AIB suggests measures to improve housing supply
The bank has suggested measures to help tackle the housing crisis
AIB has proposed a number of measures to help tackle the current housing crisis facing the UK. It has called for tax breaks for developers, incentives for private landlords, encouragement for empty-nesters to move homes, and extending the lifespan of the help-to-buy scheme to accelerate house building to lower rental costs across the country. However, it suggested that the Vat cut should be temporary.
Based on the analysis of business cases submitted to it over the past year, the bank reported less profit margins for developers which is around 10 per cent to 15 per cent. The bank considers any profit margin below 10 per cent to be marginal due to the high level of risks involved in building and selling houses, it said in the report and recommended reducing Vat for developers to 9 per cent to stimulate the market. It said that cutting Vat will directly reduce the cost of building and consequently improve developers’ ability to generate their own equity.
The report said that first, cutting costs will help make marginal projects viable and see more residential units delivered to the market. Second, an increase in profitability will help developers repair their balance sheets and build equity from their own resources. This, in turn, will allow developers to fund more developments and ultimately increase supply. AIB said that this will also encourage more developers to enter the house building market. The bank said that cutting Vat may not be the most palatable of policy options and it has its drawbacks. A cut in Vat may not result in a reduction in house prices and may ultimately feed through to higher land prices. That is why the reduction in Vat should only be a temporary measure and should be time bound or linked to housing output.
Regarding landlords, the bank said that individual private landlords should be encouraged back into the market and placed on a more equal footing with their institutional equivalents. It suggested individual private landlords as the solution to the rental crisis instead of institutional investors. The report said that the 20 largest landlords such as Reits, investment funds and companies account for less than 3% of tenancies. It claimed concessions were required to encourage landlords back into the market.
The report suggested measures such as making the Local Property Tax a deductible expense to further improve rental cash flows for individual landlords. It also called for separating rental income from other forms of income for the purposes of applying a separate tax treatment. It said that a new tax regime could be introduced for small landlords that simplifies their accounting and tax requirements and/or introduces a flat turnover tax in place of income tax on rental profits.
The report suggested making the sector attractive to potential investors by simplifying the tax system and recognising the full suite of rental expenses as deductible expenses. It recommended developing a senior housing market to “free up under-utilised family houses” and encouraging empty nesters to move. The report said that a key finding was that there was little evidence of housing mobility among this age cohort in Ireland, and significantly less mobility than occurs among this cohort in the UK and the US.
It also suggested more certainty in the help-to-buy scheme and a more fixed period to make it more effective. The report further said that developers and funders have made investment and lending decisions based on the assumption that the scheme would be in place until 2019. Any curtailment to the lifetime of the scheme may impact on the viability of some of these developments.
Meanwhile, according to Ulster Bank construction purchasing managers’ index (PMI), construction activity increased at a faster pace during December amid strong growth of new orders. Total construction activity rose to 58 in December from 56.7 in November. Any reading above the neutral 50 point mark represents a sector in growth mode.
Ulster Bank chief economist for the Republic, Simon Barry said that overall, the construction PMI is the latest indicator to paint a decidedly upbeat picture of the economy’s performance at the end of last year.