‘Overcorrection’ in house prices since financial crash

Irish house prices have overcorrected since the property crash in 2008 and resulted in an “artificially low” tax take from the sector, according to a paper from the ESRI.

The research concluded that “housing-related taxes can be expected to recover quite significantly over the medium-term”. The ESRI authors said this would have implications for the formulation of budgetary policy and the manner in which the structural budget balance is estimated.

The ESRI said its results indicate that current estimates of the structural deficit might be overstated due to a failure to adequately capture housing market developments.

“Much greater emphasis should be given to modelling key taxation aggregates in framing fiscal policy decisions,” the report said. “Incorporating likely future developments in the housing market should improve the accuracy of fiscal planning over the medium-term.”

Reliable figures on the tax tax from the Irish housing market are not available but the ESRI’s research puts it at €39.9 billion for the bubble years of 2003 to 2007. This represented a 30.3 per cent share of tax revenue.

Between 2008 and 2013, some €34.7 billion was generated in taxes, accounting for 29.6 per cent of the tax take.

Restricted demand

In a separate paper the ESRI found that the

Central Bank

of Ireland’s macroprudential rules might “well end up curbing house price inflation” but it would be at the cost of “generating a sub-optimal equilibrium in the housing market”.

It said the measures, which impose loan-to-value and loan-to-income limits on mortgage lending, had restricted demand for new houses while the supply-side response was impaired by credit and other regulatory restrictions.

“In that context, it is regrettable the macroprudential measures were not implemented on an explicit rules basis, which incorporate a counter-cyclical component,” the ESRI said.

The paper noted that between 2005 and 2007 some 80,000 housing units were built annually in Ireland. This dropped to just over 8,000 units in 2012 and 2013. House prices fell by 50 per cent from peak to trough from 2007.

The Central Bank’s macroprudential rules were introduced at the beginning of 2015, and are currently subject to a review, with the result expected to be announced towards the end of this month.