ESRI wants Irish land tax - not overall remedy for housing crisis

The Economic and Social Research Institute (ESRI) in its latest quarterly economic commentary has called for an Irish land tax similar to Denmark's, to reduce the incentive for developers to hoard land as prices rise. That would be a useful measure — China charges the equivalent of 20% of land price to owners who leave urban property undeveloped for a year; after two years, the land can be confiscated! — but in itself it would only be another band-aid measure for the housing crisis in Dublin.

The economists say that that it may take up to three years for supply in the Irish market to reach the underlying structural demand of approximately 25,000 units per annum. Ireland is in a similar situation to the UK with completions well under half of what is required annually. Therefore, they say that bridging the gap between the actual and desired housing stock, in an efficient and timely manner, requires a careful and prudent policy mix.

This year's housing completions are expected to be about 12,500, and 13,100 in 2016.

However, it is [ ] clear that the targets for social housing set out in Social Housing 2020 (2014) for the period 2015-2018 are [ ] unlikely to be met. One possible way of achieving a significant increase in social housing provision is for the State to provide this through local authority schemes as it used to prior to 2009...Land taxes that increase in line with house/land prices are also shown to act as an incentive to sell/use underdeveloped or vacant land in periods of increased demand, while Government grants to subsidise stalled developments may provide some assistance in alleviating supply-side pressures.

Economic growth is expected to be strong in 2015 and 2016, with Ireland's gross domestic product (GDP) forecast to grow by approximately 6.7% in 2015 and 4.8% in 2016, according to the latest analysis by researchers at the Economic and Social Research Institute (ESRI).

Given the volatility exhibited by the national accounts, the authors also note that GNP (gross national product — excluding the profits of the multinational sector but also distorted by multinationals' tax avoidance) is set to grow by 5.2% in 2015 and by 5.3% in 2016.

In the Quarterly Economic Commentary, Winter 2015, published today declines in unemployment are also expected, with the headline rate envisaged to fall to 7.9% by the end of 2016.

Housing

A Review of Housing Supply Policies, by Ciara Morley, David Duffy and Kieran McQuinn (ESRI), examines international and domestic housing policies, and highlights the myriad of governmental approaches used to tackle the issue of housing supply. While non-policy constraints, such as geography may contribute to a lag in new residential construction, the literature identifies that government policy plays a strong role in housing supply responsiveness.

Commenting on the note, Ciara Morley, a co-author, said:

From our analysis, policies such as strict planning regulations, substantial infrastructural costs and inappropriate taxation appear to play an important role in acting as a constraint on housing supply. There is however some scope, from an Irish perspective, for government policy reform to encourage new housing developments, bearing in mind that likely future demographic trends call for 25,000 residential units per annum over the coming years.

For example, NAMA’s Residential Funding Programme 2016-2020 should go some way to alleviating financing pressures on smaller construction firms and help prevent extended delays in the commencement of developments. In addition to this, from a taxation point of view, evidence from countries such as Denmark shows that the introduction of a land tax that increases in line with house/land prices is shown to act as an incentive to sell/use underdeveloped or vacant land in periods of increased demand. This is something that could be looked at in greater detail in an Irish context. In any case, this review highlights the importance of understanding both supply and demand side features of the housing market before implementing any such policies.

However, economists at Denmark's National Bank, the central bank, in a recent report have pointed to a common problem, also evident in Ireland — property and land taxes can have value in stabilising a housing market but only if they keep pace with prices.

The housing market and residential construction are generally areas that amplify fluctuations in the economy. This can be offset by appropriate housing taxation, where taxation acts as a stabiliser. This has not been the case since a freeze was put on property value tax in 2002, when the annual increase in property tax (land tax) was also capped.

This means that there has been no or little consistency between price developments and tax payments, so, like property value tax, land tax has not had a stabilising effect on the housing market. When house prices were falling in the years before and after the financial crisis, land tax payments went up, driving prices further down. Land tax currently has a small stabilising effect, however.

Overall, it can be said that housing taxation in Denmark is inappropriate from an economic stability perspective, including financial stability. Redressing this situation should be given priority and be a core element in the design of future housing taxation.

The current Irish property tax is already being debased by the Government and may well be allowed a slow death — what prospects would a land tax have overtime: note how Michael Noonan, finance minister, in 2014 slashed the windfall profits on rezoned land from 80% to 33% to increase housing supply.

The Society of Chartered Surveyors of Ireland in 2014 identified 2,233 hectares of land in Dublin already zoned for housing.

The ESRI economists reviewed international research on housing in different markets from their desks in Dublin but what is required is practical expertise on how challenges were met in other cities in developing land-use policies that include a focus on affordable housing.

McKinsey, the consultancy, says that while manufacturing and other industries have raised productivity steadily in the past few decades, in construction it has remained flat or gone down in many countries. Likewise, in many places residential housing is still built in the same way it was 50 years ago.

Project costs could be reduced by about 30% and completion schedules shortened by about 40% if developers make use of value engineering (standardizing design) and industrial approaches, such as assembling buildings from prefabricated components manufactured off-site. Efficient procurement methods and other process improvements would help, as well...

In Barcelona’s La Marina development, for example, increasing the floor-area ratio from 1.0 to 2.3 made it possible for the developer to offer half the units as affordable housing, with prices about a third of market rates. Many cities have also adopted transferrable development rights, allowing a private developer to fulfill its affordable housing requirement on another site. Inclusionary zoning must be carefully designed and managed to avoid unintended consequences, such as over-burdening infrastructure, allowing use of transferrable development rights to segregate low-income populations, or raising costs so much for higher-income households that demand for new development is suppressed.

To meet rising demand for affordable housing — an estimated 2.4m additional units will be needed annually by 2025 in the 20 largest cities alone — developers need to become more productive. In several affordable housing  developments, value engineering to improve capital productivity and industrial construction techniques to improve labor productivity have helped to cut costs by 30% and shorten delivery time by 40 to 50%

ESRI summary of Quarterly Economic Commentary

Dublin house rents near boom peak; Rents and wages too low

Dutch house price doubled in 350 years; Irish prices in 20 years

McKinsey Global Institute: Tackling the world’s affordable housing challenge