Brian Cowen (Laois-Offaly, Fianna Fail)

We are obviously here to ensure the place is alive today. I wish everyone well and hope everything goes well for Members. It is with a sigh of relief I can say this on the far side of an election.

I thank everyone for inviting me to speak on the Finance (No. 2) Bill 2007. This is my fourth time to speak on Finance Bills in this House. Members will recall I first addressed the House in 2005 when I concentrated on reducing the tax burden on low and middle income earners. Later in 2006, I reformed and refocused the structure of investment tax reliefs and set a minimum tax which the well-off must pay. More recently, in my third Bill earlier this year, I sought to ensure that the benefit of strong economic growth is shared by all taxpayers and, in particular, low and middle income earners. I am now implementing a very specific stamp duty reform, as set out in the agreed programme for Government, to exempt all first-time buyers from stamp duty.

I want to take a little time to review where we are now in regard to first-time buyers. In my last budget, I indicated that it was the Government's aim to help first-time buyers directly and substantially, including those who were already paying their first mortgages. I did this by increasing mortgage interest relief for first-time buyers from €4,000 per year for single persons and €8,000 per year for married couples or widowed people, to €8,000 and €16,000 per year, respectively. This measure helped first-time buyers who were already in their first home as well as brand new first-time buyers.

This Bill is the first instalment in the implementation of the agreed programme for Government which will see mortgage interest relief increasing to €10,000 for a single person and €20,000 for married couples or widowed persons. What is more, relief will start at 20%, even after the standard rate of income tax is reduced during the tenure of this Administration. The proposals it contains are timely, affordable and targeted and will support one of the most important sectors of our economy. It will do all this in a way which directly assists those without any housing equity of their own in their efforts to acquire their first home.

Home ownership is one of the primary aspirations of the people of Ireland, it strengthen communities, improves the environment and provides parents with a valuable asset to pass on to their children. As Minister for Finance, I have always supported home ownership through targeted policy initiatives and these proposed changes mark a continuation of a process of support for first-time buyers which I began in my first budget.

The housing market has enjoyed remarkable growth in terms of both output and prices over the past decade or so. We have seen a dramatic increase in the number of homes built in Ireland. In 1996, around 34,000 new homes were built. Last year, that number was more than 90,000. Enormous progress has been made in raising supply to meet very strong demand, which has had a moderating impact on price inflation. I welcome that moderation on social and economic sustainability grounds. I far prefer to see house prices increasing at a modest pace in line with changes in affordability, notwithstanding the slight re-balancing in house prices that has occurred over recent months. It is in everyone's best interest that prices increase at a moderate level that reflects sound Government fundamentals.

I have heard much speculation about the economic outlook in recent times, much of it of a negative variety. I accept there are always risks, but I believe the economy will continue to outperform most of our peers. The residential construction sector is easing back towards more sustainable activity levels. However, it should be noted that commercial property activity remains very strong and that the roll-out of the national development plan will have a positive impact on growth levels, not least in the construction sector. At the same time, the external demand environment, most notably in continental Europe, is brightening and that is something which all exporters will welcome. Certainly, the impact of tighter monetary policy is serving to dampen economic activity, but a moderation of pace should not be mistaken for a substantial and sustained deterioration in our economy's performance.

The economy is set to enjoy strong growth rates over the medium term, albeit at a lower level than enjoyed over the past decade. By accepting that more moderate outlook now, we can make it a reality and enjoy the much talked-of soft landing. It is essential that we adapt our expectations in the property market, in relation to Government spending growth and in the wider economy to that calmer but still positive growth environment. That is the best means by which we can secure our prosperity for the long term. Construction has become an increasingly important sector of the economy in recent years. Within construction, home building accounted for 11.4% of GDP in 2006 compared with 4.6% in 1997. Driven by economic and demographic fundamentals, approximately 570,000 new houses have been built. This is one third of the total national stock. Despite this rapid growth in house building, the stock of houses per head of population is still one of the lowest in the euro area, implying there is still scope for a significant level of house construction. However, the housing market has slowed in recent months, in part due to uncertainty relating to stamp duty.

In introducing this measure to reform stamp duty, I intend both to remove uncertainty from the housing market and reduce the cost of home purchases for first-time buyers in an affordable, economic and sustainable way. This will allow individuals to buy and sell their homes in a more stable market environment and help to restore necessary confidence to the market.

At this stage we can see housing demand levelling with supply and this is reflected in a slowdown in house price increases. This is clear evidence that Government policy is working. With the market stabilising, we must ensure that any changes made are carefully thought through, given the importance of this sector for jobs in every community in Ireland. While leading indicators of future output, such as new house registrations, new housing starts, planning permissions and the number of new mortgages drawn down by first-time buyers, point to a lower level of completions this year, there is consensus that the level of new housing output will decline from last year's record levels. The current market expectation is that there will be approximately 62,000 new housing starts this year, and this is still a very high output by any standard. Underlying demand remains strong and it is supported by demographic developments and the positive economic environment.

In line with these trends, the rate of house price inflation has slowed. The level pertaining to house prices is now the same as that in the middle of 2006. The main factor impacting on the housing market is the rise in interest rates. This is impacting on affordability and hence on the demand for housing. Eight quarter-point increases by the European Central Bank over the past 18 months have doubled the key official interest rate for the euro area from 2% to 4%. However, the key factor to be borne in mind in such circumstances is the amount of income used to service house loans. It may come as a surprise to learn that this has remained relatively static over the past 20 years at between 25% and 30% of income. Affordability has been assisted by improvements in mortgage interest relief and some softening of prices.

While property price increases have moderated, the cumulative increase in house values in recent years puts first-time buyers at a distinct disadvantage. Those who are already on the property ladder have benefited from those increases in value and have built up their own property market equity. First-time buyers do not share in their good fortune and our proposals are designed to help them as they compete with existing owners and investors in the property market.

In effect, the measures for which this Bill makes provision will level the playing field for purchasers by directly helping those who come to the property market without the advantage of the house price appreciation of recent years. It will also level the playing field between new and second-hand houses and widen the choice available to first-time buyers, thus resulting in clear social benefits.

As a result of the existing stamp duty regime, first-time buyers are incentivised to buy new homes which, in many cases, are considerable distances away from their families and support networks. The changes that this Bill proposes will make first-time buyers indifferent between second-hand and new homes and will remove an existing financial obstacle to establishing their own homes in the neighbourhoods and communities in which they grew up. This has obvious and desirable social benefits, which flow directly from the provisions of the Bill.

Leaving aside the equitable and social impacts on the first-time buyer, our proposals are good for the property market as a whole because they will bring an end to the speculation and uncertainty regarding the evolution of policy in this area. In addition, by making these changes retrospective on transactions executed on or after 31 March, which transactions would be presentable to the Revenue Commissioners for stamping by 30 April, we have minimised the potential for market disruption. Where a person who has paid stamp duty becomes entitled to an exemption from that duty when the Bill is enacted, he or she will be entitled to claim a repayment of that duty from the Revenue Commissioners who will, as soon as the Bill is enacted, publish details on how to do so.

I am aware from weekend reports that it has been stated a number of first-time buyers have entered the market to buy expensive houses. However, this must be put in perspective. It is not unexpected that one or two individuals would come to attention by availing of the relief, but that is the exception and it must be considered in the context of the overall benefit to first-time buyers. By contrast, those individuals could have bought a new house under the existing provisions and not have paid any stamp duty. Likewise, they could have acquired a site and built themselves a new house, again without attracting stamp duty liability under the Bill.

Reports also point to certain individuals buying houses as a result of gifts from rich parents. There is nothing unusual about parents passing wealth to children but it must be remembered that a tax liability arises under capital acquisitions tax regulations. Whether the wealth is passed by gift now or inheritance later, there is a single tax-free threshold of approximately €500,000 which is linked to the consumer price index that applies with the excess being taxed at 20%.

The changes being introduced by the Bill provide for a simple exemption which means that regardless of whether or nor the house is new or second-hand, a first-time buyer knows that the question of stamp duty will not be a consideration. More important, the focused nature of this measure means it will not have a destabilising effect on the market.

The Government recognises the importance of the construction industry to the success of the country. It directly employs 280,000 people across the country and many tens of thousands more in related industries. It is a major contributor to the health of the public finances. A strong construction sector is vital to a strong economy and is in everyone's best interests.

It is generally accepted that speculation about stamp duty in recent months has had a negative effect on the market. Such speculation was not of my making and in dealing with the situation as it evolved, I was obliged to handle it in a responsible manner, given the extra attention which is given to comments by a Minister for Finance in this area. The proposals before the House will introduce targeted stamp duty reform aimed at benefiting first-time buyers and they will restore stability and certainty to the market.

The Bill contains two sections. Section 1 provides for exemption for first-time owner-occupying housebuyers and also provides for the repayment of stamp duty where it has already been paid in respect of instruments executed on or after 31 March 2007. Section 2 consists of the Short Title and construction of the Bill.

The Government plans further measures to support those who are about to buy their first homes or have done so in the past number of years. Our policy initiatives are designed to help young people and young families — not just those who are about to buy their first home but all those who have purchased apartments and houses in the past seven years. These initiatives will improve affordability, reduce the burden of higher interest rates and have a positive social impact.