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How to make housing more affordable, from VAT cuts to planning reform

Rising interest rates, construction-cost inflation and an increase in the cost of living threaten to make the affordability crisis far worse

The challenge

Unaffordable housing is a near-constant concern in Ireland, and several recent developments will affect property prices further. For one, as part of its efforts to rein in runaway inflation, the European Central Bank (ECB) has raised interest rates by 2 percentage points since July, with the latest 0.75-point increase announced at the end of October. Although the move is clearly intended to be for the euro zone’s greater economic good, it has put additional pressure on those looking to secure a mortgage as lenders re-evaluate the rates they offer to preserve their profit margins.

AIB was the first of Ireland’s three pillar banks to react, with a half a percentage point hike on its new fixed-rate mortgages in October, to which it added a further half point last Friday. Bank of Ireland announced its decision in November to raise the cost of fixed-rate mortgage products for new customers by 0.25 of a percentage point while Permanent TSB said it would increase the rates it applies to its fixed rates for new mortgage borrowers by an average of 0.45 of a percentage point. The non-bank lender ICS Mortgages has also responded by increasing rates across its variable and fixed home loans by half a percentage point.

And while the Government’s introduction earlier this year of the First Home scheme (FHS), in which the State and participating banks pay up to 30 per cent of the cost of a new home in return for a share in its equity, will go some way to lessening the impact of the ECB’s decisions, its effectiveness will be hampered by the ongoing shortage of supply in the new-homes market. Equally, that imbalance between demand and supply will serve to undermine the Government’s decision to extend the Help-to-Buy (HTB) until the end of 2024.

It remains to be seen just how the decisions of the ECB and the Central Bank play out amid the general lack of housing supply reported by estate agents around the country

The Central Bank’s recent decision to ease its mortgage-lending rules to allow first-time buyers to take on mortgages of up to four times their income, compared with the current 3.5 times rate, from January, could, meanwhile, have a twofold impact. The first potential consequence, and the one that unsurprisingly generated the most commentary, is the feared inflationary effect the move could have on the price of new homes as borrowers take out bigger mortgages.


The other side of the equation, and one largely lost in the debate, is the Central Bank’s finding that the share of renters who could purchase a three-bed semi-detached home in Dublin at the latest estimated build price had fallen since 2015. By recalibrating its lending rules, the bank hopes to restore the viable demand for housing to the level experienced back then. In the absence of such demand, the supply of new homes could fall further as developers and their lenders pull back from projects in the face of increasing risk.

It does, of course, remain to be seen just how the decisions of the ECB and the Central Bank play out amid the general lack of housing supply reported by estate agents around the country, the rising cost of building materials, the slow planning process and the general rise in the cost of living. Add to these the as-yet-unknown impact of the planned concrete levy (proposed initially in the Budget at a rate of 10 per cent and since reduced to 5 per cent in the Finance Bill), and it’s clear that our long-standing housing crisis still has some distance to go.

It is against this uncertain backdrop that The Irish Times asked industry specialists for their views on other measures the Government might consider to make housing more affordable and speed up its delivery.

Reducing VAT

The Government currently applies 13.5 per cent VAT to the sale of new homes. The idea of reducing VAT to zero on new-builds, as has been done in the UK, has been raised in the Dáil as a possible solution to reducing house prices, but the Government has said it is not a simple fix.

In April, 2021, for example, Sinn Féin housing spokesman Eoin Ó Broin asked Minister for Finance Paschal Donohoe if it was possible to reduce VAT or have a zero-rate VAT on new-build apartments within certain price ranges and on new-build apartments sold to first-time buyers, local authorities or approved housing bodies. In response, Donohoe said that under the EU VAT Directive it was not possible to differentiate between types of residential property, meaning the same rate of VAT would have to be applied across the board, from starter homes to million-euro mansions.

Ó Broin now agrees with the minister, telling The Irish Times such a reduction would “result in a considerable revenue loss for the State” and would “limit the State’s ability to ensure that as we build new homes we also ensure we build new schools and make sure we have public transport, et cetera”.

In response to the question posed by Ó Broin last year, Donohoe went on to say it would be possible for Ireland to apply a 9 per cent VAT rate to the construction of residential housing. However, he said, as it would not be possible to apply the same rate to non-residential housing, it would be difficult to administer and could lead to fraudulent underpayments of VAT. While the minister went on to say that a reduced rate would be permitted under the directive as part of social policy, he did not elaborate on what that might entail.

“There is no party in the Oireachtas that I’m aware of who’s arguing for a reduction of VAT. It was something that Michael Noonan looked at repeatedly and Paschal Donohoe looked at repeatedly, and both of them rightly took the view that it’s not the right policy,” Ó Broin says.

On October 15th last, however, the Irish Independent reported that Minister for Foreign Affairs Simon Coveney had referred in a Fine Gael parliamentary party meeting to the UK’s zero-VAT rate on new homes as an example of a positive initiative that could be employed here.

It is also something the Society of Chartered Surveyors Ireland (SCSI) has advocated for in the past, says Kevin James, SCSI president: “There’s no VAT on new homes in the UK, so there’s a structure there that works that’s in place.”

An article examining the housing crisis in The Irish Times this week described “an allergic reaction among officials to using [tax breaks] to drive development”, calling them a legacy of the Celtic Tiger. However, the idea is apparently now gaining traction, with Minister for Housing Darragh O’Brien saying the issue of taxation would be a matter for the whole of Government but “my own view is where we can use activation measures. Tax shouldn’t be off the table where it’s focused and targeted.” A potential cut to the VAT applied to the sale of new properties is among the steps now being considered.

‘My advice to anyone who wants to discuss VAT is don’t waste your time,’ says Eoin Ó Broin. ‘Focus on the areas that are really viable and could make a real difference’

In the UK, the price of new buildings is charged a zero-rate of VAT provided the supply in question is for a “social purpose”. This includes new houses and dwellings and buildings with a charitable purpose. However, the application of the zero rate can prove problematic, according to Kevin Hall of English law firm Wright Hassall. In an article for UK Construction Online, Hall outlined the “complicated grey areas” that can arise when strict criteria are not met, such as when a multi-use building is converted into residential, or when existing buildings are not demolished to ground level.

Fiona Cormican, chief commercial officer at Clúid Housing, says the big criticism of introducing a zero-VAT rate here in Ireland is that developers might not pass the reduction on to the buyer. To guard against this, she suggests staggering the rates of VAT in tandem with caps on the price of homes.

“Supposing we say if houses are delivered under such a price, the VAT will be zero. Under a higher price the VAT will be 5 per cent, and so on,” she explains. “That gives an incentive to developers to reduce their own profits and ensure those properties come in under that price.” This would be a better solution than the subsidies the Government currently provides to first-time buyers, ie the First-Home scheme and the Help-to-Buy scheme, according to Cormican.

“My advice to anyone who wants to discuss VAT is don’t waste your time,” says Eoin Ó Broin. “Focus on the areas that are really viable and could make a real difference.”

“Rather than trying to reduce the price of a house with a VAT cut, my feeling on it is the Government would be better giving mortgage interest relief to first-time buyers,” says Keith Lowe, chief executive of estate agent DNG. “I would say it would be very easy for the Revenue Commissioners, because they’ve been doing it for years.”

Mortgage interest relief was withdrawn at the end of 2020 for those qualifying, who had taken out a loan between 2004 and 2012, and there is no plan to reintroduce it, according to a spokesman for the Department of Housing. “The gradual phasing out of mortgage interest relief has been under way since 2009. The decision to abolish [it] was taken in the wake of the financial crisis, with the cost of the relief being one of the influencing factors. Mortgage interest relief cost over €700 million in 2008,” the spokesman said.

Planning reform

Reforming the planning system is key to improving the delivery of new houses and reducing prices, according to Ivan Gaine, managing director of Sherry FitzGerald New Homes and chairman of Property Industry Ireland (PII). “With the inflection of planning and the judiciary with judicial reviews, we have a clogged system,” he says. “We need the system to have sufficient planning expertise in local authorities and we need An Bord Pleanála to be twice the size that it is in terms of board membership.”

The longer a development takes to come to fruition, the higher the total costs will be, Ó Broin points out. “I’ve been having lots of conversations recently with planning experts and with building contractors, developers, funders and local authorities, to see is there a way of maintaining the integrity of our planning system, in terms of adequate public consultation and the right to appeal, but actually reducing the time it takes, and there are really good suggestions to fix that,” he says.

‘Everyone assumes if you go out and ask the public that they’ll all want three-bed semis with their own massive garden – that is not the case’

“There needs to be clear, statutory timelines at all stages of that planning process, so that means pre-planning, formal planning for the local authority, requests for further information and appeals to the board.”

Ó Broin also suggests establishing a dedicated planning court with specialist judges and staff to deal with planning and environmental matters to replace the current judicial-review process. “The difficulty with judicial reviews is that if one goes to the High Court it can take six to nine to 18 months,” Ó Broin says. “The point is, instead of five years for the development cycle, you could reduce it to four years or three years... and that’s a lot of money saved in terms of the all-in development cost, [meaning] the purchase price at the end will be lower.”

There is an issue with planners making decisions without looking at the wider context of the economy and demand, according to Cormican.

“Nobody is asking the public what they want. Everyone assumes if you go out and ask the public that they’ll all want three-bed semis with their own massive garden – that is not the case,” she says. “If we did a proper survey to find out what the public want and feed that back into the planning system, I think people would be very surprised to find lots of people want to rent, lots of people don’t want a garden, lots of people are happy to live in a built-up area.”

In response, the Department of Housing says an overhaul of planning is under way: “The review and consolidation of the Planning and Development Act 2000 [as amended], is being carried out by the Attorney General and a working group of planning law experts which he has established and is expected to be before the Oireachtas by the end of this year.”

Gaine says there is also an issue with the availability of land zoned for residential development: “The fact that we have land being dezoned in Kildare and Wicklow is pushing up in relative terms what is remaining,” he says.

Giving an example of a Dublin city apartment costing €400,000, the land value would be €80,000-€100,000 of that, Ó Broin estimates. He says: “The reason for that is the very speculative nature of our land market and the lack of any attempt by Government to properly manage, regulate or constrain that speculation and the subsequent increase in prices.”

Development finance

Looking at the issue of funding, Ó Broin says a reform of Home Building Finance Ireland (HBFI) is needed; “The HBFI should not be financing large developments that have easy access to finance elsewhere. [ ...] All its money should be going to small- and medium-sized builder/developers, whether they’re building for sale or for rent, to add value to the market. This would save a significant amount of money for the purchaser.”

“The HBFI is spending far too much of its money assisting the forward purchase of build-to-rent apartments,” Ó Broin says, “rather than lending to builder developers building homes for people to buy at moderated prices.”

A spokesman for HBFI rejected the Sinn Féin housing spokesman’s suggestion that the agency was failing to give sufficient support to small and medium housebuilders by providing funding for the forward purchase of build-to-rent apartments, a practice typically engaged in by institutional investors, saying: “HBFI lends exclusively to construction companies that build homes.”

HBFI’s spokesman said the agency’s objective is to “increase the supply of new homes for renters as well as for owner-occupiers, social housing and affordable housing”.

“It [HBFI] has sufficient capacity to fund developments for renters without diverting any funding capacity from developments for owner-occupiers that it has approved,” the spokesman said, while adding that the agency had approved €1.16 billion in funding to support the construction of 5,210 new homes in 20 counties across Ireland as of the end of June 2022. He said that 50 per cent of funding approvals had been for homes for owner occupiers, 23 per cent for social/affordable [housing], 5 per cent for Part V and 22 per cent for renters. Some 65 per cent of funding to date had been for houses and 35 per cent for apartments, the spokesman noted.

A spokesman for the Department of Housing, meanwhile, highlighted the measures it is taking in response to the housing crisis and the specific issue of affordability, saying: “While there are still significant challenges to be overcome, the [Housing for All] plan is delivering for the Irish people through increased housing supply; a range of affordable purchase and rental measures; new initiatives to tackle homelessness; and ongoing, long-term reforms of the housing and planning systems.”

The department also pointed to the €4.5 billion housing investment put forward in Budget 2023, which, it says, “will continue to underpin the ambitious Housing for All plan and deliver the largest State home-building programme ever, with 9,100 direct-build social homes and 5,500 affordable homes”. A total of €1.3 billion is to be spent on “affordability measures, supporting home ownership”, it added.

Jessica Doyle

Jessica Doyle

Jessica Doyle writes about property for The Irish Times