Tax regime inflating house prices - OECD

Ireland’s property taxes are “unusually favourable”, contribute to house price volatility, and should be changed to a more neutral system, according to an OECD report published today.

In its Economic Survey of Ireland 2008, the OECD said the instability of Irish property taxes were particularly costly to an economy such as Ireland as it can no longer use monetary policy to slow house price growth or cushion the effects of a slowdown.

According to the OECD the “generosity” of Irish property taxes – one of the most favourable rates among those countries surveyed – has “generally contributed to the volatility of the housing markets”, although it notes that the recent reform of stamp duty were “well timed to support the housing market during the current slowdown”.

Weighting tax breaks in favour of owner-occupiers contributes to house price inflation, the OECD says, noting that these effects could be curtailed by limiting mortgage interest relief or introducing a property or capital gains tax.

However, the survey notes that while such a move makes economic sense, in the Irish context “where over 80 per cent of households own their own home, a profound tax reform of the housing sector is unlikely to be implemented any time soon”.

It said experience from other countries showed that the best approach was gradual reform.

It said Irish house prices appear to have “overshot their long-run equilibrium level” said a further easing in house prices was possible, adding that there was a risk prices could fall below their long-run level before recovering.

However, the Paris- based OECD noted that this downswing could end quickly “in line with international construction cycles” and quickly return to a level needed to meet demand.

Fine Gael finance spokesman Richard Bruton said the OECD survey has had to repeat “a large number of recommendations” because they have been ignored by Minister for Finance Brian Cowen.

“The OECD’s latest recommendations on how Ireland could better prepare itself for the difficult times ahead are not new.

“Minister Cowen has ignored repeated warnings from the IMF, the European Commission, the Central Bank and the ESRI on how his expansionary budgets were fuelling inflation and undermining Ireland’s export competitiveness,” the Fine Gael deputy leader said.

“The folly of building up permanent day-to-day spending on the back of temporary tax revenues from a property boom have now been exposed,” Mr Bruton added.