Cut VAT on new homes to 5pc and buyers will save almost €28,000’, economist claims

Under EU rules, Ireland cannot scrap VAT on new homes, but ministers have an option to reduce the rate to either 9pc or 5pc temporarily. 

Mr Power said the rate on new homes should be cut to 5pc for five years for owner-occupiers. 

The reduction would reduce the cost of delivery, and enable the reduction to be passed on to the purchasers, he said.

However, analysis published last week by analysts at the Department of Public Expenditure and Reform (DPER) warned that any benefits from a VAT cut for the construction industry could be quickly redirected by developers to bid up the price of land, with no benefits for buyers.

In his report, Mr Power argued that, in the midst of a housing crisis, “It does not make sense to force new house buyers to borrow to pay an upfront VAT bill to Government and to pay interest charges on that borrowed money over the lifetime of the mortgage.”

Measures that could reduce so-called site enabling costs should be considered to ensure the delivery of sufficient housing in a viable way for developers, while at the same time addressing affordability issues for house buyers, he said.

These could include local authority levies and the costs of bringing services such as water and power into schemes.

Cutting the VAT on new housing to 5pc for owner-occupiers would save them €27,808 and help bridge the gap between what buyers can afford and the cost of delivery, according to a report by economist Jim Power for estate agents ReMax.

The report said data from the Society of Chartered Surveyors of Ireland found that more than half the cost of delivering new houses is made up of so-called soft costs such as VAT, levies and professional fees, with 48pc of the costs associated with the physical build. VAT is charged at 13pc on newly built homes here but the same home in Northern Ireland or Britain is exempt. There is no VAT charged on second-hand homes here. 

In his analysis, Mr Power says a reduction in the rate on new housing to 5pc for owner-occupiers would reduce the cost of delivery of the house by €27,808 on an average three-bed semi-detached home in Dublin.

This would put the house within reach of a couple with a joint income of €88,000 a year within the Central Bank’s macro-prudential mortgage lending limits, he said.

Without the VAT cut, the same house would be out of reach of the couple even with a 10pc deposit.

“One of the key issues in the housing market is the relationship between affordability and viability,” Mr Power said in the

“Affordability is what a potential house buyer can afford to pay for a house, particularly given the constraints imposed by the Central Bank’s mortgage lending rules.

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