Secton 23 & 50 Properties (the Next Irish Crisis)

Treehouse72

My last post was a satirical cultural reference to former Taoiseach Bertie Ahern's outburst in the Dail at Jim Mitchell in 1994. Hence the italics. It was not meant as mindless abuse.

http://www.independent.ie/national-news/the-ahern-years/how-to-upset-the-apple-tart-and-survive-1356878.html

interpoint, you didn't answer my questions stemming from this post of yours:

Strange point of view. Go ahead and make that case to the thousands of tradesmen that were involved in the construction sector and the billions in direct and indirect tax that was harvested by the government during the past decade. You blame the investors for investing what is put in front of them. The government came up with the section 23 / 50 schemes and now wants to get out of it using retrospective taxation and an illegal act. When it comes to screwing up villages then I suggest you should complain to the local planning department.

A reminder of my questions:

1. Where do you think those "harvested billions" came from?
2. Is your suggestion for those unemployed tradesmen that we return to building 90,000 houses a year?

parsi

One of the major problems that is coming to the fore is that of "amateur investors" who thought that all they had to do was buy a property , leave it hang around for a while and then cream in the profit. However what these amateurs didn't factor was how to deal with hiccups - eg no tenant for 2 months, repairs, changes in tax reliefs.

I'd love to know how many of the mortgages that are in arrears are actually for 2nd/3rd (etc) properties rather than for the much prized family home.

Blackjack

Some recommended Reading, for anyone interested in Investors reaction to a downturn, including their own contribution to same.

antoinolachtnai

The thing is that s23/50 allowed investors to invest in projects that would not have been economically viable otherwise. The government promised to put up the shortfall through the tax break. Now the government has decided to step away and not provide the support it promised.

I am thinking of, for example, the high density development in Ballymun and Tallaght, the construction costs for which were only viable because of capital allowances. (For sure, there were other, bad projects that shouldn't have gone ahead.)

Why is it right for the government to cut and run when they were involved in promoting these projects?

If the collateral damage this will cause to banks is so small, then is the benefit of withdrawing these allowances really enough to be worth it?

In reality, any extra unforecast bad debt is a big burden for the banks. Every cent of it will have to be covered by the taxpayer. There isn't much winning in this for the exchequer.

Lots of people complain about property investors being imprudent, and that is certainly true for some of them. However, having the benefit the s23/50 provided prudent copperfastening and a safety net for many sensible property investors. It gave them protection against circumstances like property price falls, reduced rent and increased tax, and they specifically set it up that way. There is no way investors foresaw that the government would withdraw tax allowances, especially not in such a crude, blunt way, with no warning and no real wind-down period.

The amateur investors sometimes mentioned, who didn't understand Section 23/50, of which there were certainly many, won't suffer any loss as a result of this action, because they weren't going to get any benefit from the capital allowance anyway.

This doesn't effect really imprudent investors one way or the other. It only effects prudent investors who were benefiting from the tax benefit they got for investing in non-prime property. It will certainly drive some of these prudent investors over the edge.

The big problem for the government is reputation damage, i.e., if the government ever needs to promote projects through capital allowances again, investors will be very slow to get involved.

interpoint

Again I must stress that this is an IAVI (auctioneers representative association) response to the Budget 2011.

Before anyone goes "mental" and starts going on about the vested interests etc etc. It is nevertheless worth posting this into this debate. It does give a view point on the potential damage that could follow from the people in the business that sold these properties to others in the past.

This was posted on the IAVI members website and I acquired a copy. I am not a member of the IAVI and am not an auctioneer..

** Copy **

Dear Member
As you are aware, Budget 2011 provided for several measures directly relating to the property and construction industry.

Following on from requests from members of both organisations for further detail in relation to the changes to Section 23, Capital Allowances and Capital Acquisition Tax, Deloittes have prepared a special member briefing document outlining the impact of these changes.
You can download the member briefing note from Deloitte by clicking on the following link Deloitte Briefing Note - Budget 2011 Property Tax Relief Measures

PROPOSED IMPACT ASSESSMENT - IAVI/SCS JOINT SUBMISSION

In advance of the proposed ‘impact assessment’ on the property tax relief measures announced by the Minister in budget 2011, the SCS and IAVI have made a joint submission to the Department of Finance.
While both organisations understand that the economic environment means it is necessary to phase out property tax reliefs, it is important that these reliefs are phased out in a measured and equitable manner in order to create certainty, stability and confidence in the property market. A poorly executed management of the phasing of these schemes would have a very negative impact on financial institutions, pension holders, local Government and ultimately the tax-payer.
The submission outlines the areas which both organisations believe will be severely impacted should the proposed measures be introduced in their current format. While the full submission has been sent to the Department, a brief summary of some of the points outlined for the proposed 'Impact Assessment' include the following:

(1) Property Market Impact Assessment

The impact on the investor segment of the property market will be severe.

(i) Section 23
Given that the values of properties with section relief have dropped, the ability of distressed landlords to sell will be limited. This negative impact is compounded by the reduced likelihood of other persons purchasing these properties without the associated relief would be greatly diminished. There is, therefore, a real possibility that vacancy rates and defaults will increase in these developments leading to difficulties for the property market, investors, financial institutions, local Government, cities, local towns and villages.

(ii) Capital Allowances
The impact of the changes in the capital allowances on the funding of offices, hospitals, nursing homes and crèches will also be severe. Many of these important social, medical, commercial and economic facilities were developed and funded on the basis of the available capital allowances and were structured fundamentally on that basis.
Many investors who bought at the peak of the market have already contributed to the exchequer through payment of transaction charges such as stamp duty and VAT. Many of Ireland’s largest institutions hold property with capital allowances; the benefit of which forms an intrinsic part of their valuation. The proposed abolition of these allowances will immediately decrease the values of their portfolio. This will have a profound impact on Irish private pension holders.
The removal of these schemes will have an impact on properties held by NAMA. Many of the borrowers are unable to meet repayments already and this will restrict their ability further.

(2) Fiscal Impact Assessment

There is a real danger that the detrimental impact of the proposed budgetary measures on investors could lead to a significant volume of mortgage defaults with the financial institutions that provided funding for these projects. Many of the mortgages were provided on the basis of the section 23 tax reliefs and capital allowances and the removal of these allowances within the proposed short timelines may crystallize further losses to the financial institutions and ultimately the tax-payer.

(3) Planning Impact Assessment

The removal of these reliefs will result in increased difficulties for developers selling properties in areas requiring regeneration under the Integrated Area Plans and consequently the financial institutions financing such developments. The removal of these tax relief incentives will also result in significantly less development in areas requiring regeneration under the Integrated Area Plans. To date, the availability of property tax relief allowances have been a key driver for the transformation and increase in infrastructural investment in such areas under the Integrated Area Plans.

(4) Social Impact Assessment

A recent DoEHLG National Housing Development Survey identified 2,800 ‘ghost estates’ and has set about implementing measures to deal with the health and safety hazards associated with them.
Should investors default on mortgage payments and maintenance fees, there is a real possibility that some of these developments with section relief could also become ‘ghost estates’ and further compound existing difficulties currently being addressed by the Department of Environment.

Conclusion

The submission also outlined a number of recommendations including a phasing out of property tax reliefs on a tiered basis and allowing purchasers to retain some of the tax relief. This could be done on a phased basis in line with the phasing out of Mortgage Interest Relief and Rent Relief. This would provide distressed investors with a mechanism to sell. It would also facilitate transactions, reduce the likelihood of mortgage defaults and provide transactions for the creation of the proposed National Property Price Register.
Members of both organisations will be updated in due course in relation to this.

interpoint

Treehouse72 wrote: »

My last post was a satirical cultural reference to former Taoiseach Bertie Ahern's outburst in the Dail at Jim Mitchell in 1994. Hence the italics. It was not meant as mindless abuse...

Treehouse.. I now understand. I misread the context. I do remember that hilarious outbust by Bertie. Classic stuff.. Jim got him rattled that day.

Treehouse72 wrote: »

interpoint, you didn't answer my questions stemming from this post of yours:

A reminder of my questions:

1. Where do you think those "harvested billions" came from?
2. Is your suggestion for those unemployed tradesmen that we return to building 90,000 houses a year?

1. Where do you think those "harvested billions" came from?

The banks certainly encouraged the flow of money to anyone that would sign a piece of paper "with or without security"

We have all heard the stories of small investors going into the bank and asking for 200k and being told that it would be better if they took 300k instead as they could get instant approval for that amount. Crazy stuff. But true. It was a case of buy at all costs.

First time buyers were often on the receiving end as were many other sectors of society. I know one guy who sold his rural home (wife got sick and they needed to move closer to a Dublin hospital) just after Bacon III and had to pay 9% stamp and is now in negative equity. His origional home was mortgage free and now in his retirement he is back where he started mortgage'd to the hilt. There is nothing right about that...

It was an economy out of control. Nobody (including me) had the balls to stand up and say stop. In fact we voted for the same lunatics again and again and again.

Well the music has stopped and many people have been left without a seat. 90 Billions worth..


2. Is your suggestion for those unemployed tradesmen that we return to building 90,000 houses a year?

I am in total agreement with you that things were out of control. Fueled by greed and blind panic to buy at any cost (that you would somehow miss out on an investment of a lifetime etc..)

These levels were never sustainable. Developers built their first property and then rolled onto the second without fully realising the profits from the first and blind greed moving them onto the third and they still had not fully collected on the first two and it was now a cash flow game for them. They needed to pay people and needed the money from the next project to do it. It started to landgrab to keep the machine rolling. Prices rocketed. The rest is history. Two of the greatest motivators. Greed and Fear. Greed is the "Greed to make more money" and Fear is the "Fear of loosing out."

I do agree that section 23/50 was a root cause of the property bubble.

The market is a savage beast. The governement wanted to stimulate and the banks joined in and the beast got out of control. If someone tried to stop this at the height of the boom they were rediculed. Quote Bertie Ahern "For God's sake lads we'll talk ourselves into a Recession"

mastman

Hi All,

There is a meeting on Thursday in the Prince Hotel in Athlone starting at 7 o'clock sharp.

Please network with as many other effected as possible as it is crucial that there is a large number of people present to impress on the politicans present as to the implications of the changes.

The_Conductor

Just got the notice by e-mail (attached to this file). Bit childish of the two councillors to deliberately exclude reporting by RTE in my opinion.

Notice re the meeting attached.

S.

danbohan

mastman wrote: »

Hi All,

There is a meeting on Thursday in the Prince Hotel in Athlone starting at 7 o'clock sharp.

Please network with as many other effected as possible as it is crucial that there is a large number of people present to impress on the politicans present as to the implications of the changes.

hope they have invited imf / eu as well .

jimmmy

interpoint wrote: »

Section 23
Given that the values of properties with section relief have dropped, the ability of distressed landlords to sell will be limited. This negative impact is compounded by the reduced likelihood of other persons purchasing these properties without the associated relief would be greatly diminished. There is, therefore, a real possibility that vacancy rates and defaults will increase in these developments leading to difficulties for the property market, investors, financial institutions, local Government, cities, local towns and villages.

+1. People were encouraged by the govt - through the section 23 / 27 tax incentives - to invest in the Irish economy, give employment to people, improve the standard of rented accomodation in the country and provide income for their retirement ( rental income).

Some people did believe the government and invest in Ireland, often taking out big mortgages / loans to do so. The govt beneffited through all the taxes it got on the property being built.

Now those people have been kicked when they are down. The rules were changed during the game - the game they had to bet their shirt ( pension ) on.

Lets hope nobody invests in this country again and the people who get the government pensions and who have changed the rules, get their comeuppance.

Treehouse72

interpoint wrote: »

(i) Section 23
Given that the values of properties with section relief have dropped, the ability of distressed landlords to sell will be limited. This negative impact is compounded by the reduced likelihood of other persons purchasing these properties without the associated relief would be greatly diminished. There is, therefore, a real possibility that vacancy rates and defaults will increase in these developments leading to difficulties for the property market, investors, financial institutions, local Government, cities, local towns and villages.

This is so unintentionally ironic and hilarious it's giving me a bellyache (reminder, it is from an IAVI report, and not the quoted poster).

What the IAVI think they are describing here is the negative impact the abolition of S23/50 would have. But what what they are actually describing is what a property crash looks like. It's as though they've just woken up from a dream and are still bleary-eyed and confused in trying to adjust to the cold light of day. "But prices will fall and everyone will lose out!", they seem to be saying in the tone of someone who's just found buried treasure or worked-out a centuries old mathematical problem. As though it has only dawned on them that perhaps a property bubble wasn't such a great idea.

diceyreilly1

FYI this is on the IAVI members website and they conclude
Conclusion

The submission also outlined a number of recommendations including a phasing out of property tax reliefs on a tiered basis and allowing purchasers to retain some of the tax relief. This could be done on a phased basis in line with the phasing out of Mortgage Interest Relief and Rent Relief. This would provide distressed investors with a mechanism to sell. It would also facilitate transactions, reduce the likelihood of mortgage defaults and provide transactions for the creation of the proposed National Property Price Register.
Members of both organisations will be updated in due course in relation to this.

Do I understand from this and other comments from IPOA etc that there is an acceptance that a watered down version is acceptable. This unfortunately will be disastrous for the small investor like myself as it will set the ball rolling for the incoming government who have certainly shown their intentions to abolish the relief immediately and that the present government was not aggressive enough in their move. Even though Fianna Fail have made this move, the attitude of the incomers will be more aggressive only on the basis that it is seen by them as a good public pleaser.
I will not be able to afford my mortgage payments if this proceeds and the ultimate result will be possible repossession etc which will change my situation from a contributor ( NPPR PRTB VAT etc) to a drain on the public finances and a further negative figure to add to the bank stats.
Some of the general Public have mistakenly,I believe, grouped the small investor/pension investor with the developers/speculators which could not be further from reality and the various political parties are trying to grab unto these perceptions in the run up to an election.

soden12

Good to hear that they were able to push through the cut in minimum wage, the USC, the cuts in social welfare and child benefits but can't push through changes to Section 23 without an extensive discussion process.

Once again the vested interests of gombeen auctioneers and developers have screwed us.

The_Conductor

In all fairness- its just one item that has been chopped from the finance bill- the 90% tax on bankers bonuses is gone too- as are the USC contributions for med card holders etc. The tax treatment of same sex couples, has similarly fallen by the wayside.

They have taken a hatchet to many of the provisions- just to get something through pronto (the reason the opposition are pushing for getting the bill through- even if they are going to be voting against it- is because it saves them from borrowing 6 billion later on........)

Many of the provisions- and doubtless many entirely new things- will make an appearance come November when the 2012 estimates are in the public domain, and we are chopping another 4-5 billion.....