10 thoughts on “How to Deflate Property Bubbles”

  1. ‘Raising taxes on homeowners in a boom’ is one way of doing it I guess – though of course not every homeowner benefits during a boom period but will then still be taxed regardless.

    I believe here in Ireland we are going to ‘raise taxes on homeowners in a bust’ in the next budget – with a primary residence property tax? That should ensure no more property bubbles here for a while (along with one or two other property problems that just happen to be around at the moment).

    I wonder if that budget will take place before December? The odds must be high.

  2. All these tools are open to political interferrence, Ireland during a low in the market was using such mechanisms as section 23, but then wouldn’t get rid of it when the boom came. Tight controls are needed and the central bank would need to be given a strong mandate to ensure that it is enforced for economic reasons and without political interferrence.

  3. It’s interesting that as we try to cope with maybe a decade of house price adjustment, a thousand kms over to our east in Poland they are stoking a nice little property bubble of their own. And for them “it will be different this time” and they will have a soft landing! What makes them different? Why, they’re just adjusting to being comparable to neighbouring European economies.
    Yes taxation (asset or transaction taxes) and control of the money supply (including credit regulation) are tools to help regulate asset prices and mitigate the possibility of bubbles and crashes. In terms of property, it’s not likely to be a problem to visit our shores for some time. However when we do have a bubble again, we will hear the familiar refrain, that “this time it will be different”
    Now if only there were recognised strategies for deflating sovereign debt bubbles (besides the obvious one that no-one wants of raising taxes and reducing govt expenditure)…

  4. It would have been very helpful if the government had not introduced a raft of property taxes which fueled the boom in the first place. Investors, were being told by their tax advisors “well you can give this money to the government or you can buy another section 23, section 50, etc.

    Introducing counter cyclical taxes is no substitute for good governance and prudential lending by banks. The property tax being discussed in Ireland is nothing more than a revenue generating exercise. The government have been advised to use this method of taxation. Tax the roof over their heads, they cannot get out of that one, sort of thinking and besides it will be a “stable” revenue source.

    However, people may not be in the mood to tolerate such a tax and there will be so many exemptions that the tax will fall primarily on the middle income groups.

  5. @Robert
    I guess you mean rafts of “tax reliefs” rather than “property taxes”. I think some of these are still around. I have seen Section 23 still referred to – it’s crazy – but as has been pointed out many times the success of Name depends on the successful inflation of another bubble.

  6. @A McGrath:
    “tax reliefs”:

    I received this yesterday in answer to an enquiry to the Department of Finance about the Tax Incentive Scheme for the Mid-Shannon Area, which was included in the Finance Bill 2007.

    ===begins=====
    Mid-Shannon Scheme

    Section 26 amends section 372AW of the Taxes Consolidation Act 1997 which relates to the Mid-Shannon Corridor Tourism Infrastructure Investment Scheme. One of the conditions of this tax incentive scheme is that the Mid-Shannon Tourism Infrastructure Board must grant approval in
    principle for investment projects in advance of expenditure being incurred. At present an application for such approval in principle must be made within two years of the commencement of the Scheme, i.e. by 31 May 2010. The Finance Act 2010 makes provision to extend the period during which such applications can be made from two years to four years, so that the latest date for the submission of applications is now 31 May 2012.

    Under the Scheme, the current period within which expenditure must be
    incurred for capital allowances purposes is the period commencing on 1 June 2008 and ending on 31 May 2013. To cater for any projects that may avail of the new date for the submission of applications for approval in
    principle, this period is also being extended by two years and will now end on 31 May 2015.

    These new dates will come into operation by way of a commencement order to be made by the Minister for Finance following clearance from the EU Commission from a State-aid perspective.
    ===ends=====

    I have found reference to two developments approved by the Mid-Shannon Tourism Infrastructure Board (there may be others I haven’t found), one for a tourist resort at Terryglass, Co Tipperary, for which planning permission has been refused for the third time, and the other for an EcoHostel and Learning Centre at Cloughjordan Village, also in Co Tipperary. I have asked how many applications were received, how many were approved and how many projects have had work done on them. I await a reply.

    bjg

  7. @Jagdip Singh
    We should send a delegation to Poland or perhaps copies of AIB’s, Anglo’s and Nationwide’s accounts. They should at least be told that when their banks go belly up the establishment will make the public pay all the losses.

  8. @Oliver Vandt

    Not sure it would do any use. When a nation is gripped in the belief that their accelerating prices have a solid basis in reality (in Poland’s case lifting prices up to the standards of neighbours, and indeed beyond in the case of Germany) then there may well be some Cassandras that will point to the impending burst but most in the society will to some extent be dependent on the wealth and income from the bubble and won’t want to listen.

    Didn’t we have the smart economy, the best educated and most flexible workforce in Europe, one of the lowest tax rates, light regulation from a business-friendly government, 15-years of growth – sure why would our bubble have burst? When the average person was seeing €1-2k added to their wealth each month through property price appreciation? Mass cognitive dissonance?

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