The Government is making a major effort to encourage people to buy houses and apartments for renting out to tenants. This is designed to help the house-building industry and to ease the rental accommodation crisis in Dublin.
From January 1st purchasers of apartments and houses for rental will be able to offset mortgage payments against rental income.
In addition, the punitive 9 per cent stamp duty on second-hand rental properties has been abolished. This proved a major stumbling block over the last two years and reduced the sale of second-hand apartments to a trickle.
Up to now anyone investing in a £200,000 (€253,947) second-hand house or flat to rent out were faced with a stamp duty bill of £18,000 (€22,860) Investors will now pay the same sliding scale of duty as owner occupiers, with the 9 per cent kicking in only for properties costing in excess of £500,000 (€635,000).
The decision by the Minister for Finance to reintroduce mortgage interest relief overturns one of the key recommendations made in the controversial 1998 Bacon report. The measure had the desired effect of taking investors out of what was then a runaway market, giving first-time buyers a clear run on new housing developments.
However, with the slowdown in the economy over the past year, and the demand for houses well below expectations, builders have been scaling back their operations and, in some cases, have closed down sites. New housing starts fell by as much as 18 per cent in the country in the last 11 months, while in Dublin city only a handful of apartment schemes have been completed in the last three years.
This has led to a severe shortage of rental accommodation and a virtual doubling of rents. One-bedroom apartments in the city are now making up to £900 a month.
The Government has been under intense pressure in recent months to restore the mortgage interest relief in order to bring investors back into the rapidly slowing construction sector.
Yesterday's move will give a much needed boost to the building industry, according to some of the largest housebuilders who contend that the Government should never have intervened in the first place.
Private investors are expected to move quickly to buy apartments and houses, particularly with interest rates at historically low levels. Rents will almost certainly drop in many areas as the supply of rental property increases over the next year.
Ken MacDonald of Hooke & MacDonald, who specialise in new homes sales, last night described the restoration of mortgage interest relief and the reduction in stamp duty for investors as "fantastic news for tenants and for the 100,000 people employed in the residential sector of the construction industry". He expected that it would bring moderation into the rental market, and stop the flow of Irish money out of the country into residential investments in the UK and Europe.
Ciaran Ryan, director of the Irish Home Builders Association, said the tax changes would stimulate investment in the private rental market, and would help increase the supply of rental accommodation over the next few years. However, he was disappointed the Government had not acceded to their demand for a £10,000 tax credit for first-time buyers as a means of restoring confidence in the new homes sector.
The Irish Auctioneers & Valuers Institute (IAVI) said the reductions in stamp duties would give a "much-needed boost to the industry" and create a "level playing field" for investors and tenants.
Marian Finnegan of estate agency Sherry FitzGerald said consumer confidence had been eroded over the past 18 months as a result of "erroneous intervention in the property market". The changes to the stamp duty and the restoration of mortgage interest relief were essential to control the pace of rental inflation and introduce stability, she said.
Harry Lorton, chief executive of Irish Permanent, said that both of the changes introduced by the Minister would provide a "valuable impetus" to the market and ensure its stability in the months and years ahead.
However, the Society of Chartered Surveyors expressed dissatisfaction with the Minister's decision to increase the VAT rate from 20 to 21 per cent from March. The society described the change as a regressive step with major inflationary implications.