‘Cut VAT on new homes to 5pc and buyers will save almost €28,000’, economist claims

Lowering sales tax on new homes to 5 percent for owner-occupiers would save them $ 27,808 and help bridge the gap between what buyers can afford and delivery costs, according to a report by economist Jim Power for real estate agent ReMax.

He reports that data from the Society of Chartered Surveyors of Ireland has shown that more than half the cost of delivering new homes consists of so-called soft costs like sales tax, duties and professional fees, with 48 percent of the cost of building construction. Sales tax is charged here on newly built houses of 13 pieces, but the same house in Northern Ireland or the UK is excluded. No VAT is charged on used apartments.

In his analysis, Mr Power says that reducing the price of new homes to 5 percent for owner-occupiers would cut the cost of home delivery by € 27,808 for the average three-bed duplex in Dublin.

That would make the house reachable for a couple with a combined income of € 88,000 per year within the central bank’s macroprudential mortgage loan limits, he said.

Without the VAT cut, the same house would be out of reach for the couple even with a 10-piece down payment.

“One of the key issues in the housing market is the relationship between affordability and profitability,” said Mr Power in the
Report.

“Affordability is what a prospective homebuyer can afford to buy a home, especially given the restrictions imposed by the central bank’s mortgage loan regulations.

“Profitability relates to the price a developer would have to get to make it profitable to deliver this home.”

Under EU rules, Ireland cannot remove VAT on new homes, but ministers have the option to temporarily lower the rate to 9 or 5 percent.

Mr Power said the new home rate should be reduced to 5 percent for owner-occupiers for five years.

The reduction would cut delivery costs and allow the reduction to be passed on to buyers, he said.

However, an analysis released last week by analysts at the Department of Public Expenditure and Reform (DPER) warned that all the benefits of a VAT cut for the construction industry could be quickly diverted by developers to raise the price of land without benefiting buyers.

In his report, Mr Power argued that in the midst of a housing crisis, there is no point forcing new home buyers to borrow in order to prepay a sales tax bill to the government and pay interest on that borrowed money for the life of the mortgage. “

Measures should be considered that could lower what is known as site enablement costs in order to ensure the provision of adequate housing for developers in a sustainable manner while addressing affordability issues for home buyers, he said.

This could include local taxes and the cost of including services such as water and electricity in the systems.