Tax Breaks and the Residential Property Market

October 13, 2015
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The report begins with the observation that the supply of new housing appears to be falling short of demand. This observation is based on the results of demographic models and also on rising house prices and rents. Given this situation, we explore what the impact might be of tax breaks aimed at encouraging developers to build more housing units. Through a simple model of the housing market, we show that tax breaks will have limited impacts on supply if supply is being constrained by factors such as planning restrictions. Our simple model also shows that tax breaks in these circumstances can simply lead to a transfer of tax revenue from the state to developers with no effect on supply. We go on to ask if there is evidence to suggest that there are quantitative restrictions in operation in Ireland’s housing market which mirror the situation in our model. While we do not attempt to be conclusive on this point we show that three factors are consistent with supply being constrained in a way that will make tax breaks ineffective. These factors are limited finance for developers with viable projects, the planning system and the absence of infrastructure needed to support development. We also discuss how the costs of house-building may have risen due to regulations. While a tax break could be effective in stimulating supply in this case, it is not clear that it makes sense for the state to impose costly regulations on the one hand and then for the state to forego tax revenue on the other hand in an effort to ease the burden of those regulations. On the basis of this analysis, we conclude that tax breaks aimed at stimulating house and apartment building should be avoided until (a) it can be conclusively shown that the “market failure” to be corrected will yield positive results without excessive unintended transfers to developers and (b) the impacts of regulations on the cost of building are properly understood and also the potential effects of any tax breaks in the context of regulatory-related costs.