Friday, 14 March 2008

The property crash and economic slowdown. Reality intrudes at last.

Note: This article was posted under an incorrect title the other day. This is the revised version that replaces it.

In light of RTE revelations on TDs' spending splurge last Paddy's Day,
Gombeen Man was intriqued by Bertie's recent words on the Irish economy. Not for the first time.

Warning of dark days ahead as our false economy slows down - due in large part to his Government's steroidal pumping-up of the property market through tax breaks - it is timely to examine the phenomenon that was the Celtic Tiger before it finally leaves for fresher, meatier pickings.

The earlier part of this country's economic success was largely down to EU financial input in the form of funding and a general opening up of Irish society and attitudes thanks to involvement with the rest of Europe. For instance, we now have contraceptives... unthinkable in the 80s. We now have divorce.

Another factor was the work of the IDA in bringing investment here, by making our Gombeen land the ideal place for multinationals to set-up under a low corporate-tax regime, and use the location to process global profits in a "business-friendly" environment. This, make no mistake - along with the fact that we are an English-speaking nation - is why the multinationals operate in, and through, here. Whatever about the ethics of it all, we do, however, now have employment for anyone who wants it.

The problem is, this Government kept the tax-break idea going by applying it to construction in Ireland long after it was necessary. This took the from of tax shelters for the building of holiday homes, hotels, and houses and apartments in "designated areas". While there might have been some argument for state intervention (isn't that supposedly the bane of enterprise and business) when things were depressed, there was none for continuing with it when the economy took off.

Loathe to see their friends in the construction industry go short of the latest helicopters to transport their semi-literate arses in, the Government kept these tax shelters going right through the height of the property boom. Individuals who benefited were mostly those already propertied and well-off, by allowing them to write off rental income from all investment properties by means of Section 23 tax schemes.

The result? Moneyed, middle-aged, middle-class (upper echelons now, I think) people diverted money into the schemes, at a time of low bank interest rates, and pushed up prices to astronomical levels. Many properties were not even let out, but were bought purely for capital appreciation - which thankfully, has come to a belated end. The others, in the form of buy-to-lets, were let to hard-working young people, many of them building the investment properties they now rent. Another consequence is that many young people - single, cohabiting, and trying to bring up families - are now locked into 40-year mortgages on small, overpriced, shoddily built apartments.

Thank you Fianna Fail. But let's be honest - would things have been any different had there been a coalition led by the other side of Irish Civil War politics?

Probably not. Pity there is no opposition in this country.

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