Damian Kilberd on Newstalk today said a PRSI tax on rents-not on net income after costs from housing rental property-is rumoured to be advocated by minister Joan Burton. This would kill off investment in buy to let housing,contradicting government policies to support housing prices in order to limit the banks' colossal mortgage losses.
Typically in a high quality rental property in Dublin,in an all cash deal the net income after all expenses but before income tax compensates the investor with a few percentage points of return.If it didn't,the investor would have no incentive to invest and would leave the money in the bank or in a government bond. About 3% to 4% cash return before any house price rises would be typical in high quality properties in Dublin but in lesser quality properties,it is higher. For houses bought with mortgages,4% return would not service the mortgage payments.
By contrast,in the Celtic Tiger boom investors settled for no return on investment in the early years because they expected housing prices to rise rapidly,15% a year in some years.
So if a 4% PRSI applies to rents,new investment in buy to let housing will be hit hard,depressing housing prices considerably. If the long term return on housing (including housing price rises) before income tax was expected to be,say,5% to 7% range (including inflation of 2%),the 4% PRSI on the top line rent would be punitive, increasing the top marginal tax rate on bottom line rental incomes after all expenses by maybe 9 percentage points-as if taxes aren't high enough already.Marginal tax rates of around 55% would be a deterrent to investors.However, rents would probably rise partially or fully to offset the tax in time.Meanwhile,housing prices would fall. In Dublin,if buy to let investment dropped off for a time,rental housing vacancy rates would quickly become tight,putting upward pressure on rents,including social housing rents that comprise a high proportion of the rental market. But outside Dublin,it could take years for rents to reflect the tax,given overcapacity in rental markets.
Should the government go ahead with such an irrational tax,it would be yet another sign of its desperation to avoid scrapping the Croke Park Agreement con game.