DUBLIN (Reuters) — Of the 3,500 Dublin homes currently for sale on property website www.daft.ie, just 600 are below the 317,500 euro ($408,300) level at which property tax kicks in for first-time buyers.That’s less than 20 percent of the Irish capital’s housing market available for a segment of the home-buying population that accounts for 36 percent of all transactions in second-hand homes.

Other buyers must pay stamp duty at rates of between three and nine percent.

The higher rate starts at 635,000 euros — a sum no longer enough to purchase a two-bedroom flat in some parts of Dublin.

Small wonder that property — and the taxes paid on it — has moved from dinner party topic to political hot potato.

The debate took on a political dimension in September when Michael McDowell — newly appointed leader of the Progressive Democrats, the junior party in the governing coalition — suggested the government no longer needed the vast amounts of cash it was getting from stamp duty.

With the government set to generate some 3 billion euros this year from stamp duty alone, McDowell said his party was looking at proposals to change the tax regime for home buyers.

“That’s the point we want to get across, the government doesn’t need this massive flow of stamp duty from house purchases,” he said after a party “think-in”.

Though the Progressive Democrats were quick to play down a rift with Fianna Fail, the main governing party, and to stress their ideas were aimed at next year’s election rather than next month’s Budget, McDowell’s comments put the issue of stamp duty firmly on the political agenda.

Earlier this month the Institute of Professional Auctioneers and Valuers (IPAV) called on Finance Minister Brian Cowen to abolish stamp duty for first-time buyers and reduce it for others.

“I think on balance it would be a very positive social measure,” IPAV CEO Fintan McNamara told Reuters.

He pointed out that the housing industry already generates plenty of other cash channels for the government.

The Construction Industry Federation reckons that in total the Exchequer takes 40 percent of the cost of new houses — which are exempt from stamp duty — when account is taken of items like capital gains tax on the sale of the land on which it was built, the income tax on workers building it, and value added tax (VAT).

“The government does get a lot of money from the housing industry,” says McNamara.

Ironically, Ireland’s tax regime is one of the factors cited by the Organisation for Economic Cooperation and Development as having helped fuel Ireland’s housing boom over the past decade, during which house prices have tripled in real terms — the biggest rise in OECD countries.

“Ireland has some of the most generous tax provisions for owner-occupied housing, largely because it is the only OECD country that allows households a tax deduction for mortgage interest payments at the same time as not taxing property values, capital gains or imputed rent,” it said in a report.

Ireland’s central bank has repeatedly raised concerns about diminishing affordability, a possible relaxation in lending criteria and the risks to Ireland’s strongly growing economy from a sharp correction in the housing market.

The average price paid for a house in Dublin in September 2006 was 419,809 euros — 14 times the average industrial wage.

“If the distribution of income is held constant and assuming current trends in house prices, incomes and mortgage interest rates were to persist, it can be shown ... that the level of affordability could begin to deteriorate quite rapidly,” the bank said this month.

“In particular, within six years, only the top 20 percent of earning households could afford the average house price in these economic circumstances (i.e., a significant reduction on the top 50 percent of households which appear to be able to afford an average house at this time).”

So far, Finance Minister Cowen has indicated there are unlikely to be changes to stamp duty in next month’s Budget, saying he would be reluctant to interfere in a market which many believe does not require any additional stimulus.

He may be right to assume the market can regulate itself.

Already the debate over stamp duty seems to have cooled the housing market somewhat as buyers wait to see what Cowen will do in December.

Though this has generated a few ripples of concern about a long feared sharp correction, few are predicting a crash.

“There has been a lot of hype about houses not selling at auction and this is not a sign of decline but more that the market is steadying,” said Michael Grehan, managing director of estate agency Sherry FitzGerald.

“The heady days of prices rising by 25 percent to 35 percent per annum are probably no more but the much discussed and oft times derided soft landing is a welcome alternative.”