.

It also warned that the exchequer’s increased reliance on potentially volatile corporate tax revenues was a cause for concern.

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The commission report identified housing supply as a policy challenge, and was critical of some of the key Government policy moves. In particular, it said the help-to-buy scheme, introduced in the budget and offering a tax rebate to first-time buyers of new properties, was likely to increase demand.

“As such it may contribute to further prices increases, at an estimated cost of €50 million, without directly contributing to increasing supply.”

It also questioned the Government’s imposition of rent restrictions in selected urban areas, warning that rent controls “have been shown to have a significant destabilising impact on the aggregate housing market in other countries”.

The Government has imposed a 4 per cent cap on annual increases in selected “rent pressure zones” in Dublin, Cork, Galway and other urban areas.

The commission warned that stringent rent controls could discourage new housing construction and the maintenance of existing rental properties.

A coherent and timely planning process was needed to help deliver new homes in the right area, the commission said, adding that the lack of an integrated planning and infrastructure strategy was a concern. It particularly identified the delay in granting planning permission by local authorities, and warned that it was not clear that increased supply would emerge where it was needed.

Investment spending

The report was broadly positive on the economy and said it was impossible to quantify the risks from Brexit or changes in US tax policy.

Ireland’s high national debt level and relatively high household borrowings have both been falling, it said, but continued to leave Ireland vulnerable to any shocks.

The risk of a fall-off in corporation tax revenues to the public finances was a key area of concern identified by the commission. Corporation tax receipts rose by 50 per cent last year, the report said, and now accounted for 10 per cent of total revenue, with the top 10 corporate taxpayers accounting for 40 per cent of this.

“Corporate tax revenue in Ireland can, therefore, be characterised as highly concentrated and prone to volatility,” the commission said, calling for a detailed look by the Government at the risks associated with this.

The Minister for Finance has previously defended the use of corporate tax revenues to fund higher spending, saying he had been told by the Revenue Commissioners that the increase was sustainable.

Tax base

The report said the Government had taken steps towards achieving specific recommendations the commission made about economic and social policy. Steps had been taken to improve the quality of public spending, it said, though it warned that the last budget had narrowed the tax base.

It said more needed to be done to make childcare affordable and help parents return to work. For some people the tax and welfare system combined to make it unattractive to return to work.