by Conor McCabe
The arguments for so much subsidisation – direct and indirect – of the housing market, which looked reasonable at a time of free-spending high inflation, high marriage and birth rates, high interest rates and domestic rate charges looks rather different against a background of belt-tightening all round, low interest rates, low household formation and no rates.85
In May 1989, the journalist Maev Ann Wren argued that ‘The flow of money into house purchase may be limiting funds for other more productive purposes’. She pointed out that in 1988, ‘financial institutions lent nearly £300 million more to homeowners than two years previously … At the same time the amount of money being invested in new machinery and equipment for productive purposes grew by just over £200 million.’86 Wren noted that while government borrowing was down, personal borrowing by way of mortgage debt was increasing. Not only that, the rise in house prices gave homeowners the feeling that they were wealthier as a result. ‘The financial institutions regard [this “wealth effect”] as real,’ she said. ‘They are prepared to offer people new higher mortgages on their homes to finance spending on other things, and in this way the rise in house prices might be passed on in a rise in other prices.’ However, none of this ‘wealth effect’ was down to actual productive economic expansion, but to the influx of speculative capital into the housing market via incentives such as Section 23 and first-time buyer grants. Wren was describing the formation of a bubble. She concluded that unless action was taken to deflate the ‘wealth effect’ – by a property tax, for example, which would serve to remind people that property price increases are a cost to the economy, not a boon – Ireland was in danger of substituting its government debt crisis for a personal debt crisis. Over the next twelve years, Wren’s concerns would come to fruition.
In January 1991, the government announced a two-year extension of Section 23 relief. By December of that year, over 15 per cent of all new homes in Dublin had been bought by investors under the scheme. The investment aspect of the scheme – property as a tax write-off – was underlined by the accountant and tax specialist Kieran Corrigan in an interview with The Irish Times in January 1992. He said that ‘Section 23 is particularly suitable for people who already own other rental properties [as] very often people in this situation can claim immediate relief for all of the allowable cost of the Section 23 property.’ 87 Any interest on loans raised to purchase Section 23 properties was also tax-deductible. ‘This is very advantageous,’ he said, ‘as the taxpayer will receive a deduction for the capital cost of the property as well as the interest cost.’ Not only was the cost of construction subject to tax relief, so was the interest on any loan raised to fund construction. This was a boon to both banks and builders, as it made money cheap to borrow without any loss to the banks and building societies, as well as making construction itself an act of tax avoidance. The government was subsidising both speculative borrowing and speculative construction. The fact that prices kept on rising meant that these public subsidies went directly into the pocket of the lenders, builders and speculators. The Irish people, recently denied access to local authority mortgage lending and placed in impossible queues for housing, had no option but to turn to the publicly subsidised entrepreneurs for what is a basic human need. There was nothing entrepreneurial about Section 23. It was simply the transfer of public money to private hands with construction as the conduit. The apartments were built whether they were needed or not. What mattered most was the tax relief which came with the apartment.
There were around fifty Section 23 housing schemes under construction in Dublin in 1992. The properties ranged from one-bedroom apartments in Temple Bar and Bolton Street, to the leafy surroundings of Shrewsbury Park, Ballsbridge, where two-bedroom houses with turret-shaped living rooms and double-glazed conservatories went on sale for £140,000 – over three times the price of the inner-city apartments. Other areas covered by the scheme included Donnybrook, Dalkey, Sandymount, Killiney, Sandycove, Blackrock and Monkstown.
The chairman of the Society of Chartered Surveyors, Mr Thomas D’Arcy, gave a speech at its annual dinner in February 1993, in which he urged the continuation of the scheme, as it had been ‘a major factor in stimulating residential development and rejuvenating significant areas of the inner city’.88 And having praised a government scheme which gave tax breaks for the construction of apartment blocks for speculative purposes in the most opulent areas of the capital, Mr D’Arcy took time to criticise the ‘scandalous and needless waste of resources’ on public-sector civil engineering projects. He also looked forward to the EC’s Cohension Fund, which was due to come on stream later that year and which would lead to ‘further significant spending’ and provide a real boost to the construction industry. He noted that the urban renewal scheme, of which Section 23 was a key element, ‘had generated over £800 million in private sector development, although it had led to a proliferation of commercial development and a disappointing level of residential development’. Yet, regardless of whether the properties constructed were offices or houses, the fact remained that a large proportion of financial investment in Ireland was going into property, not actual, indigenous, exporting businesses, which was one of the areas of development which the Irish economy desperately needed. The idea that £800 million poured into property was a non-productive and essentially wasteful form of investment was lost on Mr D’Arcy and his audience of charted surveyors. And slowly but surely it was being lost on the rest of Irish society as well.
In January 1994, The Irish Times carried an article by Kevin Warren, a financial advisor. ‘If you are fortunate enough to have some cash on deposit you are unlikely to get a yield greater than 5 per cent per annum after tax,’ he said. ‘In the current era of low inflation there is no prospect of improving on this yield for the foreseeable future.’ Help was at hand, though. Warren pointed out that the government’s urban renewal relief scheme, which incorporated Section 23 and was due to open for investment that year, was ‘a welcome boost to the hard-pressed construction sector,’ and that ‘investors are likely to focus on property in the new designated areas on which they can claim capital allowances’. 89 The government launched the scheme in July. ‘Providing for the growth of urban communities is the bedrock on which urban renewal in the true sense is built,’ said the Minister for the Environment, Michael Smith, at a ceremony in Dublin Castle. ‘I want to see people moving back into town, families growing up in town, communities living in town.’90 The government’s vision for urban renewal, though, did not include schools, hospitals, fire stations, transport or parks. It was not a community-directed plan. Its focus, once again, was on creating commercial and residential property tax havens for investors, and hoping for the best.
In November, the mortgage finance company Irish Life Homeloans launched a new product aimed at first-time buyers. It was called the Super-Flexible Mortgage and it offered the prospective buyer ‘complete control of how and when the loan is paid back’.91 The way people were living and working was changing, they said – ‘The way we spend our money, how we marry and have children, and the decisions we make about where we live’ – and this new mortgage reflected these new times. The scheme, of course, was not about empowerment, or offering complete control, or reflecting the changes in the way we lived. It was about expanding the market for home loans. The flexibility was about widening the mortgage net and financing the purchase of the houses and apartments produced under the Section 23 scheme. All that was new was the marketing, which received a significant boost that year with the creation of a new and much-cited phrase.
On 31 August 1994, the international investment banking group Morgan Stanley produced a review of the Irish economy and stock market, the title of which ended up as a label for an era. The report was called ‘The Irish Economy, a Celtic Tiger’ and the phrase was coined by Kevin Gardiner, a UK economist who worked for the group at that time. It said that although the Irish stock market was one of the smallest in Europe, it had ‘some of the most exciting prospec
ts of all’ and that ‘The [stock] market, particularly the banks, [were] undervalued’.92 It concluded that ‘Ireland’s longer-term potential for higher EPS [Earnings Per Share] growth than the European average in both real and nominal terms assures it of an overweight position within the Morgan Stanley model portfolio.’93 The newsletter recommended a ‘buy’ for Bank of Ireland shares, and a ‘hold on AIB. It had an immediate effect, with ten pence added to Bank of Ireland’s share price overnight. Morgan Stanley’s ‘extraordinary bullish thirty-page report’ was out of step with the thoughts of Dublin dealers, but the rise in prices was more than welcomed.94
Although the Morgan Stanley report referred to the financial services centre and the share value of banks in the Irish stock exchange, the phrase ‘Celtic Tiger’ was soon picked up by Ireland’s politicians as a handy by-word for national economic recovery and government-led forward thinking. The Taoiseach, Albert Reynolds, referred to it on a trip to Australia. ‘Seemingly An Taoiseach was attempting to draw a parallel with the growth economies of south east Asia,’ wrote The Irish Times, ‘in the hopes of wooing more foreign investment into the burgeoning financial services sector.’95 The newspaper was quite dismissive of the claims of both Morgan Stanley and Albert Reynolds, seeing in the phrase a ‘picturesque imagery’ devoid of actual economic substance. It noted the high level of unemployment and saw the boasts of growth as nothing more than fancy accounting:
The problem is that much of the welcome activity is seen by many as illusory, being confined to financiers and other shufflers of paper. Abstract ‘paper’ growth has yet to make an enduring impact on unemployment, the Republic’s most pervasive economic problem. Until that happens here those filing into labour exchanges can be forgiven for regarding the ‘Celtic tiger’ as more of a paper tiger.96
Meanwhile, the march into property carried on.
The strong level of institutional investment in property was borne out by Jim McMahon, associate director of the Investment Bank of Ireland (IBI), who said in October 1994 that the bank ‘uses investors’ funds to purchase office, retail and industrial sites’, including ‘outlets in Dublin’s main shopping areas such as Grafton Street and Henry Street, in suburban shopping centres and along Cork’s Patrick Street.’ He described these retail premises as ‘very secure investments … suitable for pension funds’.97 AIB, for its part, also invested in retail, industrial and office property, and for reasons mainly due to the IFSC, property speculation and the Morgan Stanley report, the Irish economy was attracting attention from overseas investors. The Irish Times journalist Justin Comiskey wrote that it was assumed that Ireland would experience ‘growth rates of between 5 and 6 per cent for a number of years to come [and] as property values generally rise on the back of an improving economy, it is easy to appreciate the sense of anticipation which many property investors are now experiencing’. Furthermore, Ireland was now dubbed the Celtic Tiger ‘by overseas investors’. A single report by Morgan Stanley, one treated with surprise and scepticism by Irish share traders less than two months previously, had now become plural in authorship, and objective in its assessment.
The urban renewal tax havens and increased international investment in Irish banking fuelled greater demand (and supply) for mortgages and loans. The Irish Times reported in 1994 that the previous year ‘7,700 new home buyers injected £516 million into the Dublin housing market’.98 It noted that around 25 per cent of these sales were under Section 23 tax relief, and that nearly 3,100 of the purchases were apartments. Overall, there were 16,230 home loans approved that year, which was an increase of 25 per cent on the figures for 1993. House completions – and here ‘house’ includes apartments as well – also increased by 25 per cent. This had an effect on the unemployment figure, which dropped to 14 per cent, having been at over 15 per cent for the previous two years.
The amount of financial investment surrounding the construction industry, including land speculation as well as commercial and residential completions, meant that by the end of 1995 the two largest companies on the Irish Stock Exchange were AIB and Bank of Ireland. Financial shares had ‘come of age’ and were continually outperforming industrial shares such as those of Smurfit. International financial corporations were investing in Irish banks, which were investing in property, which was being subsidised by the taxpayer, who were buying the houses with finance provided by the banks, the shares in which were rising due to investment via international financial speculation. And due to this hermetically sealed universe, mortgages just kept on rising.
At the same time, almost 40 per cent of all private rented dwellings were in receipt of rent allowance. It cost the government £115 million (€146 million) in 1999 in payments. Ten years previously, that figure was £6.1 million (€7.7 million).99 By 2005 it had risen to an estimated €380 million.100 The State had gone from a policy of eradicating slum dwellings in the 1930s, to actively subsidising private landlords and sub-standard dwellings. The expansion of the private rental market was official government policy. It was, after all, one of the criteria for Section 23 relief. The Irish State had encouraged the expansion of landlordism. It had privatised public housing so that the funding which would have gone to local authorities now went to private individuals and businesses.
In the 1990s, the banks and building societies changed the criteria from householder’s income to household income. This meant that a mortgage application could be based on two incomes. Almost overnight, financial institutions could double the amount they could demand for a mortgage. By the time the Rainbow Coalition government left office in June 1997, the average house price was around £80,600 (€102,400), over five times the average industrial wage of £15,211 (€19,318). This was the highest wage:house price ratio since 1980, and a serious danger to the health of the economy. The reason was affordability. In 1967, the Department of Local Government issued a booklet entitled, ‘A House of Your Own’. It said that when buying a house, ‘The amount which you borrow should not be more than the 2½ times your annual income (excluding overtime, bonuses and the income of your wife and of any grown-up children’.101 The building societies usually limited loans to an amount which ensured that mortgage repayments were between 20 to 25 per cent of the person’s income. The reason for such a criteria was to allow the household to maintain itself while meeting repayments. In normal times, the wage:house price ratio of 1997 would be seen as a sign that a bubble had formed in the property market, but these were not normal times. The Irish State was deep into a period of financial exuberance surrounding construction, armed with little more than a bag of myths and a tiger for a sound bite.
1997 TO 2010
‘It reminds me of Islington in the 1980s.’102
The relationship between house prices and Irish wage levels lost any sense of reality under the 1997 Fianna Fáil/PD government. Soon, house prices were close to eight times the average industrial wage. ‘In today’s property market place couples at least have an edge because they have two incomes’, wrote The Irish Times in February 1998. ‘Single people need to be earning unusually high incomes to purchase even apartments, much less houses.’103 And despite numerous warnings, the government, with Charlie McCreevy as Minister for Finance, continued to stimulate the property market via tax relief. One such example was the Rural Renewal Scheme, which covered all of the counties of Leitrim and Longford as well as certain areas in counties Cavan, Roscommon and Sligo. The scheme was intended for commercial, owner-occupied, and rental residential properties, and was one of three urban and rural rental schemes which formed part of the 1998 Finance Act.
Under the terms of the scheme, 50 per cent of capital expenditure could be used as tax relief for both owner-occupiers and lessors of the buildings constructed or refurbished under the two schemes, ‘with the remaining 50 per cent being written off at 4 per cent per annum over the next thirteen years’.104 McCreevy wanted to give 100 per cent tax relief on capital expenditure, but this was rejected by the EU Commission, who gave belated permissi
on for the scheme in June 1999. There were other dissenting voices closer to home. The Chief Executive of the Western Development Commission, Mr Liam Scollan, said that it had ‘not been thought through and appears to be more appropriate for Temple Bar than Carrick-on-Shannon’.105 Both the Development Commission and the Heritage Council pointed out that almost half the schools in Leitrim and Roscommon were in danger of losing teachers due to falling numbers. They said that ‘The area is in desperate need of people, yet [the Rural Renewal Scheme] will do nothing to encourage owner-occupancy but will assist developers who build for the rental market’.106 These sentiments were in line with those of the Department of Finance, which also raised serious concerns, all of which were ignored by the Minister.
In 1999, the Department of Finance produced a tax strategy group paper on the urban and rural renewal schemes. It was critical of the fact that the objective of the scheme was to provide tax relief for investors, with construction once again the conduit rather than the actual objective. It also questioned the desirability of providing investment incentives via tax relief during a time of high economic growth. What encouragement does expansion need when expansion is already taking place? According to the report:
… the majority of the beneficiaries of property tax relief schemes are high-net worth individuals or corporate investors. The introduction of further tax incentive schemes even in times of exchequer surpluses does not assist the policy of continuing to lower tax rates and widen the base from which taxes can be levied. The possibility that tax incentives for property development have contributed to the emergence of asset price inflation cannot be discounted. Such reliefs may not be the most appropriate and cost effective way of promoting the development of an area or promotion of an undertaking given the present economic climate with record growth and increasing construction costs.107
