Duration of boom has confounded first Bacon plan

Fifteen months ago Dr Peter Bacon was being feted for having taken the hysteria out of the housing market

Fifteen months ago Dr Peter Bacon was being feted for having taken the hysteria out of the housing market. Today he is back with a new set of proposals and a tacit admission that the "considerable and significant improvement" he talked of in March last year has been short-lived.

Along with just about every other economist in the State, Dr Bacon failed to anticipate both the scale and duration of the economic boom.

The recommendations he made in 1998 have proved insufficient to meet the increase in demand resulting from economic growth.

Another more serious criticism is that the approach Dr Bacon adopted was fundamentally flawed. He concentrated as much on trying to bring down prices by reducing demand as by increasing supply.

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One of the most radical recommendations in his first report was to end tax incentives on residential investment properties. He argued that the prices of starter homes and apartments were being driven up by investors buying them to rent out. The Government acted on his recommendation and ended tax breaks on the interest on borrowings taken out for investment in residential property.

Although it proved a politically popular move it was fundamentally a bad idea, according to Dr Anthony Murphy of the economics department of UCD, who carried out much of the background work for the first report.

The recommendation failed to take into account the fact that the State provides only a relatively small amount of housing in Ireland and that the system is very reliant on private-sector landlords. The net outcome of ending the tax incentives was to drive up rents rather than reduce prices.

Dr John Fitzgerald of the ESRI agrees that Dr Bacon's recommendations on the rental sector were misguided. The only effective way of reducing demand for houses would be through a number of politically unacceptable actions such as taxing second homes, he said.

Some measures expected in today's report could compound the errors. Any increases in the stamp duty levied on properties bought as investments may have the same effect of driving up rents.

Another serious criticism of the first two Bacon reports and the Government's subsequent responses was that they did not do enough to increase the supply of housing. Although the Government has invested a considerable amount of money in new sewers and roads, it has not been able to increase the amount of land available.

The Government has yet to streamline the planning process substantially, says Mr Murphy. There is also no clarity about issues such as higher densities.

Social housing measures, requiring developers to include a certain amount of low-cost housing in any new development, might yet be challenged in court. Against a background of such uncertainty it is not surprising that many developers are holding off building on their sites, said Mr Murphy. It remains to be seen if they can now be forced into proceeding by Dr Bacon's third set of recommendations.