Rival coalitions still poles apart

Fri, May 4, 2007, 01:00

Stamp duty analysis:As of yesterday it's no longer in any doubt. Stamp duty will be reformed. What is less clear is when and to what extent, writes Marc Coleman, Economics Editor.

The urgency of action on the issue has been clear for months. While it cannot be blamed for recent house price trends the stamp duty debate has reduced the extent of buying and selling in the market and contributed to a lack of confidence.

This has happened for two reasons. Firstly, for a large number of second-hand buyers who are also selling in order to buy the ability to fund stamp duty on their purchase depends on the gain in equity from the sale. In a flat market, that ability is falling.

Secondly, since raising the issue last autumn, first Michael McDowell then Fine Gael, had created the possibility that reform would happen. Unless a buyer urgently needs to move - and with stamp duty bills of €40,000 not uncommon - the fact that opinion polls are on a knife- edge makes hanging on until after the election a worthwhile bet.

As if to complicate the matter further, when presenting a joint policy last month, Fine Gael and Labour fudged the issue of when they would reform stamp duty during their possible term of office, raising the prospect of prolonged uncertainty.

Price weakness - caused originally by rising interest rates and lower confidence - has recently risked intensifying as buyers stalled even further.

The only party not to embrace reform from the outset found itself in a dilemma, a dilemma it tried yesterday to resolve: Removing the cost of stamp duty would make prospective buyers more able to bid up prices and support the market. But it might also deprive the exchequer of a rich source of funds. For the latter reason, the Department of and Minister for Finance strongly resisted reform.

On one thing, at least, Fianna Fáil was clear: In the words of Macbeth when he contemplates killing Duncan, his rival for the throne: "If it were done when 'tis done, then 'twere well it were done quickly". This is a good principle that applies as much to the murder of troublesome taxation as to political rivals.

What Fianna Fáil may not have grasped is that timing is not the only crucial issue at stake here. Fianna Fáil does propose to abolish stamp duty, but only for first-time buyers. Their coalition partners, the Progressive Democrats, do likewise but go further in wanting to reform the regime for second-time buyers: Buy your second or subsequent house under the present system and you pay the highest rate of stamp duty on the whole price; a bit like if you paid 41 per cent of income tax on your whole income.

As well as abolishing them for first timers, the PDs promise to band the rates for second-time buyers so that no duty will be paid on the first €127,000 of a house, 3 per cent on the price between €127,000 and €190,500 and so on. Fine Gael and Labour will do likewise but will also simplify the rates, replacing six rates with three and will abolish duty for properties up to €450,000.

All parties agree on abolishing the duty for first timers, at least up to a price of €450,000. Where it exists, recent price weakness has been most worrying in recently built properties, particularly apartments, of the kind that first timers buy. That all parties agree on abolishing the duty for first timers at least for prices up to €450,000 will provide support to this market at a crucial time.

But yesterday's move still leaves a major question mark about the second-hand market. As one key player in the market noted yesterday, the major problem is that the two alternative anchors around which any government can be formed remain poles apart on what to do with this market.