Irish housing output is still set to fall sharply this year despite Brian Cowen's move, writes Paul Tansey.
The new Government has been quick out of the blocks in starting to honour its election promises.
With the ink barely dry on the programme for government, the Minister for Finance, Brian Cowen, yesterday published a Bill which will abolish stamp duty for all first-time homebuyers purchasing new or second-hand houses or apartments for owner-occupation.
Under the new Bill, first-time housebuyers will be exempt from stamp duty on new and second-hand houses or apartments purchased as principal private residences. The Bill makes the exemption retrospective to March 31st last, so that first-time buyers purchasing a home since then will be entitled to a refund of any stamp duties already paid.
Until now, first-time buyers purchasing a newly-built house or apartment were liable to stamp duty where the floor area was greater than 125 sq m. Similarly, first-time buyers purchasing second-hand properties were liable to stamp duty at ascending rates where the purchase price exceeded €317,500.
For second-hand homes priced above €635,000, first-time buyers faced stamp duty at a rate of 9 per cent on the whole of the purchase price. Thus, the unambiguous gainers from the Minister's new Bill are first-time purchasers buying second-hand homes costing more than €317,500 and new market entrants acquiring particularly spacious new houses or apartments for owner-occupation.
More generally, the Minister's speedy move to clarify a government policy on stamp duty clouded in uncertainty since last autumn will help to stabilise declining housing output.
Welcoming the Tánaiste's move, the head of policy and research at the Construction Industry Federation, Dr Peter Stafford, said last night: "It's good news. Because of the uncertainty, a lot of potential housebuyers have held off from purchasing since last summer."
Nonetheless, housing completions in Ireland are still set to fall this year from the vertiginous peaks of the recent past.
Last year, Irish housing output was in the range of 88,000 to 93,000 units, with a final precise figure still to be established.
The Construction Industry Federation now reckons that output will decline quite sharply this year, falling by about one-sixth. It is now projecting housing completions in the range of 70,000 to 75,000 this year.
The reasons underpinning this projected decline are not difficult to fathom.
Firstly, by reducing affordability, rising mortgage rates are curbing the demand for housing. European Central Bank (ECB) interest rates have risen relentlessly since the end of 2005, and these increases have been quickly passed on to house purchasers in the form of higher mortgage rates.
Since December 2005, ECB interest rates have risen in eight quarter-point steps, from 2 per cent to 4 per cent, with the latest increase coming earlier this month.
These increases have been reflected in rising mortgage rates in Ireland. The AIB standard variable mortgage rate for owner-occupiers has risen from 3.3 per cent to its current rate of 5.1 per cent since the ECB started to nudge up interest rates more than 18 months ago.
Secondly, less confident expectations about the future are acting as a constraint on the demand for housing.
With Irish house prices stalling, if not falling, and with at least two further increases in ECB interest rates expected in the year ahead, many individual households are fearful about stepping into the housing market - or trading up within it - lest they find themselves victims of negative equity in new homes they can barely afford.
Diminished expectations have also affected the demand for housing from the buy-to-let segment of the market.
With little prospect of substantial capital gains from rising house prices in the foreseeable future, and increased borrowing costs due to higher interest rates, many Irish investors are turning their attention away from the domestic markets and looking for opportunities abroad instead.
Finally, Ireland has been building houses at an extraordinarily rapid rate over the past decade and at some point the pace of output growth had to slacken.
Last year, a minimum of 88,000 houses were completed in Ireland. In Britain, a country with a population 15 times the size of Ireland's, the number of private house completions in 2002/2003 was 125,000.
The Tánaiste's move yesterday to exempt first-time homebuyers from stamp duty brings clarity where previously there was confusion, and it should be welcomed as a result.
It will act, though, in a relatively minor way to support housing output. But its impact on the overall trend in house completions will be swamped by much larger forces - rising interest and mortgage rates, diminished expectations and the size of the existing Irish housing stock.
As a result, Irish housing output is still set to fall substantially this year.