Central Bank economists call for capital gains tax link to house prices

Study says house prices may be below fair values

The rate of capital gains tax should be indexed to increases in house prices as part of efforts to prevent another property bubble, economists at the Central Bank have suggested.

In a paper published this morning, they acknowledge that any such move in the current depressed housing market would “probably be unwise”.

“However, if and when property prices recover to equilibrium values again, there may be a case to be made for the rate of CGT to be indexed directly to the rate of capital appreciation,” they argue.

The authors – Frank Browne, Thomas Conefrey and Gerard Kennedy – state that the "dominant" role played by expected capital gains in the property bubble years "points to the non-taxation of capital gains on the main dwelling and the reduction in capital gains tax on buy to let properties (from 40 per cent to 20 per cent in 1998) as being a significant factor in unleashing what proved to be a very dangerous dynamic".


The study of the fair value of property prices is based on a “user cost of capital”, which compares the cost of accessing a given bundle of housing services via home ownership rather than renting in the private market.

From a 1980 start date, they suggest that house purchase has been a better option for consumers until 2008, since when renting has represented better value.

The economists say that the collapse of the property market since 2007 may have led house prices to undershoot fair values. In the research technical paper, they state that prices “are back to levels consistent with or below long-run equilibrium values”.

In an unusual comment on the housing market in the period up to 2007, the paper claims it “amounted to something of a pathological case”.

The suggestion on capital gains is one of a number of policy initiatives they put forward to develop a more stable property market into the future – with tax policy seen as the area offering the greatest room for manoeuvre.

However, they also point to the need to engage with the construction sector to smooth out “wild swings in output” and advocate the introduction of REITS – stock market companies whose assets are rental investment properties – to allow investors access property investment without having to personally buy individual properties.