Sins of the Father (6 page)

In March 1988, Ray McSharry reintroduced Section 23 reliefs on rental properties. It was listed under Section 27 of the Finance Act but retained its name from 1981, when it was first introduced as a stimulus for investment in construction.
The Irish Times
reported that the government’s decision to bring back the section provided a ‘tax efficient outlet for investors and a valuable shelter for people with existing rental income’.
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The maximum relief available was essentially the purchase price of the property less the cost of the site.
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The scheme was announced as a short-term measure to help what was seen as a flagging construction industry, and was due to run from 27 January 1988 to 31 March 1991. It would allow investors to construct and/or purchase flats and town houses, with a floor area of no more than ninety square metres each, in designated areas in towns and cities – including large sections of central Dublin – and to offset construction costs and rental income against income tax. Its main purpose, however, was not to provide housing or rental accommodation. The reason for the scheme was to provide tax relief for investors. The fact that this was done via construction should not disguise the fact that this was a legal procedure for the avoidance of tax.

The scheme was not exclusive to the income from the rental property in question. The exemptions went to the company or individual who availed of the scheme, and the building costs were offset against all of the client’s existing rental income, subject to the maximum relief allowable. It allowed investors ‘to obtain tax-free rental income from the new units they buy and from any other new or old property they own (or subsequently may buy in the State) whether it is commercial, industrial or residential, until all the relief is used up’.
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The tax allowances meant that as a financial investment, property could provide ‘gross return [of] around 17 per cent, with the additional attraction of a potential capital gain over ten years’.
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Property, once again, was providing a tax shelter for investors, and not surprisingly, investors responded with energy and enthusiasm. For their part, builders almost immediately increased the price of properties, ‘with the tax relief in mind in much the same way that first-time buyer housing grants were previously absorbed’. A property and price boom had begun, fuelled not by wider economic activity within the State – that is, by wages, employment and demand from below – but by investors looking for tax relief and seemingly safe investments.

By the end of 1988,
The Irish Times
was reporting a 24 per cent increase in building starts in Dublin, while in Galway the increase stood at over 50 per cent. During the months of September and October, around £20 million worth of new homes were sold, and according to one Dublin auctioneer, ‘a healthy chunk of that was sold to investors availing of the tax advantages contained in Section 23 (now Section 27)’.
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The fact that investment, not jobs and wages, was driving demand could be seen by the nature of the sales.
The Irish Times
found that prices at the lower end of the housing market remained ‘all but unchanged with the middle and upper areas deriving the greatest benefit from the boom’.
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It reported that around 60-70 per cent of all sales of new homes in the affluent areas of Dublin 4 and Dublin 6 were to investors under the Section 23 tax relief scheme.

The nature of the late 1980s property boom – its subsidy by government incentives via mortgage grants and the creation of tax havens – was of particular concern to the governor of the Central Bank of Ireland, Mr Maurice Doyle. In November 1988 he gave a speech at the annual dinner of the Master Builders’ Association, where he pointed out the dangers of Section 23 concessions, mortgage interest relief, subsidised local authority housing, and first-time buyer grants:

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.
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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.’
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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.’
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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’.
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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’.
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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.’
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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’.
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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 prospects of all’ and that ‘The [stock] market, particularly the banks, [were] undervalued’.
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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.’
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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.
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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.’
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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: