Nama plan too big a gamble for taxpayers
Our property market must be allowed to run its natural course without unnecessary meddling, writes Louise McBride
FEARS are rife that Ireland's 'bad bank' -- the National Asset Management Agen-cy -- is about to gamble away millions of euro of taxpayers' money with its latest plan to kickstart property sales.
Under the plan, which is due to kick off later this year, Nama is prepared to swallow losses on behalf of a house buyer who buys one of its properties -- if that property falls in value by a fifth over the next five years. The plan has already sparked the concern of the Minister of State for Housing Willie Penrose, who believes it could inflate property prices -- and of the OECD economist Christopher Andre, who last week said that such a move could be counter-productive.
Not only could Nama's plan be counter-productive, however, there is a danger that it will simply be another way for the State -- which has already thrown billions of euro of taxpayers' money into the banks -- to pour more of our money down the drain. Even worse, it could ultimately be the banks -- rather than taxpayers -- who benefit.
"With this plan, Nama is gambling on the direction of Irish house prices using taxpayers' money," said Karl Deeter, operations manager with Irish Mortgage Brokers. "Nama will give the banks a better brand of insurance than they can currently get because the loss (if negative equity arises after the house purchase) won't be carried by the banks -- it will be carried by Nama."
Dr Brendan Williams, a lecturer in UCD who co-wrote a major report on Irish ghost estates last year, also expressed concern about the plan. "This is taxpayers' money that is being used as some sort of guarantee," said Williams. "Whose interest is such an intervention in? If it's in the interest of the holders of existing properties in Ireland, I couldn't support it. Unless the plan is in the broader public good of achieving more affordable property prices, I'd find it hard to support it -- particularly if it stops the property market reaching a natural bottom."
Nama insists the plan is not a gamble or waste of taxpayers' money. "Nama will ultimately sell these properties at some point in the future," said a spokesman for Nama. "If Nama sells one of its houses in three or four years' time instead of today, it could get a lower price for the house then than it will now. We are saying -- let's take the reduced price now, conclude the house sale, get someone living in the house, take the property off our hands and get property transactions going. The scheme is designed for a relatively small number of people who can afford a house -- but who are reluctant to buy because prices may continue to fall. It's a modest intervention in the market but it could be important in terms of generating sales."
Gregory Connor, professor of finance with NUI Maynooth, doesn't buy Nama's argument, however. "The motivation given by Nama for implementing the scheme is not entirely convincing," said Connor. "The scheme has considerable potential to manipulate recorded property sales prices, to damage confidence in Irish property market openness, and to build up a hidden future cash-flow liability for Irish taxpayers."
Previous interventions in the property market, including the tax incentives introduced to regenerate run-down inner-city areas and encourage developers to build in small towns and rural areas, have run for too long, cost taxpayers much more than envisaged and ultimately damaged the property market. "Our recent history shows that the overuse of incentives totally distorted the property market," said Williams. "When we look at some of the counties where demand for properties is lowest today, there were heavy tax incentives to purchase and invest in properties there in the past -- irrespective of demand. A key selling point of a lot of the developments in those counties was the availability of tax incentives."
Tax incentives have led to a considerable oversupply of properties in certain areas, particularly in western counties -- and are responsible for much of the 120,000 idle homes on ghost estates dotted around the country today. The oversupply of properties in counties such as Roscommon, Mayo and Sligo for example is more than 20 per cent.
"We've been over-reliant on incentives and we should try to find out what the real property market is," said Williams. "We are still absorbing the impact of old incentives. The impact of subsidies closed off in 2008 will run until 2020."
Marie Hunt, director with property consultants CB Richard Ellis, also believes the market works best "if left to run its natural course".
As Nama now owns about 10,000 properties, it is one of the biggest property owners in the country. About 8,000 of these properties are apartments or duplexes. Nama will, however, concentrate on selling its houses first "because that's what people are interested in buying", said its spokesman.
The sheer amount of properties under Nama's control means it must do something to get the property market going, according to Ronan Reid, chairman of Dolmen Securities.
"Nama's role is to get a return on its investments," said Reid. "Its move to get involved in the market and effectively replace the banks makes sense."
Reid doesn't believe Nama's plan will inflate prices or encourage people to overspend. "No one will overspend in the current environment," said Reid. "Nama's plan could get the property market going again and give people the confidence they need to buy. Anything that moves towards giving some comfort to people that we're reaching a bottom in property prices is a good thing."
Reid also believes Nama's plan could reap benefits for the beleaguered construction sector. "A strong construction sector is good for any economy," said Reid.
Even if the Nama scheme has merits, its chances of having any impact on a property market that is plagued by a stagnant economy, record unemployment and high emigration are slim. House prices have fallen by about 43 per cent on average since 2007, with the falls for Dublin houses at 51 per cent -- and at 57 per cent for Dublin apartments, according to official figures released last week.
Some in the industry believe the falls are even steeper than this.
"I believe that, on average, house prices in Ireland have actually fallen by 55 per cent from their peak -- with apartments experiencing falls of up to 60 per cent," said Hunt. "Nama is making a genuine effort to encourage some sales activity in the residential sector but incentive schemes like this are unlikely to kickstart a great deal of activity in their own right. There is limited funding available for would-be buyers and even if they could secure finance, they don't have the confidence to buy when they fear for their job security. House prices will stagnate until such time as mortgages become more readily available and the rate of unemployment shows strong signs of decreasing."
David Duffy, research officer with the Economic and Social Research Institute, agrees.
"House prices will probably go down more over the next few years," said Duffy. "There are a lot of reasons for that, including emigration, falling incomes, and high unemployment. There's also a lot of uncertainty about international debt -- and how that debt would affect our economy if it goes badly wrong. Until that uncertainty is removed, people will be reluctant to make a major commitment like buying a home. In such an environment, I'm not sure whether an intervention such as Nama's would have a significant impact. Overall, you have to wonder about intervening in the market given the negative consequences of past incentives."
Bloxham Stockbrokers believes it will be 2013 before Irish house prices start to pick up again -- with Dublin leading the recovery "given that the capital has the biggest concentration of people".
Deeter, however, believes the recovery is a bit further down the road -- and that house prices will continue to fall for another four years. "It doesn't matter what anyone does," said Deeter. "We are stuck in this cycle of downward prices."
It looks like those who bought properties during the boom years will have a lot more losses to nurse over the next few years -- and may never recover financially.
Falling house prices could, however, be good for our economy and competitiveness.
"Overall for the economy, the decline of property prices is healthy and should continue," said Connor. "The decline in prices should be speeded up. What we need is price clarity in the property market."
Whether or not Nama's new plan will delay price clarity -- and prevent the market from running its natural course remains to be seen. History tells us that meddling with the market causes more harm than good.
It could be time for Nama to backpedal before it's too late.
Sunday Indo Business