Good morning ladies and gentlemen. I am delighted to have been invited to this morning’s event to give the keynote speech.
Firstly, I welcome the formation of Property Industry Ireland, a policy ‘think tank’ that offers a forum for transparent debate on the future of the property and construction sectors, based on sound, evidential data. Your forum today enables the private sector and the public sector to come together in a professional and open context to ensure the right thing is done in the interests of all our citizens.
I don’t have to tell you the importance of the property sector to the Irish economy and the impact the deterioration of the property market has had. All commentators agree that successful economies require a functioning construction and development sector, allied with a sustainable property sector. The absence of activity in the property market has clearly had a very negative effect on the domestic economy.
When the development and construction bubble burst the consequences were dire and have had an impact on the lives of all our citizens. One hundred and sixty four thousand jobs in the construction sector have been lost since the first half of 2007. The loss of Stamp Duty, VAT, Income Tax, PRSI and Capital Gains has left a massive hole in the Government finances. The current crisis in Europe has exacerbated the impact.
To put the effect of the crash into context, between 2007 and 2012, tax revenue fell by a third, largely as a result of the tax base being too narrow and the overreliance on transaction related activity in the property and construction sectors. To further illustrate the dependence on property related taxation, receipts from Capital Gains Tax and Stamp duties accounted for 4 per cent of all tax revenue in 1996. A decade later in 2006, this proportion had climbed to 15 per cent and in nominal terms had increased from €650 million to over €6.8 billion. By 2006 construction accounted for 14.6 per cent of Irish GNP, compared with just 3.5 per cent in 2010.
[Present economic position]
Turning to the present macro-economic situation, the latest figures show that Ireland’s economy is growing again, with GDP increasing by 0.7 per cent in 2011. This comes after three successive years of declining GDP and is to be welcomed.
The external sector is leading the recovery, with exports of goods and services now well in excess of pre-crisis levels. This shows that the improvement in competitiveness, which has been evident in recent years, is standing to us. This, I believe, demonstrates the inherent flexibility of the Irish economy – prices and costs in Ireland have fallen significantly, and further improvements are in the pipeline. The strong export performance also means that our balance of payments with the rest of the world moved into surplus in 2010 for the first time in over a decade.
Obviously as a small open economy whose recovery is being driven by exports, Ireland is currently being affected by the international economic uncertainty. This is clearly evidenced by the revisions downward of growth forecasts. However, the composition of our exports and the aforementioned competitiveness improvements will help to offset the potential negative impact of this slowdown. Indeed, I would emphasise that forecasters expect Ireland will record positive GDP growth again in 2012.
Looking towards the medium term, the external environment is expected to strengthen from 2013 onwards, as is our export growth. As this stronger export performance starts to feed through to investment and employment, consumer confidence is expected to return and the savings rate should start to begin to unwind. So, what we expect to see is economic activity beginning to gradually firm and broaden out, from being solely externally-driven to including some initially modest contribution from domestic demand. It is also worth noting that last year the IDA reported a record number of investments were made in Ireland and that the pipeline for further investment is strong.
I want to reiterate that addressing unemployment remains the Government’s number one priority. In spite of figures from earlier in the month showing signs of stabilisation in the labour market, the unemployment rate remains unacceptably high.
The 2012 budget aimed to restore confidence, re-build our economy and provide stability and certainty to investors to invest in Ireland. In my budget, I said that as well as introducing policies to assist economic growth, we must also address the constraints on growth. It was with this imperative in mind that the property related measures were introduced.
The Budget reduced the Stamp Duty rate for commercial property transfers from the rate of 6 per cent to a flat rate of 2 per cent on all amounts in respect of all non-residential property, including farmland as well as commercial and industrial buildings. In addition, the Government introduced a Capital Gains Tax incentive for property purchased between Budget day and the end of 2013. If a property is bought during this period and held for at least seven years, the gain attributable to that seven year holding period will be relieved from Capital Gains Tax.
The Government also gave clarity on the issue of upward only rent reviews. Unfortunately, it was not constitutionally possible to introduce such a measure but through the guidance given to NAMA we have effectively brought it into being for all NAMA related properties. The clarity given by this decision has led to the beginning of a normalisation in the Dublin commercial property market.
We are all well aware of the difficulty that some homeowners are facing. In order to help address the problems faced by those that bought their homes at the height of the property boom between 2004 and 2008, the Government increased the rate of mortgage interest relief to 30 per cent for first time buyers who took out their first mortgage in that period.
As part of measures to address the constraint that the property market was placing on economic growth, the Budget provided that first time buyers in 2012 will get mortgage interest relief at a rate of 25 per cent and non-first time buyers will benefit from relief at 15 per cent. This measure gives certainty to those considering purchasing a home. I want to emphasise that this mortgage interest relief measure will come to an end at the end of this year. There will be no extension to this measure and prospective purchasers should make sure to factor in the time required between purchase and mortgage drawdown in order to qualify for mortgage interest relief.
In the interest of fairness and revenue raising, the Finance Act 2012 contains two measures aimed at reducing the cost to the State of the “legacy” property-based tax incentive schemes and bringing it to an end in a shorter time period. These measures consist of a property relief surcharge, which took effect from 1 January 2012 and a cap on property-based Accelerated Capital Allowance Schemes to be introduced from 1 January 2015.
These provisions reflect the findings of the Economic Impact Assessment on the measures proposed by the previous Government for restricting the property-based "legacy" tax relief schemes. The Impact Assessment, which I published with the Finance Bill, considered the impacts of these proposals and highlighted, in particular, the vulnerability of small investors to insolvency if they lost these reliefs. The Economic Impact Assessment report concludes that relief to small scale investors should not be restricted in the current climate but that there is scope for larger investors to contribute more. The Government believes that large scale investors in property that attracts tax reliefs can and should make more of a contribution. The property relief surcharge is therefore imposed on investors with an annual gross income of €100,000 and over.
The ESRI has recently published a very informative paper on the Irish Housing Market. This paper highlights the number of vacant properties in the country. Under the Census definition of vacant dwellings, which includes holiday homes, almost 290,000 homes were vacant in April 2011, which gives a national vacancy rate of 14.5 per cent. Of the vacant houses, 21.3 per cent were vacant flats, 58 per cent were vacant houses and 20.5 per cent were holiday homes.
If you analyse the data it is clear that there is a very wide regional variation in vacancy rates, for example in Dublin the vacancy rate is now closer to what it was in 1996 which suggests that house construction in Dublin is necessary, however it remains exceptionally high in Connaught and the three counties in Ulster. Based on these figures, care is needed to ensure that there is a sufficient supply of houses in areas of growing demand such as Dublin, as the last thing we need is a surge in house prices.
The latest CSO figures indicate an apparent stabilisation of house prices in Dublin since the start of this year at 55 per cent lower that at their highest level in early 2007. In the rest of Ireland properties are down 47 per cent. Overall, the national index is 50% lower than its highest level in 2007. A number of observers have noted the positive effect that the budget measures appear to have had in terms of stabilising the property market in Dublin. In the discussions with the banks, especially AIB and Bank of Ireland, they stated that they have significantly increased the number of mortgage approvals given, however, mortgage drawdown remains low. They cited two factors for this: In the country – uncertainty about house prices, and in Dublin – house prices moving above the expected sale price.
Different organisations produce different results on an average house price in Dublin and the rest of the country. The National House Price Register which is provided under the Property Services (Regulation) Act 2011, will hopefully put an end to the divergence in estimates of an average house price.
I have engaged with NAMA since coming into office and I am pleased that NAMA is making a positive contribution to a renewal of sustainable activity in the property market in Ireland. This involves an entrepreneurial approach and effective working with NAMA debtors and others to deliver real value for the taxpayer.
As announced on the 23 May 2012, NAMA plans to invest €2 billion approximately in Ireland in development capital in order to preserve, enhance and complete commercial and residential projects in Ireland over the period to 2016. This includes the completion of residential and commercial properties which are currently under development and the development of land assets in cases where that makes sense from a commercial perspective. To avoid compounding previous bad practice, NAMA will not advance funds to develop property for which there is no foreseeable demand.
All funding proposals are subject to full cost benefit analysis – the key consideration for NAMA is whether the expected return in developing out projects is potentially greater to that from selling the site in its current state or waiting for market improvements. Based on recent studies, an investment of €2 billion through advances of development capital for projects in Ireland is expected to generate up to 25,000 direct and indirect construction jobs and potentially an additional 10,000 jobs in the wider economy.
NAMA clearly sees its role as the need to respond, not just to current supply and demand conditions, but also to prospective supply and demand over its projected lifespan up to 2020.
NAMA estimates that 90% of the property assets in Ireland securing its loans are located in Dublin and neighbouring counties and in counties Cork, Galway and Limerick, all of which have large urban centres of population. It takes the view that long-term prospects for much of this property are good and, on that basis, it proposes to invest considerable sums over the next three years with a view to ensuring that this property is available to meet commercial and residential demand over the rest of the decade. In this context NAMA works closely with other State Agencies with a direct interest in this – one good example being the IDA in respect of provision of first class office space for interested FDI companies.
To date, NAMA has approved over €500m in new working capital and development capital advances for projects which are located in Ireland. Over €300m of this has already been drawn down and €200m is in the pipeline for drawdown over the coming months; This represents a significant injection of capital into the construction and property sectors, which, alongside other Government measures, including the investment of nearly €4 billion in 2012 in delivering public infrastructure improvements across a range of headings under the Public Capital Programme, can provide the basis for recovery and longer-term sustainability in these sectors.
Private sector investment is now needed to complement these initiatives by the State and NAMA initiatives, including for instance vendor financing, which can help leverage increased private sector appetite for property-related investment in Ireland.
[Measures to stimulate property market] - [Initiatives]
My Department is taking a lead role in returning the property market to normal. The Department has already held positive meetings with the CEOs of the lending banks and relevant stakeholders to discuss ways forward. My Department recently published a revised Statement of Strategy, which sets out my vision that the Department should take an active role in supporting growth in key sectors of the economy, of which the property market is one. Last year’s budget measures were an example of that role in action. The Secretary General of the Department, Mr. John Moran will go into more detail on this later this morning however I am confident that the Department will be a key player in this area and Mr. Moran will keep me up to date on progress on a regular basis.
NAMA’s Board recognises that its success in meeting their commercial objective is closely linked to the performance of the economy in general: a vibrant domestic economy means increased demand for the property assets which secure NAMA’s loans. NAMA recognises their role in making whatever contribution they can towards instigating a renewal of sustainable activity in the property market in Ireland.
The recent launch of the 80:20 Deferred Payment Initiative to support the residential market has been broadly welcomed This product involves Participating buyers drawing down a mortgage from one of the participating banks (Bank of Ireland, AIB [through their subsidiary EBS] or Permanent TSB) for the full property price and paying a deposit of 10% in line with the banks’ normal lending practices. This initiative has already generated considerable interest and looks like generating a good number of sales in the months ahead.
NAMA’s provision of vendor financing will play an increasingly important role in attracting international investor capital into Ireland. The Agency is willing to provide funding of up to 75% of an asset’s purchase price to suitable purchasers in an effort to stimulate sales activity. One transaction already completed is the sale of 1 Warrington Place, a transaction facilitated by vendor finance provided by NAMA.
I would cite the benefits of Vendor finance as:
·it will generate transactions that might not otherwise take place and ensure that we thereby receive 25% or more of the asset price upfront, and
·It will also involve a favourable shift in credit risk from debtors to more creditworthy investors. Applied judiciously, vendor finance will enhance competition and price tension and will enable NAMA to convert international interest into sales.
It is inherently difficult to estimate in advance the volume of future vendor finance transactions but the Agency’s working assumption is that at least €2 billion will be involved. They are doing this is to fill a gap in the market where buyers with equity cannot obtain bank finance to buy our assets.
[Future Strategy for the Property Market]
Before finishing up I would like to set out three principles that should underpin a sustainable property market and industry into the future.
Firstly, Competitiveness – Property must be available at competitive global prices in order to facilitate the creation of sustainable jobs in Ireland. Due to the property crisis, property is currently extremely competitive in international terms. We need to maintain that competitiveness by ensuring a balance between supply and demand at sustainable long run levels.
Secondly, Fairness – Fairness must be at the heart of the provision of current and future housing needs; of adequate property provision in the areas of health and education; and of the kinds of 21st century infrastructure that a modern society and economy require. We must strive to ensure that housing is available to all.
Thirdly, Measured entrepreneurism – The future of the property industry is responsible, demand-led property development based on evidential data, and a culture of private sector responsibility. This industry must be both regulated and supported by a responsive public sector. Compared to previous practice, this would be a new type of partnership, based on supporting the common good, but at the same time encouraging entrepreneurial activity and rewarding risk appropriately.
In devising policies, I think Property Industry Ireland should be fully conscious of these principles as they go to the very core of a sustainable property market. I very much look forward to seeing the outputs of your discussions this morning and I am sure they will make an important contribution to returning this economy to sustainable growth.