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Higher property tax 'will stabilise house prices'

A Central Bank Economic Letter finds that recurrent property taxes can, over time, help to mitigate downside risks to house prices.

Such taxes may also provide a stable source of revenue for government, as they are less likely to be affected by the economic cycle, the letter adds.

Recurrent Property Taxes and House Price Risks by Martin O’Brien, David Staunton and Michael Wosser takes a cross-country analysis and examines recurrent property taxes and the role they may play in promoting more stable growth in house prices over time 

In Ireland, these taxes include the Local Property Tax (LPT) and the Residential Zoned Land Tax.

Lower than average share

The Central Bank Letter finds that, overall, Ireland’s tax revenue as a share of national income is slightly lower than the average across most OECD countries.

Revenue from recurrent property tax as a proportion of national income – a measure of the overall incidence of the tax – is significantly lower in Ireland than average.

The letter finds that a higher incidence of recurrent property taxes may help to mitigate volatility in house prices, with a link between a higher recurrent property tax and lower downside-risks to house prices.

Overall, cross-country analysis suggests that recurrent property taxes can play a positive role in promoting more stable growth in house prices over time, the Central Bank believes.

Macro-prudential policy

Higher property taxes could complement macro-prudential policy (such as borrower-based mortgage measures) in promoting wider financial stability, the regulator believes.

The letter notes that cyclical taxes, such as individual or corporate income tax and consumption-based taxes, tend to rise and fall in line with economic growth which is challenging when growth is constrained.

Revenue from recurrent property taxes tends to remain stable, due in part to the frequency of revaluation of properties and the use of valuation bands for calculating tax liability.

This suggests that such taxes can provide a stable source of revenue and one that is less likely to be affected by the economic cycle, the letter concludes.