Finance (No 2) Bill 2007
Tánaiste and Minister for Finance
Second Stage Speech – Seanad Eireann
3 July 2007
I would like to thank you for inviting me to speak to you on the Finance (No 2) Bill 2007.
This is my fourth time to speak to you on my Finance Bills. You will recall that I first spoke to you in 2005 when I concentrated on reducing the tax burden on low and middle earners. Later in 2006, I reformed and refocused the structure of investment tax reliefs and set a minimum tax which the well-off must pay. More recently in my last Bill earlier this year, I sought to ensure that the benefit of strong economic growth was shared by all taxpayers and, in particular, low and middle income earners. I am now implementing a very specific stamp duty reform, as set out in the Programme for Government, to exempt all first-time buyers from stamp duty.
I want to take a little time to review where we are now in regard to first-time buyers. In my last Budget, I indicated that it was the Government’s aim to help first-time buyers directly and substantially, including those who were already paying their first mortgages. I did this by increasing mortgage interest relief for first-time buyers from €4,000 single and €8,000 married or widowed per year, to €8,000 and €16,000 respectively. This measure helped first-time buyers who were already in their first home, as well as brand new first-time buyers.
This Bill is the first installment in the implementation of the Programme for Government which will see this mortgage interest increasing to €10,000 for a single person and €20,000 for a married or widowed person. What's more, relief will stay at 20%, even after the standard rate of income tax is reduced. The proposals it contains are timely, affordable, targeted and will support one of the most important sectors of our economy. It will do all this in a way which directly assists those without any housing equity of their own in their efforts to acquire their first home.
Home ownership is one of the primary aspirations of the people of
The housing market has enjoyed remarkable growth in terms of both output and prices over the past decade or so. We have seen a dramatic increase in the number of homes built in
I have heard a lot of speculation about the economic outlook in recent times, much of it of a negative variety. I accept that there are risks to the outlook but I believe that our economy will continue to outperform most of our peers. The residential construction sector is easing back towards more sustainable activity levels. However, it should be noted that commercial property activity remains very strong and that the roll-out of the National Development Plan will also have a positive impact on growth levels, not least in the construction sector. At the same time, the external demand environment, most notably in continental Europe, is brightening and that is something which all exporters will welcome. Certainly, the impact of tighter monetary policy is serving to dampen economic activity but a moderation of pace should not be mistaken for a substantial and sustained deterioration in our economy’s performance.
Our economy is set to enjoy strong growth rates over the medium term, albeit at a lower level than that enjoyed over the past ten years. By accepting that more moderate outlook now, we can make it a reality and enjoy the much talked of ‘soft landing’. It is essential that we adapt our expectations in the property market, in relation to government spending growth and in the wider economy to that calmer but still positive growth environment. That is the best means by which we can secure our prosperity for the long term.
Construction has become an increasingly important sector of the economy in recent years. Within construction, home building accounted for around 11.5 per cent of GDP in 2006, compared to about 4.5 per cent of GDP in 1997. Driven by economic and demographic fundamentals, around 570,000 new houses have been built. Despite this rapid growth in house building, the stock of houses per capita is still one of the lowest in the Euro area, implying that there is still scope for a significant level of house construction. However, the housing market has slowed in recent months, in part due to uncertainty relating to stamp duty. In introducing this measure to reform stamp duty, I intend both to remove uncertainty from the housing market and to reduce the cost of home purchase for first-time buyers. This will allow people to buy and sell their homes in a more stable market environment and help to restore necessary confidence to the market.
At this stage we can see housing demand levelling with supply and this is reflected in house prices. This is clear evidence that government policy is working. With the market stabilising, we have to ensure that any changes that are made must be carefully thought through, given the importance of this sector for jobs in every community in Ireland.
Leading indicators of future output, such as new house registrations, new housing starts, planning permissions and the number of new mortgages drawn down by first time buyers, point to a lower level of completions this year. There is a general consensus that the level of new housing output will decline from last year’s record levels, with the current market expectation at around 82,000 new housing units this year, which is still a very high output by any standard. Underlying demand remains strong, supported by demographic developments and the positive economic environment.
In line with these trends, the rate of house price inflation has slowed. Indeed, the level of house prices is now back to the same as those in mid 2006.
The main factor impacting on the housing market is the rising interest rate environment. This is impacting on affordability and hence on the demand for housing. Eight quarter-point increases by the European Central Bank over the last 18 months have doubled the key official interest rate for the Euro area from 2% to 4%. However, the key factor that needs to be borne in mind in this situation is the amount of income that is used to service house loans. It may come as a surprise to learn that this has remained relatively static over the last 20 years – between 25 and 30 percent of income. Affordability has, of course, been assisted by improvements in mortgage interest relief, and some softening of prices.
While property price increases have moderated, the cumulative increase in house values over the past number of years puts first-time buyers at a distinct disadvantage. Those who are already on the property ladder have benefited from those increases in value and have built up their own property market equity. First-time buyers do not share in their good fortune and these proposals are designed to help them as they compete with existing owners and investors in the property market. In effect the measures for which this Bill makes provision will level the playing field for purchasers by directly helping those who come to the property market without the advantage of the house price appreciation of the past number of years.
It also will also level the playing field between new and second-hand houses and widen the choice available to first-time buyers with clear social benefits. Because of the existing stamp duty regime, first-time buyers are incentivised to buy new homes, homes which in many cases are considerable distances away from their families and their support networks. These changes will make first-time buyers indifferent between second-hand and new homes and will remove an existing financial obstacle to establishing their own homes in the neighbourhoods and in the communities where they grew up. This has obvious and desirable social benefits which flow directly from the provisions of this Bill.
Leaving aside the equitable and social impacts on the first-time buyer, our proposals are good for the property market as a whole as they bring an end to the speculation and uncertainty about the evolution of the policy in this area. In addition, by making these changes retrospective on transactions executed on or after the 31st March, which would be presentable to the Revenue Commissioners for stamping by the 30th April , we have minimised the potential for market disruption.
Where a person who has already paid stamp duty becomes entitled to an exemption from that duty when the Bill is enacted, he or she will be entitled to claim a repayment of that duty from the Revenue Commissioners. The Revenue Commissioners will, as soon as the Bill is enacted, publish details of how to claim such a repayment.
I am aware from weekend reports that it has been stated that a number of first-time buyers have entered the market to buy expensive houses. However, this must be put in perspective. It is not unexpected that one or two individuals come to attention by availing of this relief, but that is the exception and it is must be put in the context of the overall benefit to first-time buyers.
By contrast, those individuals could have bought a new house under the existing provisions and not have paid any stamp duty. Likewise, they could have acquired a site and built themselves a new house, again without attracting a stamp duty liability on the build.
Reports also point to certain individuals buying houses as a result of gifts from rich parents. There is nothing unusual about parents passing wealth to children, however it has to be remembered that a tax liability arises under Capital Acquisitions Tax. Whether the wealth is passed by gift now or inheritance later, there is a single tax free threshold of around €½ million, which is linked to the CPI that applies with the excess being taxed at 20%.
The changes being introduced by this Bill provide for a simple exemption which means that regardless of whether or not a house is new or second-hand, a first-time buyer knows that the question of stamp duty will not be a consideration and more importantly, because of the focused nature of this measure, it will not have a destabilising effect on the market.
We recognise how important the construction industry is to our success. It directly employs 280,000 people across the country and many tens of thousands more in related industries. It is a major contributor to the health of our public finances. A strong construction sector is vital to a strong economy. It is in everyone’s best interests.
It is generally accepted that speculation in recent months about stamp duty has had a negative effect on the market. Such speculation was not of my making and in dealing with the situation as it evolved, I was obliged to handle it in a responsible manner given the extra attention drawn to comments of a Minister for Finance in this area.
I believe that these proposals before you today to introduce targeted stamp duty reform aimed at benefiting first-time buyers will restore stability and certainty to this market.
The Bill runs to 2 sections. Section 1 provides for an exemption for first-time owner-occupying house buyers and also provides for the repayment of stamp duty where it has already been paid in respect of instruments executed on or after 31 March 2007.
Section 2 is simply the short title and construction of the Bill.
We have further measures planned to support those who are about to buy their first homes or have done so in the past number of years. Our policy initiatives are designed to help young people and young families, not just those who are about to buy their first home, but all those who have purchased apartments and houses in the past seven years. They will improve affordability, reduce the burden of higher interest rates and have a positive social impact.
In December’s budget, I plan to increase the ceiling of mortgage interest relief for first-time buyers from €8,000 to €10,000 for single people and from €16,000 to €20,000 for couples or widowed people. This will see single first-time buyers receiving up to €167 directly into their bank accounts every month in mortgage interest relief while couples will receive up to €333 each month in relief. As a result of this initiative for first-time buyers, a couple with a joint mortgage of up to €400,000 over 33 years at an interest rate of 5% will be able to claim interest relief at 20 per cent on the full amount of the interest on their loan. In the case of a single person, the upper limit will be €200,000. As income taxes are reduced, I said that we will keep the rate for mortgage interest relief at 20% for all home owners.
These changes will help young people and families to purchase their first home, it will help them meet the repayments and it will ensure that the mortgage interest burden does not rise as a result of future income tax changes. Our approach is good for certainty, it is good for affordability, it is good for society and it is good for the economy.
These changes will make a direct and substantial difference to young people and families as they strive to own their own homes, not just at the time of purchase but during the early years of home-making.
Our proposals, in line with the entire policy approach of this Government, are both progressive and responsible. They are the right measures for our economy and for our society. By targeting first-time buyers immediately and directly, this Bill’s proposals will have an important socially-equitable impact at reasonable cost to the Exchequer and without causing unnecessary disruption in one of our most important industries.
No doubt, I will be asked why I am not introducing other types of stamp duty reform at this time. The answer is simple. I am doing what the Government said it would do in the Programme for Government. I am exempting first-time buyers from stamp duty in respect of all houses, regardless of whether they are new houses or second-hand houses, and in doing so, I am removing uncertainty about the stamp duty regime amongst house-buyers that may have arisen during the election campaign.
Taken together, the measures in this Bill, combined with the mortgage interest relief measures in my 2007 Budget and those proposed for 2008, provide real and tangible benefit to first-time buyers as they seek to purchase a home.
I ask that you recommend the Bill as published and passed by the Dáil.
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