MoneyTimes - November 5, 2013

Posted by Jill Kerby on November 05 2013 @ 09:00




Has your family home or buy-to-let property increased in value by 3.6% in the last 12 months, as the latest CSO property index for national price movement suggests?

Is the trend in your neighbourhood or town higher or lower? Are certain kinds of houses or apartments selling faster than others?

Some things never change in any property markets and location, supply and demand and the availability of mortgage finance are the three certainties. A closer look at these figures and the ones issued as well by the private property indices at daft.ie and myhome.ie show that there continues to be an oversupply of property outside of Dublin. The huge number of new(ish) estates in unpopular locations and the continuing difficulty in securing a mortgage means that there is a very slow, and inconsistent recovery. 

Nevertheless, this has been the best year for property prices though the Trinity College based economist Constantin Gurdgiev reckons that at the ‘normal’, steady, historic price inflation rate that has pertained in most western economies, it could take c37 years before Irish house prices are restored to their 2007 ‘bubble’ levels.

The other factor that needs to be considered before anyone races out and buys a less than ideal property (right house, right neighbourhood, right price) is that Dublin prices in particular (up 12.3% in the past year) are being driven by mainly cash buyers (60%) and by the very tight supply of family homes in higher priced neighbourhoods mainly in south Dublin, but also in certain north city areas like Clontarf, Glasnevin, Howth and Malahide.

Whether rents – which are up as well – can keep up with the price hikes is another matter. They have not done so up to now, and this was always the most striking signal that something was very wrong during the property bubble years: yields never reflected the soaring capital values and too many landlords were subsidising their tenants.

Property investors should also be warned that the government, which has given a moderately enthusiastic reaction to this rise house prices as another sign of general economic recovery continue to interfere with the market.

Its latest wheeze is the extension of a capital gains tax (CGT) exemption that was introduced in an earlier budget on the sale of residential and commercial investment properties that were purchased between December 7, 2011 and December 31, 2013 on the grounds that were held for at least seven years by their owners. 

The latest Budget has extended the purchase and seven year holding deadline to December 31, 2014. Any profits earned from the sale of such properties after seven years will not be liable to the 33% CGT.

The original exemption was introduced in an effort to stimulate investors to come back into the moribund Irish market. Auction results showed however that cash rich investors were already the biggest group of buyers cut price properties and hardly needed more tax incentives.

Now, with a supply shortage in Dublin this extended tax exemption is likely to fuel prices as some people opt – mistakenly perhaps – that this is a buying opportunity that could pay off in seven or more years time when they can sell their investment and not have to pay 33% of their potential profit over to the state.

Perversely, at a time when the government is also keen for people to spend the savings here, this CGT exemption for investment properties held at least seven years is also available for property purchased anywhere in the EU and the European Economic Area (EEA) countries that include Iceland, Lichtenstein and Norway.

Financial advisers said this past week that they are already getting inquiries from clients who are unhappy with poor deposit returns, DRT tax on those deposits that go up to as much as 45% next year (if they are liable to the 4% PRS charge on ‘unearned’ income) or who are not willing to invest in the stock markets.

Property remains their investment of choice (or last resort), despite the uncertainty about rental yields, growing income tax and capital tax liabilities, the impact of management and maintenance charges and other costs on potential profits.

The advisers I have spoken to share the same concern:  that some people, with very short memories, will buy domestic or foreign property for this limited tax break without weighing all the other pros and cons.

Buyer beware.

Property should be considered a medium to long term asset, whether you are buying a family home or an investment. It isn’t as liquid an asset like deposits or shares (even funds of shares, especially ETFs) and it carries numerous initial and ongoing costs and charges.

And as thousands of amateur landlords have discovered, a property can drain your emotional resources as well as your financial ones.

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