Implementing Limits on LTVs and DTIs: A Cross Country View

The Riksbank and IMF recently organised a conference on macroprudential policy – programme here.

A presentation on “Implementing Limits on LTVs and DTIs: A Cross Country View” by Luis Jacome and Srobona Mitra of the IMF is here.

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22 thoughts on “Implementing Limits on LTVs and DTIs: A Cross Country View”

  1. I’m particularly interested in hearing people’s views on how to get speculation out of the housing market. I’m only an engineer but it seems to be that having every 60 something with a lump sum chasing up property prices in South Dublin isn’t good for anyone.

    2nd home tax seemed like a good idea. Shame Noonan ended it. Getting it in is always the difficult part?

    Capital gains of 100% of any increases in value above inflation? Politically unviable but would it work or just destroy the market?

    Speaking of property. How about this suggestion of decoupling the property tax from the price of property and attaching it to the CPI. Sounds totally bonkers to me. We’re going to decrease the tax because property owners are becoming wealthy too fast? Meanwhile there’s a homeless crisis and a hollowing out of rural Ireland.

  2. “A hollowing out of rural Ireland …”
    It is interesting to note that during the period of unprecedented population growth in the US, from 1900 to 2010, the center of the country was “hollowed out”
    Here’s how the phenomenon is described in Wkipedia:

    “Better roads and the automobile permitted many farmers to live in larger towns and cities rather than on the farm. While urban areas on the Great Plains more than doubled in population, thousands of small towns and communities disappeared. Two-thirds of counties lost population, and, as the table below demonstrates, many rural counties lost more than 60 percent of their population between the early 1900s and the 2010 census. A few counties lost more than 80 percent of their population. Population density of some Great Plains counties dipped below two persons per square mile.”

  3. HI, “That’s legal?!! Getting speculation out of the res property market?

    Not possible. But what might (big might!) be politically acceptable is to have mortgage lending protocols which placed quite severe limits on the amount of credit that a lender could advance: ie: the lender shall set aside 36% of the loan by way of a negative interest bearing cash deposit with the CB – the logic being that if it is not financially ‘painful’ it has no impact.

    That deposit would be forfeited if the borrower went into mortgage default. If Neg Equity appears, then the lender faces an immediate Margin Call. Basically there needs to be a very sharp reversal of responsibility for mortgage loans: from borrower to lender. Won’t happen. No bonuses!

    Replace all Planning Permissions and Approvals with a system of Building Permits. Lands are zoned for taxation purposes only, not for usage. You want to construct: get a permit issued by a National Authority. No permit. No buildee! No exceptions. You build without that permit – you face certain jail and loss of the site you built on. Make non-compliance real painful. Won’t happen. Farmer Paddy would go apoplectic!

    Tax all land transactions (sales and bequests) at 25% VAT. Land value, not the value of any buildings. No exceptions for agri lands. There is a problem here with some inheritances, but the Revenue Commissioners are quite imaginative. Won’t happen. Farmer Paddy again; he’d be “destroyed” – he would.

    Cap Gains: Tricky one. What’s a ‘gain’ when its ‘private property’ time again? Tax the gross, not the nett. Won’t happen.

    Folk are going to have to pay for local services – either directly or indirectly. Its make up your mind time for both politicians and public – but maybe next year, or perhaps the year after. No, make that the year after that, etc. etc. Will happen. Enda the Insecure will ensure.

    The ‘hollowing out’ is an international phenomenon. It will only reverse when urban folk encounter persistent food and freshwater shortages. Pray (to Saint Jude!) that those Frackers are kept at bay and our parliamentarians acquire the moxie to invoke Art 43: 2.2. I’ll not hold my breath on that.

  4. Periodic reality update. Do not be alarmed, this is just a test.

    Unemployment down to 10.7%.

    Tax take well ahead of profile and public finances recovering at a dramatic pace.

    PMI readings all in record territory – growth accelerating.

    We now return you to our normal programming.

  5. Sweden itself could suitably have been included in the study.

    http://www.reuters.com/article/2014/11/11/sweden-economy-regulation-idUSL6N0T136Y20141111

    The arrival of the right-wing anti-immigration party Sweden Democrats in the parliament has given rise to an unprecedented government crisis with the likelihood of new elections. The best outcome in terms of the management of the economy would be the return of a centre-right government. This would require voters that moved either too far to the left or the right to wake up and smell the coffee. (This would hold true for many countries in the EU at the moment).

  6. @ Peter

    Not sure what your point is?

    @ Brian Woods Snr

    Thanks for your reply. Yeah, making all future property lending non recourse would focus minds. Not sure I understand your permit idea. I like the idea of compulsory purchases of land before zoning, in order for the state to capture the up side. I think most people in Ireland know of a few well connected shyster or just lucky farmers that were made instant millionaires by rezoning. Only for the state to come in and pick up the tab for more flood protection, schools, services, roads, lighting etc etc

    Leinsterization may be a trend but is it desirable? As time goes on we have more of a province with a small country attached. I’m not talking about promoting one off housing in Connemara. I mean supporting our rural towns and villages.

    It would be one thing if people were moving from the country to live in a less energy intensive way in the city. Apartment, close to services, less money on fuel more money in the corner shop etc etc. Urbanisation is Ireland seems to be more energy intensive to me that elsewhere.

    What happens in Ireland is someone grows up in the country. Goes to college in Dublin. Finds a job in Dublin. Shares a flat with as many as possible, as flats are only for students and single people in Ireland. Gets a job/partner/has child and moves to a house somewhere in Leinster to drive in/out of Dublin every day. Wasting more time, energy and money than he/she would if he/she was living 5 minutes from a job in his/her local town.

  7. “Unemployment down to 10.7%.
    Tax take well ahead of profile and public finances recovering at a dramatic pace.”

    Wow Johnny. Only 10.7% What is the rate when you throw in emigration ?
    And real wage increases over the year ?
    Dramatic pace- care to guess when normality will hove into view ?
    And personal debt- how’s that doing ?
    We need another 10 years at this pace to get out of the mess.
    And the EZ is going to have another seizure well before that with money going back to core countries and panic everywhere.

    Martin Wolf back in 2010 noted that “to make anything close to the present system less unsafe requires radical changes in the rules. Tighter supervision is not enough. Incentives must change fundamentally”

    http://www.ft.com/cms/s/0/cca02e40-522d-11df-8b09-00144feab49a.html

    Calls to reform such as the above were dropped in favour of QE , which is an experiment. Monetary policy works via asset prices and credit expansion and we now have very high asset prices amidst stagnant real earnings in the US and the Eurozone. Speaking at the International Monetary Fund on July 2, Janet Yellen, chairwoman of the Fed said that “financial stability risks shouldn’t have a central role in monetary policy decisions, at least most of the time.”

    http://www.ft.com/intl/cms/s/0/abaedfd4-02bd-11e4-8c28-00144feab7de.html

    the next one is prolly going to be el Gordo.

  8. “That’s Legal?!: Thanks also.

    Yeah, as soon as you put your ‘thinking hat’ on – the matter slowly spirals away from you. There are some very influential folks and groups who would be very put out if there were to be any meaningful restructuring; ie. a genuine parliamentary and administrative effort to tackle the problems of land use and development – even for partially sustainable residential housing or to provide housing for those folk whose economic circumstances exclude them. A lot of folks’ hearts are (temporarily) in the right place – but when they realize its their wallets and purses that are the target ….!

    In Dublin City (between the canals) there could be up to 50,000 opportunities for residential use. But any meaningful re-developments would have to start with family-sized (1700 sq ft) units and move down to singles, rather than the reverse and stop at two-beds: its families! The required infrastructures are there. Its the Messiah that’s absent. No Messiah, no change.

    Mind you. They do say, and there is ample evidence to back this up. Propertied elites would prefer to idle a habitable structure or even demolish it, rather than be ‘coerced’ to put it into use for the public good. Charity is a credit entry in their bank statement.

    A characteristic and deeply ironic attribute of Capitalism is that real and virtual stuff which is classified as ‘private’ can be legally withheld from use if the owner so wishes. Even if that refusal causes hardship and suffering to others who, because of their economic situation (no or low incomes), are unable to either pay ‘rent’ for its use or are unable to accumulate a capital surplus so that they could purchase the stuff for their own exclusive use. This capitalist attribute is enshrined in both our constitution and laws. I’d opine that “The People Before Profit” folk have it sort of arseways. Its not profit, but the social and political practices that are deployed to foster the accumulation of a capital surplus that they should be targeting.

    One can only accumulate a capital surplus if, and only if, the laws of your state protect you, and your state also provides (through coercive taxation) those public goods that are essential to support your ability to accumulate that capital surplus in the first instance. Because if you had to pay for those infrastructural goods yourself – you’d not be able to accumulate that surplus! The framers of our Constitution seem to have been alert to this capitalistic paradox: Art 43: 2.1 and 43: 2.2 are there, and the language is clear and unambiguous. So, just what part of the phrases “…the principles of social justice.” (43: 2.1) and “…the exigencies of the common good.” (43: 2.2) do our legislators fail to understand? Maybe they simply stop reading at 43:1.2., since their paychecks depend on them not going any further. Funny thing. Capitalism could be explained; that at its core, its the systematic privatization of parliamentary politics!

  9. An interesting suggestion from the slide presentation is to not pre-announce plans for limits.

    With Dublin prices up 24% in a year while mortgage approvals are at 1977 levels; rents 10% below the 2007 peak; 38,400 BTL mortgages in arrears at end Sept (27% of investment loans), and a requirement of 75,000 rental units for social housing by 2020, it’s really unknown post crash what the credit situation will be like for the investment market.

    @ Johnny Foreigner

    The data from the UK shows that despite the net 1.1m jobs added from 2008 to Sept 2014, only 80,000 are full time employee positions.

    This is reflected in lower tax receipts than expected.

    In Ireland, given the poll this morning in the Irish Times, the Government’s spin machine is likely to adjusted down a gear or two in coming months.

    Adding jobs is a hell of a lot better than losing them – 162,000 officially in 2009 but that number was exaggerated by an underestimate in in farm number by 27,000 – added back in 2013.

    In Ireland, half the jobs added since Q1 2011 are in tourism activities, which is a low paid sector and 33% of staff from overseas.

    Yesterday’s Live Register data + 83,000 in activation schemes means that 451,000 or 21% of the workforce are in receipt of benefits.

    http://www.finfacts.ie/irishfinancenews/article_1028513.shtml

    Ireland is doing better than the UK on full-time employee positions with half the additional 28,000 jobs in the 12 months to Q3 2014 accounted by this segment.

    @ All

    Anyone who doesn’t now expect significant international corporate tax changes in coming years hasn’t been following the news recently.

    1) George Osborne has introduced a diverted profits tax and its likely that all the 3 devolved governments will have power to set corporation tax rates.

    2) Germany & UK have agreed patent tax rules and they are pushing for it to be adopted by the OECD BEPS project.

    3) The European Commission has agreed to a joint request from Germany, France and Italy to develop a draft anti tax avoidance directive that would cover transparency on tax rulings between countries as well as other issues.

    Pierre Gramegna, Luxembourg finance minister, said he supported the move – until earlier this year the Grand Duchy opposed automatic exchange of bank information.

  10. @ MH

    I would suggest that in relation to tax competition between states and regions that the beginning of wisdom is to accept that it is a saga where the roles of saints and sinners cannot be assigned. If all agree to change together, some things will definitely happen and some changes have already taken place. But the ultimate result is unlikely to be earth-shaking e.g. as in the current case of Northern Ireland.

    This explanation of the EU legal situation affecting NI culled from a paper prepared by the Scottish government underlines the context within which sovereign states that have joined the EU must operate.

    “Within the context of the Scotland Bill, it is important that any tax varying power satisfies EU rules and regulations. In recent years a number of cases have been brought before the Courts concerning the ability of governments within Member States to set business tax rates which are different to those set for the Member State as a whole. Recent cases have concerned the corporation tax measures introduced in the Azores, Basque Country and Gibraltar.

    In delivering judgement on the Azores case, the European Court of Justice (ECJ) ruled that to justify a different tax rate on businesses at an intra-Member State level the region/country must satisfy three conditions of autonomy; constitutional, procedural and financial. Institutional autonomy requires that the sub-central government has a political and administrative structure distinct from the centre. To comply with procedural autonomy, any decision by the sub-centre to change taxation must be taken without central interference.

    Finally to satisfy financial autonomy, the fiscal consequences flowing from a reduction in the tax rate must not be offset by aid or subsidies from the central government.”

    The fundamental problem remains that tax competition is global but an effective international legal framework within which it can be regulated – or, at least, corralled – is largely confined to the EU. However, for EU countries to act collectively, when the impact with regard to non-EU countries acting – or rather not acting – at the same time varies between EU countries, is politically a very tall order.

    cf. also

    http://businessetc.thejournal.ie/ireland-tax-haven-1796050-Nov2014/

  11. @ DOCM

    I wish people would read the original reports rather than press releases or newspaper reports on them.

    The PwC template company is a flower pot manufacturer with 60 staff, no exports and in its second year of operation with losses forward – it doesn’t have relevance for MNCs.

    Some people in Ireland still claim from claims made in 2010 that France’s effective corp rate is about 8% because of this – it has a 15% rate for SMEs.

    The Irish Times had a headline on a report yesterday where again the journalist was out of his depth or didn’t look at the data:

    “R&D investment by Irish companies more than double world average” – it was bs.

    http://www.irishtimes.com/business/r-d-investment-by-irish-companies-more-than-double-world-average-1.2025627

    The top “Irish” companies spent as much on R&D in 2013 as Ireland’s total spend of €2.7bn – 14 of the 21 firms are US tax inversions.

    On tax, The Wall Street Journal says about the UK that what might seem an obvious physical presence in a country may not be, under current international tax treaties. Based on long-standing interpretation of these treaties, foreign companies, for instance, only have to pay taxes on profits generated in the U.K. that are associated with a permanent establishment within the country, said Chris Morgan, head of tax policy at KPMG in London. But having a warehouse, for example, isn’t a permanent establishment. Neither is a sales team, as long as they don’t finish off the transaction, he said.

    “Every single treaty would have to be changed,” he said – that’s a ridiculous claim and he is a vested interest.

    The House of Commons Public Accounts Committe last year in a report ridiculed the claim that Google’s big sales transactions in the UK were completed in Dublin.

    Problems of course but as the fin ministers of Germany, France and Italy said last week: “This development is irreversible.”

  12. @ MH

    With respect, you are tilting at windmills that have not been constructed by me. Only time will tell which of us is right with regard to the outcome of this present flurry of activity.

    Sovereign states make up the membership of the EU, not bits of them. The Institute for Fiscal Studies points out the difficulties involved from a purely UK domestic perspective without even mentioning the EU context. (Pages 5 and 6).

    http://www.ifs.org.uk/uploads/publications/budgets/as2014/as2014_miller.pdf

    On the Google tax, the difficulties involved are also identified.

    The one certain conclusion that can be drawn at this stage is that politicians will promise literally anything in order to get re-elected. But we knew that already!

  13. @ DOCM

    Look at the big picture rather than googling for other people’s material to confirm your existing position.

    You move on from a previously cited report which as I pointed out has no relevance to the issue and you find new links – you can dismiss Osborne’s move as populist but ignore significant anti tax avoidance measures that have been introduced in recent years.

    The times have changed and even a conservative finance minutser knows that.

    The Swiss agreement to automatic exchange of banking information is of no consequence while Noonan’s plan to end the Double Irish is motivated by what?

    Wonder why Noonan is concerned about the UK-German agreement on patent box incentives?

    Of course he can easily veto it at EU level – but it may become part of the BEPS proposals.

    The EU of course can’t do x or y but even the former PM of Luxembourg knows that the old days are over and whatever your copy of the rule book says, one or two small countries holding up anti-avoidance tax measures, are over – whatever the tax vested interests say, groups of countries will implement changes.

  14. @ MH

    The odd reference in support of your own position would be welcome. As I said, time will tell as whether or not there will be a sea change in international behaviour with regard to company taxation. This is the topic under discussion and to which I have stuck rigourously.

    On the patent box issue, as the core of the German-UK agreement is that there should be substantive research activity, and this is a position which Ireland shares, I cannot see where there might be a difficulty. The sole right of proposition for EU legislation, incidentally, lies with the Commission. It would place itself in an invidious position were it to be even hinting at tabling a proposition at the behest of a few member states, however large.

  15. This has been the best week for the Irish economy since peak Celtic Tiger: Eat your hearts out, doomsters.

    monday: Ireland’s PMIs for both manufacturing and services in November the highest in the EU

    tuesday: exchequer returns show tax revenue for Jan-Nov up 8.5% on 2013 and the budget deficit falling sharply and below even the revised-down budget target – in contrast tax revenue in the UK is up just 1% and its budget deficit is rising and above its budget target

    wednesday: unemployment rate down to 10.7% compared with its peak in June 2012 of 15.1% – at its current rate of fall it will hit 5% in 29 months, although obviously the rate of fall could accelerate or decelerate

    thursday: the CSO services index for October showed a 9% year-on-year rise, the highest since the index began

    thursday: DAVY forecast Ireland’s debt/GDP ratio will be down to 80% by 2020

    friday: Ireland’s manufacturing output surged in October to a new high and was 38% up year-on-year – while this may be exaggerated by pharmaceuticals, output in traditional manufacturing (mostly Irish-owned) was up 17.3% year-on-year

    friday: Standard & Poor upgrade Ireland’s credit rating again and revise their forecasts for Ireland’s economic growth up to 2016 – in response, Ireland’s 10-year borrowing rate fell again to 1.37%

    friday: the ISEQ hit a post-recession high, closing at 5,230

    friday: the US posted its best jobs growth figures since 1999, over 300k jobs added in November

    Despite all this, I’m not as confident of the Q3 GDP figures as I was of the Q2 GDP figures (which I correctly forecast on here). Q3 GDP could go either way – I simply don’t know which. Most sectors grew strongly, but manufacturing fell back a bit after its sensational growth in Q2. Today’s figures show it rebounding to a new high in October, but that’s Q4, so won’t be included in the Q3 GDP figures. But, it matters little. Quarterly GDP in Ireland is highly volatile. The important fact is that this week’s figures show year-on-year growth accelerating in Q4. So, I’d be fairly confident the year-on-year figure for 2014 as a whole will exceed all forecasts made up to now.

  16. @ JTO

    Dan O’Brien on a not unrelated issue; that of company taxation and the role of US corporations in it!

    http://www.independent.ie/opinion/comment/dan-obrien-our-corporation-tax-doesnt-need-to-be-reformed-it-needs-to-be-abolished-30800073.html

    Our emergence from the economic slough of despond has little or nothing to do with good governance – least of all by FF – but the recognition by the vast majority of the electorate that there is no such thing as a free lunch and that it was best to follow the direction dictated by the country’s creditors.

  17. thursday: DAVY forecast Ireland’s debt/GDP ratio will be down to 80% by 2020

    JTO- will we stick that down as your best estimate? Will you stand over it ?

  18. @Seafoid

    Its Davy’s forecast not mine. However, I think its very realistic. So, associate me with the forecast if you like.

    But, there are a couple of threats to the rosy outlook for Ireland. It would be unwise to ignore them

    (1) Continental Europe is mired in high-tax high-spend socialism. In addition, its demographics are destroyed. It will have low growth as far ahead as one can see. This could be a drag on Ireland’s growth. Hopefully, the U. States and, to a lesser extent, the U. Kingdom will compensate.

    (2) According to the polls, the loony-left vote in Ireland is higher than at any point in my lifetime. This is an obvious danger. Hopefully, a fair chunk of the 32% ‘others’ in the latest poll will turn out to be potential supporters of a new Lucinda Creighton party. But, until the polling companies publish more information on the views of those 32% ‘others’, I can only speculate.

    BTW I see in today’s Irish Times Chris Johns is coming out with pure JTO-speak:.

    He says;

    “Its unfashionable to say it but the economy may get a lot better.”

    and:

    “For entertainment during the party season, express optimism in front of any member of our rapidly expanding, self-regarding political factions emotionally invested in a depressing future.”

    I may just try that myself over Christmas. It should be fun.

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