Property policies – some renovation required

Spare a thought for Alison O’Riordan. In 2008, she “ploughed in head first” and paid an eye-watering €525,000 – about $700,000 – for an apartment in Dublin. Just two years later, as Irish property prices crashed, neighbouring apartments were fetching less than half that, about €190,000.

As Ms. O’Riordan discovered, she was among the last to be sucked into the Irish property bubble: Fewer than a dozen of the properties in the complex were sold. “Today,” she laments, “the other apartments in my building are filled to the brim with wise renters.”

To buy or to rent? An agonising question, especially when you know that getting it wrong could seriously hurt your finances. But, as the recent crisis demonstrated, such decisions can have a much wider economic impact – look to how countries like Spain, Ireland and the United States cope are still coping with the hangover from property bubbles. That’s one reason why there’s increasing interest in how government policy can shape individuals’ housing decisions and reduce the harmful side effects on the economy.

A new paper from the OECD looks at a number of these issues, and argues for policies that would reduce volatility in home prices and provide greater flexibility for buyers and renters.

Take the decision to buy. In a number of countries, governments have promoted home ownership in recent decades, in part because they believe it gives people a stake in society and promotes responsible citizenship. But at a time of high unemployment, that can have a downside: In effect, people who are tied to their homes – and, in some cases, burdened with negative equity – may be less willing to move to another part of the country to start a new job. 

The solution, says the OECD, is not to discourage home ownership, but to reduce barriers that discourage people from moving. There are many such obstacles, but one striking example is the charges you pay when you buy a new home – stamp duties, property registration, notary and property agency fees and so on. These differ greatly between countries: In Denmark and Iceland, they amount to only about 4% of the value of the property; in Belgium, France and Greece they’re equal to at least 14%.

Another area where government policy can help determine people’s property decisions is taxation. In many countries, the tax system effective encourages people to buy property, typically by providing tax relief on mortgage interest payments. That helps people buy homes, but there can be downsides. Firstly, by making it attractive to take out mortgages, and so cut individuals’ tax burdens, it can encourage property speculation. Secondly, it benefits only people who pay tax; low-paid workers outside the tax net get no benefit.

The OECD paper suggests such tax incentives should be scrapped, and that an investment in property should be treated like any other investment. This, it argues, would curb excessive property investment – and limit price bubbles – and free up funds for investment in more productive areas of the economy.

Useful links

Going for Growth 2011 
OECD work on housing
OECD Insights: From Crisis to Recovery

Brian Keeley

4 comments to “Property policies – some renovation required”

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  1. Stephen - 21/01/2011 Reply

    2008 was well over a year into the crash, with prices having peaked by last quarter of 2006 and clearly starting to tumble by third quarter 2007. Alison O’Riordan is the archetypal fool so easily parted from her money.
    However, the Irish property bubble and crash is riddled with stories that paint a bigger picture. Alison is (supposedly) a well educated professional who should have known better. Personally, I know of two other professionals who are genuinely well educated and bright who bought property at the very peak in 2006 despite warnings from many that the bubble was unsustainable. In Alison’s case you might rightly dismiss her as plain dumb given the timing. But the fact that so many people who really should have known better were indeed ‘sucked into the Irish property bubble’ suggests that gross policies designed to encourage or discourage ownership amongst the mass public are not of any real help.
    The root problem in Ireland (as has been pointed out by many many commentators) was the lack of prudence in the banking sector, the lack of regulation of the banks and developers and the lack of control of the zoning councils.
    When an ordinary average Joe can access huge amounts of credit without serious examination of his future potential to repay; when banks are allowed to behave like market traders trying to turn a quick profit out of thin air and developers are allowed to behave like greedy children in a veritable sweetshop; when councils are allowed to zone residential land willy-nilly always with an eye on the bank balance and never with an eye on the civic good then you have a recipe for one of the biggest housing bubbles ever seen.
    So, dig a little deeper Brian Keeley before you present blithe suggestions of dickering with policies that ‘reduce barriers that discourage people from moving’.

  2. Simon - 21/01/2011 Reply

    It wasn’t all doom and gloom for Ali. Some charitable soul has been leaving freebies on her doorstep

  3. Eleanor Firman - 04/02/2011 Reply

    I was struck that there was no mention of land value tax in this article and the paper linked to it. This is surely the most obvious and simplest way to solve the problem of volatility in home prices?

    Landowners do not create land values. It is the efforts of others that generate land values. Imagine the effect on the price of housing land in an area which has no public services? When the Jubile Line extension to the London tube was built it added 13billion pounds to the value of land close to the new stations. It cost 3.5 billion to build. Why should landowners reap the benefit when they contributed nothing to this gain? A tax on land rental values is fair because of this unearned benefit.

    Compare two neighbours living in identical properties by one of the Jubilie Line stations. One is a tenant, the other a private freeholder. Both have the same jobs, both pay the same council tax. But the freeholder sees his/her property double in value, whilst the tenant faces rent increases. Hardly fair is it?

    Compared to taxes on buildings Land Value Taxation provides a broad tax base because it would include all empty properties and empty sites. LVT would encourage new capital investment rather than sterile land speculation as it would encourage a shift of private investment from land speculation (which creates no extra land but only higher land prices) to productive enterprises.

    LVT would encourage the use of empty sites zoned for development, creating more job opportunities and wealth. The money raised could allow other taxes including income tax to be reduced, thus incentivising greater individual productivity.

    I can’t think why this is not discussed in this paper.

    Eleanor Firman
    Chair, Labour Land Campaign

  4. connor - 05/01/2012 Reply

    Taking out a mortgage on a house is an investment move, but it is also a home, a bedrock on which a family finds security to grow and in turn add to the worth of the community. The tax system in which a fair rate of tax (or even for periods of economic hardship a harsh tax rate) on wealth gained is just, but the introduction of a second and annual tax on those savings which have already been taxed is unjust and bring into question the system.The issue of a property tax puts pressure and douth in the minds of people, if you and your family finds itself experiencing a run of bad luck such as losing a job, or other unexpected costs like medical or legal the family may find themselves be between a rock “mortgage payment” and a hard place “tax bill”, two wolves at the door leaving no possablity of a light at the end of the tunnel and the real prospect of losing the family savings/home with the resulting damage this causes to families and the general community. It was in school I was shown the positive outcomes that can come from countries finding common ground, but it was also in that classroom the lessons covering our past showed the bad times when the general population couldn’t have this bedrock throught the uncertainty of an unjust system.

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